Monday, November 30, 2009
The two most significant structural consequences of the recent financial debacle are the massive deficits and debts of the US and the shift of economic power from west to east. There is only one effective way for governments to address the combined impact of both: press for a sea change in currency relationships, especially a permanently and greatly weakened dollar.
The roots of this situation are well known. The American budget deficit of this past fiscal year reached 10 per cent of gross domestic product, the largest since the aftermath of the second world war. Meanwhile, the net external debt of the US nearly tripled last year to $3,500bn and it is projected to increase by nearly $1,000bn every year for the next decade. All this underestimates the problems of a country where unfunded liabilities for baby boomer entitlements are in the stratosphere, infrastructure deterioration is scandalous and many large states are out of money. To close the gaps, taxes would have to be raised to sky-high levels and spending brutally slashed. It would take a miracle if America’s political system – one rife with vicious partisanship and riddled with well-financed special interests – could do either, let alone both.
Washington will therefore have little choice but to take the time-honoured course for big-time debtors: print more dollars, devalue the currency and service debt in ever cheaper greenbacks. In other words, the US will have to camouflage a slow-motion default because politically it is the easiest way out.
There is another factor pushing America towards a weaker dollar: lacking the domestic consumer demand that came with the unrestrained credit of the past 15 years, the US is desperate to find buyers abroad, especially in emerging markets where the middle class is growing and infrastructure requirements are soaring. A cheaper dollar could make US products and services more competitive.
Meanwhile, in the coming decade, the big emerging markets of Asia will be growing twice as fast as the US and three times faster than the European Union. By 2020, China, India, Indonesia, Korea and Vietnam together could generate more wealth than the the US, Japan and the EU combined. China, India, and South Korea have all been amassing dollar reserves and will be looking to reduce them. While imports into leading industrial countries have slowed, intra-Asian trade is booming and need not be financed only in dollars. The bottom line: Asian currencies are likely to strengthen against the dollar.
A much cheaper dollar is a sad development for the US, even though it is inevitable. It will make the US poorer, since Americans will pay higher prices for everything they buy from abroad – clothes, computers, cars, toys, food, you name it. It will make the US military presence abroad more expensive, since the cost of contractors and local suppliers will escalate in dollar terms. It will slow imports, removing competition that is essential to hold down the general price level in America, thereby making inflation more likely. It will send the wrong price signals for a country that prides itself on creating sophisticated, highly valuable products, for a low dollar will encourage producers to compete on price more than quality. It will diminish the political influence and prestige that the US has had while the dollar has been king.
Moreover, the US dollar has been at the heart of the global economy for well over half a century. Its demise, if not smooth and gradual – hardly certain – could lead to an era of competitive devaluations and other mercantilist trade policies.
An alternative to a global monetary system that has been centred on the dollar is now imperative. That means a multi-currency framework including the euro, the yen, the renminbi and significant issuance of an IMF-backed currency called “special drawing rights”. This regime will take time to devise, but it should start now.
That is why Tim Geithner, US Treasury secretary, should invite his colleagues in the UK, eurozone, Japan and China to meet secretly, perhaps between Christmas and New Year, to start discussions out of the public spotlight (to avoid spooking markets). The big question: what kind of monetary system will best serve the world given deep-seated changes in the balance of economic power, and what process can be followed to develop it?
Since the late 1980s I have believed that a strong dollar was in the US and world interest. Now, however, the context has fundamentally changed. The issue is no longer whether the dollar is in long-term decline but which of two options will be taken. Should Washington and other capitals calmly and deliberately manage the transition to a new era, or, by default, should they let the market do it, with the risk of massive financial disturbances. Today, governments have a choice. Soon they may not.
The writer is the Juan Trippe professor of international trade and finance at the Yale School of Management
Saturday, November 28, 2009
Dubai was meant to be a Middle-Eastern Shangri-La, a glittering monument to Arab enterprise and western capitalism. But as hard times arrive in the city state that rose from the desert sands, an uglier story is emerging. Johann Hari reports
But something has flickered in Sheikh Mohammed's smile. The ubiquitous cranes have paused on the skyline, as if stuck in time. There are countless buildings half-finished, seemingly abandoned. In the swankiest new constructions – like the vast Atlantis hotel, a giant pink castle built in 1,000 days for $1.5bn on its own artificial island – where rainwater is leaking from the ceilings and the tiles are falling off the roof. This Neverland was built on the Never-Never – and now the cracks are beginning to show. Suddenly it looks less like Manhattan in the sun than Iceland in the desert.
Once the manic burst of building has stopped and the whirlwind has slowed, the secrets of Dubai are slowly seeping out. This is a city built from nothing in just a few wild decades on credit and ecocide, suppression and slavery. Dubai is a living metal metaphor for the neo-liberal globalised world that may be crashing – at last – into history.
I. An Adult Disneyland
Karen Andrews can't speak. Every time she starts to tell her story, she puts her head down and crumples. She is slim and angular and has the faded radiance of the once-rich, even though her clothes are as creased as her forehead. I find her in the car park of one of Dubai's finest international hotels, where she is living, in her Range Rover. She has been sleeping here for months, thanks to the kindness of the Bangladeshi car park attendants who don't have the heart to move her on. This is not where she thought her Dubai dream would end.
Her story comes out in stutters, over four hours. At times, her old voice – witty and warm – breaks through. Karen came here from Canada when her husband was offered a job in the senior division of a famous multinational. "When he said Dubai, I said – if you want me to wear black and quit booze, baby, you've got the wrong girl. But he asked me to give it a chance. And I loved him."
All her worries melted when she touched down in Dubai in 2005. "It was an adult Disneyland, where Sheikh Mohammed is the mouse," she says. "Life was fantastic. You had these amazing big apartments, you had a whole army of your own staff, you pay no taxes at all. It seemed like everyone was a CEO. We were partying the whole time."
Her husband, Daniel, bought two properties. "We were drunk on Dubai," she says. But for the first time in his life, he was beginning to mismanage their finances. "We're not talking huge sums, but he was getting confused. It was so unlike Daniel, I was surprised. We got into a little bit of debt." After a year, she found out why: Daniel was diagnosed with a brain tumour.
One doctor told him he had a year to live; another said it was benign and he'd be okay. But the debts were growing. "Before I came here, I didn't know anything about Dubai law. I assumed if all these big companies come here, it must be pretty like Canada's or any other liberal democracy's," she says. Nobody told her there is no concept of bankruptcy. If you get into debt and you can't pay, you go to prison.
"When we realised that, I sat Daniel down and told him: listen, we need to get out of here. He knew he was guaranteed a pay-off when he resigned, so we said – right, let's take the pay-off, clear the debt, and go." So Daniel resigned – but he was given a lower pay-off than his contract suggested. The debt remained. As soon as you quit your job in Dubai, your employer has to inform your bank. If you have any outstanding debts that aren't covered by your savings, then all your accounts are frozen, and you are forbidden to leave the country.
"Suddenly our cards stopped working. We had nothing. We were thrown out of our apartment." Karen can't speak about what happened next for a long time; she is shaking.
Daniel was arrested and taken away on the day of their eviction. It was six days before she could talk to him. "He told me he was put in a cell with another debtor, a Sri Lankan guy who was only 27, who said he couldn't face the shame to his family. Daniel woke up and the boy had swallowed razor-blades. He banged for help, but nobody came, and the boy died in front of him."
continue reading this and all ten chapters of the Dark side of Dubai...
Friday, November 27, 2009
Pittman suffered from heart-related illnesses. The precise cause of his death wasn’t known, said his friend William Karesh, vice president of the Global Health Program at the Bronx, New York-based Wildlife Conservation Society.
Pittman, a former police-beat reporter who joined Bloomberg News in 1997, wrote stories in 2007 predicting the collapse of the banking system. That year, he won the Gerald Loeb Award from the UCLA Anderson School of Management, the highest accolade in financial journalism, for “Wall Street’s Faustian Bargain,” a series of articles on the breakdown of the U.S. mortgage industry.
Pittman’s fight to make the Fed more accountable resulted in an Aug. 24 victory in Manhattan Federal Court affirming the public’s right to know about the central bank’s more than $2 trillion in loans to financial firms. Pittman drew the attention of filmmakers Andrew and Leslie Cockburn, who gave him a prominent role in their documentary about subprime mortgages, “American Casino,” which was shown at New York City’s Tribeca Film Festival in May.
“Who sues the Fed? One reporter on the planet,” said Emma Moody, a Wall Street Journal editor who worked with Pittman at Bloomberg. “The more complex the issue, the more he wanted to dig into it. Years ago, he forced us to learn what a credit- default swap was. He dragged us kicking and screaming.”
Police Reporter, Ranch Hand
James Mark Pittman was born Oct. 25, 1957, in Kansas City, Kansas, where he played linebacker on the high school football team. He took engineering classes at the University of Kansas in Lawrence before graduating with a degree in journalism in 1981. He was married soon after and had a daughter, Maggie, in 1983. The marriage ended in divorce.
Pittman’s first reporting job, covering the police department for the Coffeyville Journal in southern Kansas, paid so little he took a part-time job as a ranch hand across the Oklahoma border in Lenapah, according to an interview he gave to Ryan Chittum for the Columbia Journalism Review’s The Audit, a watchdog for the business press.
“What a funny guy -- huge personality,” Chittum said in an e-mail message. “Mark was my favorite reporter working. In a time when too much journalism is timid or co-opted, Mark personified the whole ‘afflict the comfortable’ tenet of the business. Mark’s passing is a huge loss for journalism at a time when we can least afford it.”
No Small Moves
Pittman spent a year in Rochester, New York, with the Democrat & Chronicle newspaper and 12 years at the Times Herald- Record in Middletown, New York, where he met his second wife, Laura Fahrenthold-Pittman in 1995.
“All I know is we fell in love the moment we met,” Fahrenthold-Pittman said in an interview Friday. “We moved in together a week later. He was as serious about his family life as he was about work. Mark did nothing in a small way.”
Pittman joined Bloomberg News in 1997. In 2007, he was writing about the securitization of home loans when subprime borrowers, who have bad or limited credit histories, began missing payments on their mortgages at a faster pace.
Pittman’s June 29, 2007, article, headlined “S&P, Moody’s Hide Rising Risk on $200 Billion of Mortgage Bonds,” was excoriated at the time by Portfolio.com for “trying to play ‘gotcha’ with the ratings agencies.”
“And that really isn’t helpful,” said the unsigned posting.
Beating the Pack
Pittman’s story proved prescient. So did his reports on U.S. banks exporting toxic mortgages overseas, on Treasury Secretary Henry M. Paulson’s role in creating those troubled assets while he was chief executive officer of Goldman Sachs Group Inc. and on the U.S. bailout of American International Group Inc.
“He’s been on this crisis since before the crisis,” said Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the New York Times. “He was the best at burrowing into the most complex securities Wall Street could come up with and explaining the implications of them to readers of all levels of sophistication. His investigative work during the crisis set the standard for other reporters everywhere. He was a giant.”
In the “Faustian Bargain” series, Pittman explained how 5 percent of U.S. mortgage borrowers missing monthly payments could lead to a freeze in lending throughout the world.
‘Fearless, Most Trusted’
“Mark Pittman proved to be the most fearless, most trusted reporter on the most important beat during the 12 years he wrote about credit markets, corporate finance and the Federal Reserve at Bloomberg News,” said Bloomberg Editor-in-Chief Matthew Winkler. “His colleagues will miss his laughter and generous sense of mission. Bloomberg readers were rewarded by his many achievements culminating with a federal court ruling validating his search for records of taxpayer-financed policies withheld from the public and the Gerald Loeb Award.”
Public policy would be more effective if reporters, lawmakers and citizens understood how the financial system worked and why the crisis happened, Pittman said in the Feb. 27, 2009, interview with Chittum.
“Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed,” he said with a laugh. “We need to know how to prevent it from happening again, and we need to know who did it.”
Standing 6 feet 4 inches with a booming laugh, a loud telephone voice, and a taste for bourbon, Pittman made lifelong friends on Wall Street, in Congress, in journalism circles and in the artistic community after he and his wife opened an art gallery in Yonkers in 2005.
‘A Great Loss’
“I always learned something new when I spoke with Mark,” said Representative Scott Garrett, a New Jersey Republican on the House Financial Services Committee. “He was dogged in pursuit of the truth. This is a great loss for journalism and for those who relied on Mark for his insight.”
In “American Casino,” the title of which comes from an expression Pittman uses in the documentary, the filmmakers profile subprime borrowers who are losing their homes, mortgage brokers who made loans they knew their customers could never repay and bankers and ratings analysts whose companies profited from the housing boom.
Pittman provides an anchor for the narrative, at one point searching the Bloomberg terminal and finding the mortgage of a Baltimore teacher going through foreclosure inside a security underwritten by Goldman Sachs.
“He was a wonderful friend, a seeker of truth, a fighter for right, a proud family man, a big and jovial hand, a lover of food, drink and celebration of life,” said Joshua Rosner, managing director of Graham Fisher & Co., a consulting and analysis firm in New York. “This is a personal loss, a professional loss and a societal loss. He is truly irreplaceable.”
Along with his wife and daughter Maggie, Pittman is survived by daughters Nell, 10, and Susannah, 8, from his second marriage; his father Warren Pittman; mother Donna Pittman- Nealey; and brothers Barry Pittman and Craig Pittman.
“He was so large -- in spirit and in person -- and his passion for his craft was so great, it is impossible to think that it could just end,” said Jeffrey Taylor, Pittman’s editor on the “Faustian Bargain” series.
Bloomberg’s lawsuit against the Fed, which was filed after Pittman’s requests under the U.S. Freedom of Information Act were denied, continues without him. The central bank won a delay pending an appeal, which is scheduled for the week of Jan. 4.
“He was one of the great financial journalists of our time,” said Joseph Stiglitz, a Nobel Prize-winning economist and Columbia University professor. “His death is shocking.”
At the time of his death, Pittman’s outgoing messages offered a link to a black-and-white photo of Woody Guthrie. Written on Guthrie’s guitar: “This machine kills fascists.”
Thursday, November 26, 2009
...and In the End the LOVE WE TAKE
is Equal to the LOVE WE MAKE...
THE GIVING TREE
by Shel Silverstein
Once there was a giving tree who loved a little boy. And everyday the boy would come to play Swinging from the branches, sleeping in the shade Laughing all the summer’s hours away. And so they love, Oh, the tree was happy. Oh, the tree was glad. But soon the boy grew older and one day he came and said, "Can you give me some money, tree, to buy something I’ve found?" "I have no money," said the tree, "Just apples, twigs and leaves." "But you can take my apples, boy, and sell them in the town." And so he did and Oh, the tree was happy. Oh, the tree was glad. But soon again the boy came back and he said to the tree, "I’m now a man and I must have a house that’s all my home." "I can’t give you a house" he said, "The forest is my house." "But you may cut my branches off and build yourself a home" And so he did. Oh, the tree was happy. Oh, the tree was glad. And time went by and the boy came back with sadness in his eyes. "My life has turned so cold," he says, "and I need sunny days." "I’ve nothing but my trunk," she says, "But you can cut it down And build yourself a boat and sail away." And so he did and Oh, the tree was happy. Oh, the tree was glad. And after years the boy came back, both of them were old. "I really cannot help you if you ask for another gift." "I’m nothing but an old stump now. I’m sorry but I’ve nothing more to give" "I do not need very much now, just a quiet place to rest," The boy, he whispered, with a weary smile. "Well", said the tree, "An old stump is still good for that." "Come, boy", she said, "Sit down, sit down and rest a while." And so he did and Oh, the tree was happy. Oh, the tree was glad.
Tuesday, November 24, 2009
I was pleased last week when we won a vote in the Financial Services Committee to include language from the Audit the Fed bill HR1207 in the upcoming financial regulatory reform bill. As it stands now, if HR 3996 passes, because of this action, the Federal Reserve’s entire balance sheet will be opened up to a GAO audit. We will at last have a chance to find out what happened to the trillions of dollars the Fed has been giving out.
Finally, the blanket restrictions on GAO audits of the Fed that have existed since 1978 will be removed. All items on the Fed’s balance sheet will be auditable, including all credit facilities, all securities purchase programs, and all agreements with foreign central banks. To calm fears that we might be trying to substitute congressional action for Fed mischief in tinkering with monetary policy, we agreed to a 180 day lag time before details of the Fed’s market actions are released and included language to state explicitly that nothing in the amendment should be construed as interference in or dictation of monetary policy by Congress or the GAO. This left no reasonable objections standing and the amendment passed with a vote of 43 to 26.
Monday, November 23, 2009
The indisputable fact is that billions of cash went out the door to Goldman et al as a result of the Fed’s actions. The Fed took ownership of the CDOs underlying the swaps that AIG had entered with the banks, and effectively paid the banks 100 cents on the dollar. That is, they ensured that the CDO hedges were perfect (belying the old trader adage that the only perfect hedge is in a Japanese garden).
The question is, therefore, what were the alternatives? The alternative that has garnered all the attention is that the Fed should have paid less than 100 cents on the dollar.
But that’s not the only alternative. Hank Greenburg has suggested that the Fed should have simply guaranteed the swaps, thereby vitiating the need to provide any collateral payments. (I made a similar suggestion in an earlier post on AIG).
The SIGTARP report states clearly (p. 14) that this alternative was considered, but dismissed. The ostensible reasons for the rejection seem very dubious, indeed.
First, “FRBNY told SIGTARP that a perceived downside of this structure from FRBNY’s perspective was that it could involve FRBNY in long-term credit relationships with supervised institutions.” Please. The Fed has gone hog wild in extending credit (through repos, for instance) with supervised institutions. It has taken all kinds of dodgy collateral at all kinds of dodgy valuations. That certainly involves taking a long term credit exposure. (Spare me any protests that there is no credit risk here because these repos are collateralized. Given the quality of the collateral, and the counterparties, there is an appreciable probability that the Fed will suffer a credit loss on these deals.) And if the Fed’s actions were a response to an existential event, which is the gravamen of its defense of its actions, such prissiness over protocol appears decidedly inappropriate–making this explanation exceedingly implausible.
Further thought (added at around 1900 CT): Given that the CDS were so far underwater to AIG, if the government had guaranteed them, the likelihood that the Fed would have become a creditor to the banks on the other sides of the deals was exceedingly remote. That is, it was highly unlikely that the Fed would have been exposed to default losses on these deals, meaning that the “credit relationship” was a fiction. (Besides, at the time, were most of the counterparties even under Fed supervision? Most were foreign banks, and even the US counterparties, with the exception of Wachovia, were investment banks that I do not believe were under direct Fed supervision, except perhaps as Treasury primary dealers, rather than as banks.)
Second, “there was a lack of statutory authority of the Federal Reserve to provide such a guarantee.” Please, again. There are a variety of structures that effectively create guarantees. For instance, if the Fed could see its way clear to setting up and capitalizing a special purpose vehicle (SPV) to buy the CDOs, it could have set up and capitalized an SPV, and then novated the deals to the SPV. If it was concerns about counterparty risk that made the banks so insistent on receiving collateral payments, this structure would have allayed their concerns–and required no cash to go out the door.
In this structure, the government’s risk exposure would have been the same as under Maiden Lane and its purchase of the underlying CDOs: it would have been long the CDOs.
In sum, the rationales given for not providing some sort of guarantee are completely unpersuasive. Completely. A guarantee would also not have required agreement on valuation with the counterparties. They would have been assured of receiving their contractual payments, and that should have been that.
The transparently implausible rationale for eschewing the guarantee alternative tells me that the Fed’s–and Geithner’s–injured and adamant denial that “the financial condition in the counterparties was not a relevant factor” (p. 15) in deciding to pay 100 cents on the dollar is dishonest. Geithner has said many other things that do not pass the honesty smell test, so it wouldn’t surprise me that if this was the case here as well.
Thus, it is highly likely in my view that this was a backdoor way of providing liquidity to systemically important institutions at a time that their financial condition was in serious question.
In this regard, it could well be that Goldman was the firm that was in greatest need of an injection of cash. The SIGTARP report states that, unlike the other AIG counterparties, “Goldman Sachs did not hold the underlying CDOs but rather had sold equivalent credit protection to its clients who held those positions.” Very interesting. It is likely that these client counterparties were demanding collateral from Goldman. If so, if Goldman didn’t receive cash from AIG–or the government–it would have needed to find additional cash to make these payments.
Yes, Goldman states that it was hedged by its purchase of credit protection on AIG. But, (a) in prevailing conditions, there was considerable credit risk in those CDS, meaning that Goldman may not have been paid out 100 percent of what it was owed, and (b) even if the CDS paid out, there would almost certainly have been a cash flow date mismatch, with Goldman needing the cash to make margin calls to its clients immediately, and receiving any cash payments on CDS at some later date. Given the state of the credit markets at the time, funding this gap would have been an expensive, and dicey, proposition.
Given the supposed First Commandment to Treat All Banks Equal (p. 29), the Fed could not have bought out Goldman and not the other banks.
Against that, if providing liquidity to Goldman alone was the objective, there should have been ways of doing that directly–unless the Fed was concerned that special treatment of Goldman would have commenced a destablizing run on it like the one that cratered Lehman.
I therefore can’t conclude for certain that the AIG bailout was really a Goldman rescue in drag. One can tell that story, but there are alternative explanations. However, given that the Fed’s explanation for not taking actions that would have required no cash payments is so weak, my conclusions are that the AIG bailout was an indirect of providing liquidity to systemically important institutions, and that one cannot exclude the possibility that this was an indirect way of providing liquidity to one institution in particular–Goldman.
(One question unanswered by the SIGTARP report: if Goldman didn’t own the CDOs that eventually wound up in Maiden Lane, how did they get there? Did Goldman buy them from its clients in a mirror image deal that involved swap tearups, and then sell them to Maiden Lane? It would seem that would be necessary to deal with Goldman’s own sales of protection. )
A couple of other points related to the SIGTARP report. First, as I emphasized in “It’s a Wonderful Life: AIG Edition,” if AIG hadn’t been born and hence not around to sell protection, the owners of the CDOs would have taken a bath. Thus, it is not credit default swaps per se that were the ultimate source of the problem; it was the underlying CDOs. Only to the extent that the existence of AIG contributed to a larger CDO market could CDS have contributed to the financial crisis. Indeed, the crisis–that is, the losses suffered by big banks–could have been worse if AIG hadn’t taken a $50 billion hit.
Second, one of the narratives has been that AIG didn’t have to post collateral, and hence took on bigger positions than it would have if it had been required to do so. It indeed didn’t post any initial margin, but it is clear that the deals contemplated the posting of collateral even absent an AIG credit event. AIG had posted at least $22 billion in collateral prior to its downgrade (Table 1). Perhaps the necessity of posting initial margin would have reduced AIG’s appetite, but likely not, in my view. First, by not requiring original margin, counterparties were extending AIG credit, and presumably charged for it; only to the extent that it would have been costlier to finance initial margin payments would the posting of such margin have made AIG reduce its positions. Second, given that it lost huge sums on mortgage backed in its security lending program and other operations, it is clear that AIG viewed these as very attractively priced risks. Sure, a slightly higher cost (due to the necessity of posting initial margin) might have induced it to cut back some, but likely not very much.
To conclude: given the availability of another alternative to buying out the banks at 100 percent of par, that would not have required a cash payment, and the weak justifications for avoiding that option, make it highly likely that the AIG bailout was structured in part to provide liquidity to major banks (and perhaps, but not conclusively, one particular bank). Which makes the Fed’s–and Geithner’s–denial that the financial health of these firms was an irrelevance highly dubious, not to say, a lie.
Who is more foolish, the child afraid of the dark, or the man afraid of the light?
Saturday, November 21, 2009
Friday, November 20, 2009
• Born Oct. 31, 1947, in Brussels. Attended Sint-Jan Berchmans College, a Jesuit school in the Belgian capital, before studying philosophy and economics at the Catholic University of Leuven.
• Worked at Belgium's central bank from 1972 to 1975. Became active in the Flemish Christian Democrat party beginning in 1973, and headed the party from 1988 to 1993.
• Served as Belgium's Budget Minister and Deputy Prime Minister from 1993 to 1999. A budget hard-liner, he successfully lowered the country's significant debt load. He later joined Belgium's Parliament, leading the lower house from July 2007 to December 2008. (Read "Why Europe Is Fuming About the Stimulus Package.")
• Appointed Prime Minister in December 2008 — the country's third in less than a year (his predecessor, Yves Leterme, stepped down after nine months amid allegations that his aides exerted improper influence over the dismantling of a major bank). A reluctant leader, he reportedly required 90 minutes of persuasion by King Albert II to accept the position.
• As Prime Minister, his moderate temperament and fair-minded style has helped calm tensions between the nation's rival French- and Flemish-speaking cultures, easing a rift that once threatened to divide the country of 10 million.
• Married with several children and the author of six books on economics and politics. Goes on regular Catholic retreats to the ancient monastery of Affligem Abbey and is known for writing haiku in FlemishRead
"Turkey is not a part of Europe and will never be part of Europe ... The universal values which are in force in Europe, and which are fundamental values of Christianity, will lose vigor with the entry of a large Islamic country such as Turkey."— During a meeting of the Council of Europe in December 2004 (London Telegraph, Nov. 19, 2009)
Thursday, November 19, 2009
Wednesday, November 18, 2009
its soooooo nice
but there's no way out : )
By Edward Harrison of Credit Writedowns
The US Department of Agriculture highlights how the United States in the last decade, despite increased aggregate wealth, slid back significantly in terms of food insecurity as measure of poverty. With everyone now focused on the unemployment situation, it bears noting that even before the downturn in the economy there had been a large surge in food insecurity nationwide.
The Guardian says:
Food insecurity – defined by the USDA as when "food intake … was reduced and their eating patterns were disrupted at times during the year because the household lacked money and other resources for food" – afflicted 14.6% of Americans in 2008. ie, some 50 million people were too poor to guarantee being able to put food on the table.
The table below, also from the Guardian, shows where food insecurity is highest. While much of the distress is concentrated in the South, there are plenty of states in the Southwest and West as well. Maine has the highest food insecurity in the Northeast.
My interpretation of the data goes to income inequality. I see this as evidence that the last decade of growth in the U.S. has not been beneficial for poorer Americans. However, I would go further in saying that the downturn in the U.S. and rising unemployment, bankruptcy and foreclosure in the middle class has made plain that the middle class has also been left behind. While distress amongst poorer Americans is plain from these numbers, the diminished position in the middle class was masked by a surge in debt. This was made plain only as a result of a drop in asset prices.
At present, U.S. policy makers are trying to make this problem go away by reflating an asset bubble, but continued high unemployment is the elephant in the room which higher asset prices can not make disappear.
As for the poor, a related Guardian article gets to the heart of things:
The report said 6.7 million people were defined as having "very low food security" because they regularly lacked sufficient to eat. Among them, 96% reported that the food they bought did not last until they had money to buy more. Nearly all said they could not afford to eat balanced meals. Although few reported that this was a permanent situation throughout the year, 88% said it had occurred in three or more months.
continue reading Food insecurity in America skyrockets …
also see referenced artilces:
Record numbers go hungry in the US – Guardian
Was a long and dark December
From the rooftops I remember
There was snowWhite snow
Clearly I rememberFrom the windows they were watching
While we froze down below
When the future's architectured
By a carnival of idiots on show
You'd better lie low
If you love me
Won't you let me know?
Was a long and dark December
When the BANKS BECAME CATHEDRALS
And the fog
Became God Priests clutched onto bibles
Hollowed out to fit their rifles
And the cross was held aloft
Bury me in honor
When I'm dead and hit the ground
My nerves are poles that unfroze
If you love me Won't you let me know?
I don't want to be a soldier
Who the captain of some sinking ship
Would stow Far below
So if you love me
Why'd you let me go?
I took my love down to violet hill
There we sat in the snow
All that time
She was silent still
So if you love me Won't you let me know?
If you love me
Won't you let me know?
Tuesday, November 17, 2009
The graphic below shows counties designated as disaster areas by the U.S. Department of Agriculture (data from the USDA. See http://www.fema.gov/dhsusda/searchState.do). It speaks for itself.
“As so often happens in disasters, the best course always seemed the one for which it was now too late.”
Tacitus, The Histories
For environmental, business, and political organizations alike, the term that has come to stand for the hope of the natural world is “sustainable.” Sustainable agriculture. Sustainable cities. Sustainable development. Sustainable economies. But you would be mistaken if you assumed that the point of sustainability was to change our ways. It’s not, really. The great unspoken assumption of the sustainability movement is the idea that although the economic, political, and social systems that have produced our current environmental calamity are bad, they do not need to be entirely replaced. In fact, the point of sustainability often seems to be to preserve—not overthrow—the economic and social status quo.
This should not be surprising. Sustainability is, after all, a mainstream response to environmental crisis. It may want change, but it does not want what would amount to a fundamental self-confrontation. While it wants to modify existing models of production and consumption, especially of energy, it does not want to abandon what it calls “freedom,” especially the freedom to own and use large accumulations of private property. And certainly it does not want to ask, “What went wrong in the great Western experiment with freedom? Why do we seem to be mostly free to destroy ourselves?”
What no one is allowed to consider is the distressing possibility that no amount of tinkering and changing and greening and teaching the kindergartners to plant trees and recycle Dad’s beer cans will ever really matter if our assumptions about what it means to be prosperous, what it means to be “developed,” what it means to live in “progress,” and what it means to be “free” remain what they have been for the last four hundred years under the evergrowing weight of capitalist markets and capitalist social relations. As Marx put it, under capitalism we carry our relation to others in our pockets. Marx would now have to add, sadly, that those “others” must now include the animals of the field and the birds of the sky (Daniel, 2:38) as well as the fields and sky themselves.1 But such a line of thought is not tolerated because the very word “capitalism” (not to mention “Marx”) is a fighting word.2 (Or, worse, it is a sort of faux pas to speak of “capitalism” at all; you’d be better off saying “the economy,” just as if you were a slave asked to refer to your master as your employment counselor.) Unfortunately, in banishing this word we eliminate from the conversation the very thing we came together to discuss. We can talk about our plans to save the world, but we can’t talk about the economic system that put it in jeopardy in the first place. That’s off the table.
But I do not believe that capitalism is somehow singularly at fault. I don’t even think that it is necessarily bad. It is too reductive to say simply that there are cruel and greedy and violent people among us (capitalists), and that we need somehow to confront them and assert the good in ourselves. The truer problem is that the people who are destructive honestly believe that they are doing good. They are more often than not, or more often than any of us should be comfortable with, an expression of the virtues of what I call the Barbaric Heart.
This is the barbaric calculation: if you can prosper from violence, then you should go ahead and be violent. In short order the Barbaric Heart is led to conclude that, in fact, prosperity is dependent on violence. Therefore, you should be good at violence, for your own sake and the sake of your country. Which is a way of saying that the barbaric itself is a form of virtue, especially if you think that winning, surviving, triumphing, and accumulating great wealth are virtues, just as athletes, Darwinians, military commanders, and capitalists do.
My reader may wonder how I can yoke together virtue and violence. To which I would reply, “How can one remove the claim of virtue from the behavior that is most habitual to a people?” The artful (if ruthless) use of violence is obviously something that we admire in those sectors of the culture that we most associate with success: athletics, the military, entertainment (especially that arena of the armchair warrior, Grand Theft Auto), the frightening world of financial markets (where, as the Economist put it, there are “barbarians at the vaults”), and the rapacious world we blandly call real estate development. Instead of being “shocked, just shocked” by it, instead of living in bad faith, let’s just say that violence (especially competent violence, violence that has a skill set and a certain virtuosity) is something that we’re rather pleased with ourselves about. As ever, artful violence is the marker of an elite (whether the Persian “Immortals,” the Spartan 300, the Praetorian Guard, the United States Marines, or the Redeem Team of men’s basketball at the 2008 Beijing Olympics).3
Violence is an ethical construction that we forward to the rest of the world as an image of our virtue. The idea that we can “move mountains” is an expression of admiration. When it is done with mammoth machines provided by the Caterpillar Company of Peoria, Illinois, it is also a form of violence (as the sheered mountain tops of West Virginia confirm). To any complaints about the disheartening destruction and injustice that comes with such power, the Barbaric Heart need only reply: the strong have always dominated the weak and then instructed them. That is how great civilizations have always been made, from the ancient Egyptians to the British in India to Karl Rove and George Bush.
When Scipio Africanus looked over the army of Hannibal in the deciding battle of the second Punic War, he saw not only another long day’s work in the phalanx worrying about being stepped on by the Carthaginian elephants. He also saw the end of any limitation on Roman power. One last concerted act of violence and Rome would be history’s lone actor for the next five hundred years. As the historian Polybius described it, “The effect of their victory would be not only to make them complete masters of Libya, but to give them and their country the supremacy and undisputed lordship of the world” (302). This is how the American government felt as the Berlin Wall fell: Carthage is no more. After the fall of the Berlin Wall, the Karl Roves of the world (those who soak themselves in the blood of the Barbaric Heart as if it were a marinade) understood that they could use violence any time it was in their interest to do so, and they believed that was a good, if bloody, thing.
The question becomes, if this is our moral context, violence masquerading as virtue, how is this thing we call sustainability going to work? Sustainability presents itself as a kind of wisdom. It argues that it can reach an understanding, an accommodation with our destructive virtues and our faithfulness to capitalism. The wisdom of the sustainability movement (especially in its most visible activities through the United Nations and NGOs) is that it can make the Barbarian play nice. (“Attila, this is a tea cup. It’s fragile. No! Okay, here’s another one, now . . . Oh!” And so on.)
But I want to be quite uncompromising in saying that the logic of sustainability is also a sort of thoughtlessness. It is not really opposed to the Barbaric Heart. In fact, it participates in the yearning and willfulness of the Barbaric Heart in spite of itself. In spite of the fact that it can feel that this Heart is grasping, pitiful, and a danger to itself and others. The logic of sustainability provides a sort of program of carefully calibrated amendment (“Sure! We can make coal clean and still maintain our lifestyle”). But in the end, it is not an answer to our problems but a surrender to them. Its virtues are dependent on its sins. It is, as Simone Weil put it, a “good without light.”
What is most menacing about the logic of sustainability is evident to anyone who wishes to look into its language. It will “operationalize” sustainability. It will create metrics and indices. It will create “life-cycle assessments.” It will create a sustainability index. It will institute a “global reporting initiative.” It will imagine something called “industrial ecology” and not laugh. Most famously, it will measure ecological footprints. What the so-called sustainability movement has accomplished is the creation of “metrics,” ways of measuring. It may not have had much impact on the natural world, but it has guaranteed that, for the moment, thinking will remain only technical interpretation. In short, it has brought calipers to the head of a songbird.
But what is most thoughtless about the logic of sustainability, especially as it has emerged through the Kyoto and Bali international agreements and protocols, is the assumption that it should allow for continued economic growth and development. In short, sustainability assumes that the reasoning of economics—of economics as a form of reason—must continue to provide the most telling analyses of and prescriptions for any future model for the relationship between human beings and the natural world. But what if the assumptions of economics are nothing more than a form of thoughtlessness? And what if that thoughtlessness’s purpose is nothing more than to allow—oh, tragically, we’ll all say—the very activities and, more importantly, the very habits of mind that over the last two centuries of industrialization have brought us to this sorry pass? In short, what if the thinking of economics is merely another vestment for the Barbaric Heart?
The idea that economics will aid us in thinking through the problem of the destruction of the natural world, will aid us in managing the earth’s “carrying capacity,” commits us to the assumption that our world ought to be governed and guided by technicians. It is part of the thinking that says, “If only the politicians would listen to what we scientists have to say! Listen to what the climatologists have to say about the sources and consequences of global warming! The scientists will save us if only we’d listen to them, respect their authority, follow their instructions.” They can maintain this while gloriously ignoring the fact that the world we presently inhabit was conceived by science, designed by engineers, and implemented by technicians. It starts with the rapidly beating heart of the four-stroke engine inside your automobile, and then radiates out in what is laughably called urban planning, the world as designed for the convenience of the automobile, the sterility of the interstate highway, and the fantastic waste and increasingly fascistic experience of jet travel. Of course, behind all this there is the global energy infrastructure, burning off methane waste, spilling its toxic cargo on land and shore, and destroying the people who have been cursed with “oil wealth.” Looming over everything, guaranteeing it, is the grim visage of the warrior, the global oil police known as the military. In short, looming over all this is the Barbaric Heart.
What I want to suggest, not to put too fine a point on it, is that the act of trusting these experts—whether economists or scientists— to provide us with a sustainable future of ever-growing capitalist enterprise is not to place faith in the subtle capacities of the engineer but to indulge in the primitive longing of the barbarian in his moment of despair. After a period of truly grand slaughter and plunder, the barbarian discovers with an audible “uh-oh” that the legions have regrouped, they’re moving forward in an orderly and powerful way, and it’s going to be murder and mayhem in the barbarian camp for a while. The barbarian sees that his willfulness and violence has become the equivalent of self-defeat. That is his inescapable reality, even if it’s one he is constitutionally incapable of understanding. (Rising oceans may make Manhattan the next fabled city of Atlantis. Get that?)
What science should be saying now is not, “Why were we not listened to, respected, followed?” but, “We have wittingly taken common cause with the barbarians and participated in the making of this world, and it is clear now that this making was also our collective unmaking.” In other words, science should be looking to something other than science, and certainly something other than barbarians, for ideas that will be a truer response to the disasters it has helped create. This looking elsewhere is not something science is particularly good at, if for no other reason than because, as intellectual victor for the last two centuries, it has contempt for those religious, philosophical, and artistic “elsewheres.”
For instance, at the Ecocity World Summit in San Francisco in 2008, climatologist Stephen Schneider commented that science could only demonstrate the “preponderance of evidence” and make suggestions about risk management and the investment of resources. (You see how comfortable science is in the garments of economics?) But it cannot make decisions that depend upon what Schneider called “value judgments.” In other words, science can tell you that global warming puts the polar bear at risk, but it can’t tell you why you should care.4 It’s as if Schneider were saying that we should take that issue up with the Pope. And maybe what I’m saying is: that’s exactly right. We need a common language, not arrogance and then a punt.
The irony here, and it seems to be mostly lost on Schneider, is that nothing has been more destructive of value than Western science. It has contempt for the truth claims of religion, obviously, but also the arts and even the so-called “soft” or social sciences. So just where, one might ask, does Schneider expect these “values” to come from when in fact science has done all it could to use its social prestige and intellectual authority to destroy all non-scientific systems of value?
From the point of view of the Barbaric Heart, this is all good news. Until science can manage to join its habits of mind to a way of thinking that is genuinely dedicated to the cultivation of value (i.e. a whole, thriving human culture and not the shards that science leaves to us), the Barbaric Heart will only hear in what science says that it can continue to be barbaric, if under a somewhat chastened model. Endless, profligate energy consumption, yes, but we’ll pump the CO2 back into the ground. How about that? That should fix it. That’s sustainable, ain’t it? For the barbarian, so long as someone suggests to him that he can continue to be violent and willful but mitigate the self-destructive consequences if he’s shrewd about it, well, he’s more than willing to listen and believe. And that is what the logic of sustainability does. “Let us mitigate your violence,” it tells the barbarian, “so that your heart may retain all those barbaric qualities that have become the envy of the world.” 5
As the Romans knew, empire and wealth attract envy, but in the end it is envy not of some sort of civilized superiority but of the freedom to behave like barbarians without the consequences.
But, perhaps we should say with a breezy sigh, “Thus has it ever been.” What makes such breeziness untenable is the newfound understanding, for which the term “Global Warming” has become a sort of shorthand, that as we pursue our own venal ends, heedless of the consequences that pursuit will have on others, we are “sacking,” in the barbarian vernacular, ourselves. We are like the barbarians described so aptly by Edward Gibbon in that we are not much conscious of the fact that our energetic pursuit of our own interests has a “blowback” factor (as the CIA puts it). Our pursuit of what we want makes us blind to how that pursuit is actually destroying ourselves. In the midst of its murderous pillaging, the Barbaric Heart discovers with a cry of surprise and animal anguish that it has dug its own grave. This self-defeat is true of our international bungling in places like Iraq, but it is most dramatically true in relation to the destruction of our own environment. Ask the people of New Orleans, or all of the places from Southern Europe to Africa to Australia to Malibu that have been visited by “once in a century” droughts, or places like Shanghai or Mumbai or the tiny island nation of Tuvalu, all of which are about to have the unique opportunity of seeing what it’s like to live underwater. The future and its consequences is obviously now.
Which makes it a little easier to see why I would say that we are a culture dominated by a rationality that is the equivalent of thoughtlessness. We are dominated by a form of logical intelligibility (science) that insists that what is not intelligible to it is not intelligible at all. Strangely, what is most dramatically unintelligible to science is itself. Especially hidden to it is the degree to which its own habit of logical orderliness prepares the way for the progress of the Barbaric, just as Rome’s system of roads proved a great convenience not only to its own legions but to the barbaric armies that for once didn’t need to “swarm” but could proceed in an orderly and direct fashion to their bloody destination: the final sacking of Rome.
To say that we live in thoughtlessness is really no more than to say that for the moment the Barbaric Heart is very comfortable. It does not feel threatened except distantly by things like Islamic terror, which it understands very well since that violence is little more than a reflection of its own conduct. And nothing is working persuasively with it, suggesting that it ought not to be what it is. (The intellectual disdain of science keeps all those voices at a distance in their respective communities: the university, the church, the museum, or the downtown art scene.) Rather, it hears only the narcissistic self-congratulation from the “experts” it hires to describe its triumphs and its benevolence on cable news programs. We are not quite yet at the point where the orderly rhythm of violence and plunder have no choice but to stop.
“And why should we stop?” you might ask. After all, the Barbaric Heart produces certain sweet and pleasurable things that we know quite well. The food is abundant, sex is everywhere, and the spectacles are spectacular.6 (Always a sufficient argument for the populus Romanus.) But these sweet things are all produced by procedures that we do not see and do not understand, like the black boxes that run our cars or televisions or computers or, well, our lives. We know the benefits of these things but not their origin and not their procedures and not their ultimate purpose. The finely marbled filet at the supermarket meat counter is shrink-wrapped and looks as if it has been produced by an algorithm. It looks as if it were the Platonic idea of meat and not something hacked from a cow, not something produced by poor people standing in blood. At the far end of a gallon of gasoline is a Marine rolling a hand grenade into a living room in Haditha, Iraq. At the far end of the purchase of a plastic gizmo at Walmart is a Chinese industry dependent on the oil produced by a genocidal regime in Sudan. How that changes the look of the delightfully cheap gizmo! It is steeped in blood!
Monday, November 16, 2009
Sunday, November 15, 2009
Saturday, November 14, 2009
Friday, November 13, 2009
The national unemployment rate still hasn't quite edged past 10%. But some places blew past this benchmark ages ago. In some places, it's not a matter of "if" a full-blown depression could emerge.
Some cities you can probably guess (Detroit), but others (Hollywood, and Silicon Valley) are pretty surprising.
See the most unemployed places in America >>
(Photo via Flickr user Franco Folini)
Monday, November 9, 2009
Sunday, November 8, 2009
The most important implication of trade whether it is between two individuals, two companies, or two countries is the fact that both must benefit or trade will not occur. This should be an obvious concept since neither you, me, nor anyone else is going to trade to be worse off than before the trade. There are just not enough unintelligent people of this sort for this to occur. It is irrational and we are rational beings. Now, it is a pretty simple concept for what we trade between two people, for example, I have a baseball bat and you have a football we exchange because we value what the other has more than what we have. We both benefit. We are both now better off. Our wealth has increased because we both have something we value more. The question of how two countries trade is a bigger concept but the very same principle. It was discovered about 200 years ago by David Ricardo. It is called the Law of Comparative Advantage. Here is what it says: One country is said to have a comparative advantage over another in the production of a particular good relative to other goods if it produces that good less inefficiently than it produces other goods, as compared with the other country.
What Mr. Ricardo said is 100% true, yet most people don’t understand what it is he said exactly. An economist might decipher this but we need for everyone to understand. So here goes.
Let’s look at an example and see if we can clear things up for us regular people. An investment broker has to fill out a lot of forms and hires an assistant to do this typing and paper work. The investment broker discovers that she can type faster and complete the forms faster than her assistant. She is more efficient at this than her assistant is but it is not likely that she will fire her assistant and start doing the typing herself. Her good judgment tells her that although she is a more efficient at typing, it is much more lucrative for her to concentrate on clients. The opportunity cost of an hour with clients is much more efficient than the hour she would devote to typing. Precisely, the same principle applies to two nations. Even if one of them is more efficient than the other in producing everything. Being more efficient producing everything is an absolute advantage but trade is based on comparative advantage. The USA maybe more efficient at typing and producing all goods than China but still benefit from trading with China or vice versa.
When every country does what it does best, all countries can benefit because more of every commodity can be produced without increasing the amounts of labor and other resources used. Let’s look at the arithmetic of comparative advantage.
To keep it simple we’ll say the only input is labor, remember what I said in the beginning about 2+2=4, We’ll say China has an absolute advantage in producing TVs and computers, in other words, one year of labor they produce 50 TVs and 50 computers, While the US with one year of labor produces 40TVs and 10 computers. So China is a more efficient producer of both goods. I apologize that this forum does not show charts very well or I would produce one. None the less, it pays for China to produce computers and trade with the US for TVs even though China produces more of each. We see that China produces 50 TVs to the US’s 40 TVs so China is 25% more efficient producing TVs than the US with a years worth of labor. However, China is 5 times more efficient at producing computers than the US, 50 computers to 10 computers. China has a comparative advantage in computers. Their competitive edge is far greater in computers.
From the US perspective, we are more efficient producing TVs than we are producing computers. According to Ricardo, both countries can gain by specializing; Thus China should produce computers and the US should produce TVs and the two countries trade.
Let’s verify this. If the US moves 1000 labor hours from producing computers to producing TV’s , then computers go down by 10,000 but TV’s go up by 40,000, so that the US is now producing 0 computers and 80,000 TVs. China would shift 500 labor hours out of TVs and into computers; thus producing 75,000 computers and 25,000TVs. Together the two countries now produce 15,000 more computers and 15,000 more TVs with the same amount of labor. This represents a change in production arrangements so that world production is increased. Trade then produces an increase, a benefit, for both countries. The national income of both countries rises. They are both wealthier by trading.
Something that should be clear from this example is that stopping imports and using domestic production can not create the gains of 15,000 more TVs and 15,000 more computers. It would only lower the standard of living for both countries and reduce their national incomes by using domestic production only. What does this 2+2=4 process tell us about trade that involves millions of goods and services between the US and China? It tells us that China has a comparative advantage in labor and we have a comparative advantage in capital; thus we are trading capital for their labor. Let’s go back to the investment broker for a moment. The greater the difference in what the investment broker makes by spending her time with clients and what she pays her typing assistant the greater the benefit; likewise the greater the difference in wages in the US and China the greater the benefit. I know the question you are thinking. What about all the unemployed it creates in the US and lost income? I’ll get to this in a minute. First, I want to digress and cover the myth or fallacy of cheap labor.
If one will think of international trade as proportionate, relative, or comparative then you will avoid the common fallacies of international trade. You will avoid the most dreaded fallacy of all: cheap foreign labor. The argument maybe summarized as follows: It is patently unfair to subject the highly paid American workers to the competition of foreign labor which works for a handful of rice a day. Imports of goods, therefore , which are produced by cheap foreign labor should be restricted to protect our domestic jobs.
This is the absolute way of looking at trade. It could be extended in the following absurd way: If all trade is based on the cheapness of labor then it would be impossible for high wage nations to export anything. Exports would have to be produced my workers willing to subsist on less than a handful of rice per day. If countries are willing to sell us products cheaper than we can make them then our standard of living must rise not fall. In the late 1990’s, imports poured into our country yet the unemployment rate was the lowest in a generation. It is our national monetary and fiscal policy that should be blamed for unemployment and not our international trade policies. Remember it is relative and comparative and this explains our trading with China. They have an abundance of labor and we have an abundance of capital. Our trade is based on these relative advantages. Cheap labor will be of little significance in generating hydroelectric power because labor is only a small part of total production costs. Producing bananas requires more than cheap labor or people in Siberia would produce bananas. The cheap labor fallacy fails to see that different products require different factors of production. This thinking can be applied to the reverse about high union wages too.
Now we are getting to the part where the readers are wondering how if we are better off with this trade with countries that have cheap foreign labor that all of us seem to be suffering from a lower standard of living right this moment and high unemployment too? We don’t feel all this good stuff you keep telling us about! You see, most of the public has identified the wrong problem and keep asking for a solution to the wrong problem which naturally, will not solve any of our problems. We know from the above that just like the investment broker and just like our trade with China doing these things based on relative, comparative, proportional thinking creates greater gains. Our national income goes up, we have more than we could have had we not traded. The question becomes one of who benefits? Since the US is trading capital for labor with China, then the owners of capital experience a rising income as our national income rises but since these owners of capital are not buying their labor here anymore then the wage earners here experience a declining income as the national income rises. The problem is not one of trade but one of the distributions of the gains from trade. The importing of labor intensive goods is a warning that we must shift our production to capital intensive goods. Not lower our wages because the gains are greater the bigger the differences between our two countries.
The public is just as confused about trade and cheap labor as they are about distribution of wealth. They are against any redistribution of wealth because they believe in capitalism and free markets. I believe in capitalism and free markets/trade. It should be apparent from the above trading of capital for labor that free trade/markets between them and us will not change the fact that the owners of capital will get more income and the wage earners here in America will get less income. Also, trade restrictions will only lower the gains from trade for both countries. Additionally, capitalism is about maximizing production with limited resources. Notice that this does not say anything about distributing the gains from maximizing production but for some reason the public equates these two distinct processes, as if by doing one the wealth created somehow automatically ends up with who it should end up with. Distributing the wealth created is not the same as maximizing production with scarce resources. These are not synonymous. It should really be all too obvious to everyone from the statistics that capitalism is a very poor distributor of wealth created in any manner that would be considered distributive justice.
What does this indicate going forward for a nation that trades capital for labor and where 10% of the population owns 80% of the stock on the stock market and about this much of all the capital producing assets in America? It indicates that we as a nation need to rethink the “rules of the game” so that there is a more democratic ownership of capital.
Listen, we keep asking for jobs. Where are the jobs? What we really want is not jobs but income. If you had plenty of income you wouldn’t need a job, you could buy labor. Remember wages are just one of two ways to earn income, the other being capital. Going forward we know that the US will be trading capital for labor and this suggests that we expand those who own capital but it also, suggests that we move our exports to those things that are capital intensive and we move workers to these areas of production. It is important as this transition occurs that we move smartly to help those displaced by international trade. We must move to easy the disruptions in people’s lives that are affected by these transitions. However, I repeat, that it is our shortcoming in national monetary and fiscal policy that is the cause of high unemployment and not international trade policies.
Before I go on to explain about why we don’t need to export more than we import since this would just make us poorer and why this doesn’t happen anyway, I would like to say something about value. The value of something doesn’t change because of what country it is in. In other words, the value of a barrel of oil is the same no matter what country it is in. Perhaps an example would help show this. If I go outside and use a yardstick to measure the height of a tree in my yard and it is 10 yard sticks high and the next day I break the yard stick in half and measure the tree and it is 20 half yardsticks high, the height of the tree did not change. The unit of measure changed. The value of a barrel of oil does not change, just the unit of measure. The purpose of exchange rates is to reflect that the value of a barrel of oil does not change depending on what country it is in. I don’t wish to get bogged down in money and exchange rates in this discussion so I’ll move on to international trade.
How do we keep up with this international trade? Well we use accounting; not economics. We use what is referred to as the Balance of Payments. Its accounting and all countries use this accounting regardless of their economic philosophies. We credit this and debit that and at the end of the period; guess what? It balances. That’s right all these transactions of trade whether exporting or importing must balance. They have to equal. It is accounting. I’m going to simplify. All international transactions can be summarized into one of five categories: exchange of merchandise, exchange of services, investment income, transfers, or exchange of financial assets. You see if we are importing more merchandise than we are exporting then we must be doing one of the other four things to make the Balance of Payments balance. This makes sense since transactions must be paid for in some fashion. Credits must equal debits. The balance of payments always and necessarily balances. I know this comes as a surprise to many of you since you are always hear this and that about a deficit or surplus in the balance of payments as if we are precariously about to lose our equilibrium. If we are importing more manufactured goods than we are exporting then that deficit must be offset by a surplus somewhere else. In other words, somewhere we are exporting more than we are importing to create the surplus to offset the deficit in manufactured goods. It is financial assets generally speaking that offsets this manufactured goods deficit. I told you earlier that our country trades capital for labor; the labor in the imported goods. We hear this deficit talk all the time and must ask ourselves from whose point of view? Didn’t the importers want to purchase whatever they purchased? Didn’t the bank want to lend whatever they lent? Didn’t governments want to offer grants abroad? You see, you must question who where the people for whom the results of international trade turned out different from what they intended? When someone says there is a deficit in the balance of payments: Ask them how they know that? Is it the “deficit in the US trade balance”? This has been going on for years. For years we have imported more “ merchandise” in value terms than we exported. But why ignore all the exported services and financial assets. Merchandise, services and financial assets are all valuable to the people who receive them. They want them! The Balance of Payments must balance.
We are losing financial assets you might say but that is no more a deficit than to say Japan is experiencing a deficit because they are losing automobiles and TVs. You might say it can’t continue forever and it won’t.
Saturday, November 7, 2009
Thursday, November 5, 2009
Carry trades - the Economist - To the extent that carry trade (ie speculative) financing is supporting money growth, the Fed could be deceived into thinking monetary policy is looser than it really is. That could set up the markets for a nasty shock, in which the Fed signals an end to accommodation, the dollar surges, and the carry trade reverses. In such circumstances, not only would asset prices fall but the higher dollar would tighten US economic conditions at a very awkward moment
Mother of all carry trades faces an inevitable bust - So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions. Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
Roubini warns risk assets 'party' may end abruptly - Over the past year, the dollar has increasingly been at the center of a so-called carry trade. With interest rates effectively at zero in the U.S., global investors seeking risks and higher returns are increasingly borrowing risk-free dollars to invest in higher-yielding currencies and assets, such as stocks, commodities, and emerging markets. These trades have kept putting pressure on the dollar as investors short the currency to invest elsewhere. The big rally seen over the past year in stocks, commodities and other risky assets, are all the same trade, Roubini said. And it's been exacerbated not just by the Fed keeping rates near zero but also with the Fed buying Treasurys, keeping rates low not just at the short end but also at the long end, thereby reducing volatility. "When it unravels, it's going to get ugly," Roubini said. "Everyone that's shorting dollars will try to get out of those positions at the same time, and we'd have a stampede."
Roubini On The Dollar Carry Reversal, And Why He Is Only Half Way There - Nouriel has a great op-ed in the FT, discussing the imminent reversal of the dollar carry trade, a topic Zero Hedge has been harping on for quite some time: not because we believe that in the long run America will stabilize its economy (on the contrary), but because in a globalized economy (yes, a sad side effect of $1.4 quadrillion in derivatives is the fungibility of declining asset leverage) economies are relative, not absolute concepts. While our biggest pet peeve has to do with the lack of contrarian thought in whatever the groupthink trade de jour is (when everyone is on the same side of the boat, it always inevitably capsizes), Nouriel is similarly unimpressed with what he sees is doomed to end badly for so many institutional and retail traders who are part of the herd mentality. Never one to mince words, Roubini's conclusion is scary…
Did We Learn Anything? Carry Trade Edition - My concern now is that it appears we haven't learned anything from the turmoil that happened all of 8-12 months ago. As Nouriel Roubini recently pointed out, the correlation of all risk assets has approached one as all assets have all moved in one direction... up. Why? One reason is the world's investors are turning to the US dollar for their carry trade currency of choice (if you haven't read it yet... READ IT). At a high level it goes like this... the dollar's decline is a one way bet. So why wouldn't a foreign investor: Borrow the dollar at a 0% rate. Plan to pay the dollar back at some point in the future when it is worth 10-20% less in their local currency. Use that money to invest in ANY risk asset (as long as the asset doesn't lose more than gain on the dollar short, the investor wins... so why not ratchet up the risk?) The issue is that at some point the dollar may not even reverse its decline, but will stabilize, increasing the "real" cost of borrowing the dollar... if the correlation of assets purchased is near one on the way up, it is sure as hell going to be that high or higher on the way down. And what happens to all these investors that are attempting to leave the same exit door at the same time? Massive re-purchasing of the dollar and massive selling of any risk asset... joy.
The roots of the coming crash - Now, along comes Nouriel Roubini to burst my bubble. This isn’t a case of the weak dollar making asset prices look good; in fact, it’s the “mother of all carry trades”, setting up “the biggest co-ordinated asset bust ever”. I believe him. Nouriel’s analysis is quite compelling, given the way the carry trade works. In its most harmless form, people borrow at low rates in a funding currency and then invest the proceeds in a higher-yielding target currency. When that trade starts becoming crowded, the flow of money into the target currency causes that currency to rise, which makes the carry trade even more profitable — you not only pocket the spread between the two interest rates, but you also get a capital gain on the fx trade. But this carry trade is even stronger still: not only are the target currencies rising, but the funding currency — the dollar — is falling. Players are making money on three different legs at once, and that means they can start investing not only in foreign currencies and local interest rates, but rather in a whole panoply of other asset classes, including commodities, energy, junk bonds, even equities. These assets might not yield much, but they don’t need to, if the funding currency is falling fast...
Wednesday, November 4, 2009
According to Science Daily, Hobbie-J was able to remember novel objects, such as a toy she played with, three times longer than the average Long Evans female rat, the smartest rat strain. Hobbie-J was also better at remembering which path she last traveled to find a chocolate treat.
Researchers from the Medical College of Georgia and East China Normal University developed Hobbie-J 's superior brainpower by transgenic over-expression of the NR2B gene, which in turn increased communication between NMDA receptor sites maybe a hundred milliseconds longer than normal, just enough to enhance learning and memory. NMDA receptors (and their NR2B subunits) are the controlling molecular structures for synaptic plasticity and memory.
"This adds to the notion that NR2B is a universal switch for memory formation," says Dr. Joe Z. Tsien, co-director of the MCG Brain & Behavior Discovery Institute and co-corresponding author with Dr. Xiaohua Cao of a paper called “Genetic Enhancement of Memory” published recently in PLoS One.
Gene expression is translation of information encoded in a gene into protein or RNA. When done to a very high level, it is known as over-expression. The researchers wanted to determine whether the NR2B gene is “a universal genetic factor that acts as a rate-limiting molecule” across species. Here’s a short video showing the process of gene expression:
Previous studies of mice suggest a common biochemical mechanism at the root of nearly all learning. Tsien and Cao wanted to show that the brain uses the same basic mechanism in rats when it forms associations. Their research supports the hypothesis that NR2B is a key switch that controls the brain’s ability to associate one event with another, critical to learning.
Monday, November 2, 2009
Dangerous Side Effects of Ultra-Easy Money
by Gary Dorsch
Operating under the elixir of ultra-low interest rates, and flush with trillions of fiat currency at their disposal, courtesy of the world's top-20 central banks, hedge funds and banking Oligarchs are once again making risky and daring bets in commodities, emerging markets, junk bonds, and blue-chip stocks, defying gravity with trades that would have been un-thinkable just six-months ago.
In order to engineer a 180-degree turnaround in trader psychology, from the chronic fear of meltdowns last year, to the opposite side of the spectrum - the euphoric illusions of V-shaped recoveries, the "Group-of-20" have committed $12-trillion of taxpayer money, equivalent to a fifth of the entire globe's annual economic output. The G-20's largesse has been used to fund capital injections into banks, soaking-up toxic assets, guaranteeing financial company debt, and flooding the world credit and stock markets with ultra-cheap liquidity.
On Sept 20th, the G-20 nations, which account for 90% of the world's output, agreed it was too soon to begin withdrawing the $5-trillion of surplus cash that's been injected into world money markets. The IMF estimates that banks in Britain, the Euro-zone, and the United States have recognized slightly less than half of the $3.4-trillion of bad loans sitting on their books, and are still struggling to absorb heavy losses primarily from failing US mortgage loans.
The G-20 says its drawn-up plans for coordinated exit strategies that would drain trillions of dollars of liquidity, such measures are still seen unlikely until sometime next year. On Sept 25th, US Treasury chief Timothy Geithner noted that although the global economy has pulled back "from the edge of abyss" and was showing early signs of resuming growth, it's too early to let-up on the monetary accelerator. "We still have a very long way to go," he said.