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Global Crisis/ Innovation Blog
Where Will the Money Go? When Will Inflation Recur?
By Shlomo Maital
Simplify! Simplify! In an age of uncertainty and enormous fog enfolding the global marketplace, how can we make sense of the rapid and often startling events that occur? For example, yesterday’s Financial Times reports that Ireland, Portugal, even Spain, cannot sell either government bonds or any corporate bonds any longer. Since neither government nor business can do business without borrowing, unless this situation unfreezes soon there will be crisis. The unthinkable appears increasingly likely – withdrawal of periphery states of Europe from the euro system, returning to their original currencies. The key will be Spain, whose government owes 250 b. euros this year in maturing debt. If Spain cannot roll over the debt – what will happen? Spain’s socialist Prime Minister Zapatero appears angry and in total denial, blaming everyone and anyone for Spain’s woes – except his own government’s ineptness.
Let’s simplify and look at the issue of money. America is engaged in an enormous and irresponsible experiment, flooding the world with money. (It is called QE2, it should be called PRINT ONE TRILLION MORE AND RUIN THE DOLLAR). There already is a huge amount of money, not only dollars but euros and yen and yuan, in the world, after Central Banks tried to battle the crisis with credit expansion. That money is at present earning nothing. A quick look at the back page of The Economist reveals that real interest rates worldwide are near zero. Even where nominal interest rates are high (India, Brazil, Vietnam), inflation is equally high, and the different is nil. So huge amounts of money are parked, waiting, waiting. It is like a football (soccer game), the final game of the World Cup 2012. The pitch is ready. The players are on the sidelines waiting. They have not yet taken the field. The referee is waiting to blow his whistle…..and we wait. WHERE WILL ALL THAT MONEY GO? It has to go somewhere – the opportunity cost of lost interest while it is waiting is huge, and pensioners, for instance, need their monthly payments, so pension funds, institutional investors, insurance companies, all need to find some reasonable return somewhere, adjusted for risk.
Where????
When will the money “go onto the field” and begin to play? Where will it go? How will it be invested? With enormous uncertainty surrounding global capital markets, and risk hysteria (the next step beyond severe risk aversion) prevalent, with bond markets frozen, banks unwilling to lend – when will the money begin to ‘play’? If you can innovate a new and attract investment vehicle, one which offers attractive return and transparent easy-to-measure clear risk, you can do very well. The old vehicles are tired and unsuitable.
I recently looked at this question: Why has the world not had inflation, if so much money has flooded into the world, in Europe, America and Asia? Answer: the ‘velocity’ of money has slowed everywhere, without exception. The money is not in play. Since economic momentum is the product of the amount of money times its velocity, even if M money has grown, V velocity has fallen to offset it, leaving momentum stagnant.
When will inflation again rear its ugly head? When the money begins to move again. When velocity begins to rise. Watch that number closely. You will have to calculate velocity yourself (nominal GDP divided by Money), the World Bank, which provides 1,158 data series, sees fit NOT to provide one of the most vital ones, velocity of money.
Global Crisis/ Innovation Blog
Insanity: 1997/8, 2007/8 — 2017/8 ?
By Shlomo Maital
In 1997/8, a housing bubble and a wrongheaded decision not to rescue those ruined by it created a global crisis.
In 2007/8, a housing bubble and a wrongheaded decision not to rescue those ruined by it created a global crisis.
It is not a misprint. The events of 97/8 and 07/8 are strikingly similar. Only the names of a few of the players and the countries are different.
In 1997, Thailand found it had created an enormous housing bubble, including an entire ‘city’ that could house 700,000 people (about the size of Boston) between central Bangkok and the airport, funded by numerous fly-by-night banks. On July 2, the baht, the Thai currency, collapsed, helped by forex speculators. America chose not to provide emergency loans to Thailand, via the IMF. It was a horrendous decision. The ‘contagion’ quickly spread to the rest of Asia, and ultimately, on Aug. 18, 1998, led to Russia’s default on its debt (as Asia sank into recession, the price of oil plummeted, Russia’s oil revenues collapsed, and the Russian government couldn’t pay its debts).
The decision not to bail out Thailand was taken by U.S. Sec. of the Treasury Robert Rubin, who had been co-Chair of Goldman Sachs, where he worked for 26 years. He was joined by Fed Chair Allan Greenspan. I am certain they hugely regret it.
In 2007/8, America found it had created an enormous housing bubble, including entire neighborhoods in California that emptied when mortgagees defaulted. On Sept. 17, 2008, U.S. Secretary of the Treasury Henry (Hank) Paulsen, who had led Goldman, Sachs, along with Ben Bernanke, Fed Chair, chose NOT to rescue Lehman Brothers, facing bankruptcy. It was a horrendous decision. The Lehman “contagion” led to a 20 % drop in stocks in one week, biggest in decade, and greatly worsened the global crisis. I am certain Paulsen and Bernanke hugely regret this disastrous mistake.
The similarity between those two events is staggering, is it not?
Albert Einstein once wrote, “insanity is doing the same thing over and over and over, and expecting different results.”
Those who run the global capital market system are making the same mistakes over and over. Why would we expect anything other than recurring global crises? Why is it totally justified to call this situation “insanity”?
And when will sanity be restored? Before, or after, the crisis in 2017/8? Can we expect from those who control our money and economy, an “innovation” — acting sanely, after learning minimally from history?
Global Crisis/ Innovation Blog
Happiness – What Neuroscience Shows
By Shlomo Maital
BBC has been running a four-year series on the science of happiness. The results are truly fascinating. In some ways, they are encouraging, because they indicate that there are many ways to be happy, or more happy, without gaining wealth or income – good news in an era when many people, in the U.S. and Europe, are struggling to find employment.
Here is a short précis on what scientists studying happiness have found:
***Happy people live a lot longer: According to Professor Diener the evidence suggests that happy people live longer than depressed people. “In one study, the difference was nine years between the happiest group and the unhappiest group, so that’s a huge effect”.
*** We’re richer but often not happier: “Standard of living has increased dramatically and happiness has increased not at all, and in some cases has diminished slightly,” said Professor Daniel Kahneman of the University of Princeton. “There is a lot of evidence that being richer… isn’t making us happier”.
**** Above the minimum, money doesn’t count much: “Once you have a home, food and clothes, then extra money does not seem to make people much happier.”
*** Why money doesn’t make us happier? Two reasons. We go for things which give us short bursts of pleasure whether it is a chocolate bar or buying a new car. But it quickly wears off. Secondly, it is thought that we tend to see our life as judged against other people. As we get richer, so do our peers, often.”
*** What DOES bring happiness? Ed Diener: First, family and friends are crucial – the wider and deeper the relationships with those around you the better. It is even suggested that friendship can ward off germs. Our brains control many of the mechanisms in our bodies which are responsible for disease. Just as stress can trigger ill health, it is thought that friendship and happiness can have a protective effect. According to happiness research, friendship has a much bigger effect on average on happiness than a typical person’s income itself. [One economist, Professor Oswald at Warwick University, has a formula to work out how much extra cash we would need to make up for not having friends. The answer is £50,000. ] Marriage also seems to be very important. According to research the effect of marriage adds an average seven years to the life of a man and something like four for a woman. The second vital ingredient is having meaning in life, a belief in something bigger than yourself – from religion, spirituality or a philosophy of life.
The third element is having goals embedded in your long term values that you’re working for, but also that you find enjoyable. Psychologists argue that we need to find fulfilment through having goals that are interesting to work on and which use our strengths and abilities.
None of this is new or surprising, and all of it is consistent with common sense. Yet, remarkably, how many of us pursue wealth and income, in the pursuit of happiness, often at the expense of those very things that do bring us happiness? Why?
Innovation Blog
America’s 99’ers: BO, Phone Home!
By Shlomo Maital
A disturbing and angering segment on the CBS show 60 Minutes featured the 99’ers – Silicon Valley high-tech engineers and managers who are unemployed, and whose unemployment benefits are running out because they have used all 99 weeks – after Congress extended unemployment benefits at a cost of $100 b. San Jose alone, the capital of Silicon Valley, has 75,000 persons who have lost their jobs. In October nearly one American in 10 were unemployed. Some 42 per cent of them had been out of work for 27 weeks or more; and 20 percent, for a year or more. Many of the 99’ers are about to lose their homes through mortgage foreclosure. Many are 50 or over, and have no hope of gainful employment, other than working at Wal-Mart or McDonald’s for as much as $9 per hour. Many have used up their IRA’s, their savings, their 401k’s, believing the jobless period would be temporary – and finding it might well be permanent – at least at the level of skill they worked at previously.
The actual unemployment rate is far higher than 1 in 10. Those who have given up job-hunting are no longer considered part of the labor force, hence do not count as unemployed. The legions of workers who can find only part-time work are also not counted. So, true unemployment rates must be 16 per cent or higher. And a very large segment of the American workforce believes they might become unemployed in future, living under a sword of Damocles.
The only way America will regain well-paying jobs for its middle class is by curing its addiction to inexpensive Chinese imports and producing far more of its consumption goods in America. This is America’s #1 issue.
After badly losing the Nov. 2 mid-term elections, President Barack Obama spoke with the press, intimating that basically he felt the American people were ungrateful, and failed to understand what a heroic job he and the Democrats had done in grappling with the worst economic crisis since the Depression, a crisis dumped on him by Bush and the Republicans. He indicated he thought the election drubbing was caused by his failure to communicate.
BO, phone home! Right now you are travelling the world, visiting India, Indonesia and Portugal. Apparently you think that by playing foreign policy games, somehow the American people will come to admire you more. Phone home, Obama. Phone the Silicon Valley unemployed. Come home! Stay home, unpack your bags. Focus every day, all the day, on jobs. Never since the 1930’s have so many Americans been unemployed for so long. They are losing hope. This is the #1 problem – and #2 and #3. How is it that neither you nor your Administration get it? What must happen for you to come home and deal with it?
Global Crisis Blog
Germany Puts America In Its Place – It’s About Time!
By Shlomo Maital
Angela Merkel, German Chancellor
Readers have noticed: This blog has been highly critical of America, America’s President, America’s Treasury Secretary, and the economic (non)-policies they have implemented. Turns out American voters felt the same way on Nov. 2. Obama apparently thinks the failure was one of communication – he just did not explain how he saved America. It is the American voters, apparently, whom we need to replace, not the President. They don’t get it.
Following the G-20 summit in Seoul Korea, Obama made an incredible statement detached from reality. It was tough going, he said, but – we achieved consensus!
We did? Consensus? On what? The only consensus reached was on the utter stupidity of America’s current analysis of global problems. It’s not us, say Obama and Geithner. It’s everybody else. When will this pair get real?
Writing in today’s International Herald Tribune, author Stephen Hill tells us what really went on in Seoul. It did not come close to resembling Obama’s ‘consensus’. Instead, it featured Angela Merkel telling America to smarten up, with other G20 leaders backing her. Obama floated an absurd plan to require nations who have NOT screwed up their economy to bail out America by buying American goods (does America still make anything? If so, what?). In response, Angela Merkel said:
The United States is the one that must take the necessary steps to increase its competitiveness, she said. The U.S. should not try to put limits on countries that have figured out how to get the world to buy their goods. “In the task ahead, the benchmark has to be the countries that have been most competitive, not to reduce to the lowest common denominator,” she said. Ouch! — America being called “the lowest common denominator.” Her finance minister, Wolfgang Schäuble, was even more blunt. He described American policy as “clueless” and said the American growth model is stuck in a deep crisis: “The U.S.A. lived off credit for too long, inflated its financial sector massively and neglected its industrial base.” Ouch again. Germany — previously sneered at by U.S. pundits for its “weak and sclerotic” economy — lecturing America about how to grow its economy. Merkel said something else that is even more of a game changer: “It is essential to return to a sustainable growth path.” One cause of the crisis was that “we did not have sustainable growth. In many countries growth was built on debt and bubbles.” What Merkel was saying is that the era of U.S.-style consumption-driven economics is over. The world needs to figure out how advanced economies can provide for their people without having roaring growth rates driven by asset bubbles, and how to develop in a way that is ecologically sustainable.
If consumer-driven growth was the order of the day in the post-World War II era, in the new era of Pax Germania it will be steady-state economic growth — not too fast, but not too slowly — and producing value-added products that the rest of the world wants to buy. Utilizing more conservation and renewable energy technologies than the United States, Germany already has reduced its carbon footprint to half that of America’s — and it provides universal health care and has less inequality.
America ruined both its own economy and that of the world. It and its leaders should remain perfectly silent for, say, 20 years, and listen carefully to others who have done better. America is financially and morally broke. Good for Angela for speaking out. She said what many other world leaders have been thinking for years but have hesitated to say out loud.
Global Crisis Blog
Hot Potato: Which Country Will Be Burned?
By Shlomo Maital
(Bill Whalen, Politi-Cal)
In Korea, at the G20 meetings, President Obama said to Asian leaders: Don’t count on America to continue to create jobs for you. Here is what he meant.
Children play a game called “hot potato”, a party game in which players sit in a circle and pass a potato to one another while music plays. The player who holds the ‘hot potato’ when the music stops is out. The game ends when there is only one player left.
Nations of the world are currently playing ‘hot potato’ with unemployment. Here is how it works. America imports $620 b. more than it exports. If this number were zero, that is if America produced itself the import surplus it currently gets from abroad, 5 million jobs would be created, and America’s unemployment rate would fall from nearly 10 per cent to about 6 per cent. This will get Obama re-elected in 2012.
At the same time, if America’s trade balances, Asia will lose about 40 million jobs — half of them in China. (Asia loses far more jobs than America gains, because American productivity is about 8 times higher). Even China cannot absorb such a huge loss of jobs without severe social unrest.
WTO rules forbid imposing tariffs. Budget deficits are already excessive. So the “hot potato” game becomes one of currency devaluation. By printing up to $1.5 trillion in new money, America purposely seeks to devalue the dollar. This, despite the mealy-mouthed declaration of Treasury Secretary Timothy Geitner that this is not America’s intention. China, Japan, Korea and Taiwan can prevent this dollar devaluation by simply buying up huge amounts of dollars, as they have in the past. A sub-game called “Chicken” will result — how many dollars will America print, how many will Asia buy, before one country is “chicken” and gives up? Who in the end will be stuck with the unemployment “hot potato”?
This game is totally unnecessary. If leading nations got together and built a consensus policy for rebalancing the world economy and for stimulating trade and growth worldwide, over the coming decade, all would benefit. Win-win. But so far, there is not one sign this will happen. When one or more nations are burned by the hot potato, ultimately, all are.
Global Crisis Blog
America’s Economic Policy: Load of Dung
By Shlomo Maital
Author Clyde Prestowitz, who has just published The Betrayal of American Prosperity, recounted that he originally wanted to title his book Load of Dung, referring to the fact that just before Rome collapsed, loads of carts came in to Rome carrying a wide variety of goods, and left Rome carrying…dung. Check the containers entering and leaving America, and the picture is not much different.
An article in the latest edition of Fortune magazine reveals that for the first eight months of 2010, fully 700,000 more containers entered the Ports of New York and New Jersey than left. I wonder where they put them all ??? The same article reports that 45 per cent of the containers exported from America are empty – sent back to China, to be refilled and shipped to the U.S.
In August, latest figures available, America’s trade deficit grew to $46 b., an increase. For the past 12 months ending in August, The Economist reports that the trade deficit remains a staggeringly high $621 b. Imports totaled $200 b., up $4 b. from July. More than half the total trade deficit came from America’s trade with China, or a total of $28 b.
Intel CEOPaul Otellini recently noted that “Intel is the ‘last one standing’”, because “no one else has built a new [semiconductor] factory [in America] in five or 10 years. Everyone is building it either offshore or through joint ventures somewhere else. If [semiconductors] is the most important technology of the 21st C., and the first derivative is negative relative to building new factories here, it ain’t good.”
The only way the containers will leave America full, and not full of dung (or paper for recycling, as if often the case now), is if America makes a strategic decision to renew and reinvent its manufacturing, and to take the necessary steps to make this happen. Exports from the US must rise, if the world is to achieve ‘rebalancing’, and the only way to export, as far as I know, is when you actually make things and sell them abroad. If you do not make things, you cannot export, no matter what the exchange rate for yuan-dollar is.
Global Crisis Blog
Bernanke Denies Creating the Last Bubble –
And Claims Credit for Creating the Next One
By Shlomo Maital.
Fed Open Market Committee Chair Ben Bernanke faces a storm of criticism worldwide for his QE2 policy – the second round of quantitative easing, which sees the Fed purchase 10-year government bonds in massive amounts, totaling (by some accounts) some $1.5 trillion before the program ends. The policy is not about buying bonds, it is about paying for them and thus creating huge new mountains of dollars. The policy of spilling such vast amounts of dollars into the world is, to say the least, highly irresponsible, when the American dollar is still the world’s key currency and its stability is crucial to the wellbeing of every country that participates in world trading and global capital markets.
Prof. Bernanke, formerly an economics professor at Princeton University, now has a new justification for his policy. He says it will help boost the price of common stocks. This is a remarkable statement. Bernanke, who became Fed chair in 2006 when Alan Greenspan retired after 19 years of service, has joined Greenspan in denying that the Fed helped create the housing bubble, despite drastic interest rate cuts in 2001-3 and rapid credit expansion. Yet he is now apparently trying to create a new one, possibly this time in Asia, to which much of the money he is printing is fleeing.
Here are the facts. The Dow-Jones 30 Stock Industrial Average DJIA peaked at 14164.53 points in the summer of 2008, and then fell rapidly to 6,547.05 at bottom within a year, a drop of 54 per cent. Since then the DJIA has recovered, to about 11,200 points, a rise of 71 per cent. So stocks have already made up a large part of their losses. Do they really need short-term short-sighted help, by massive printing of money? Is this really what the American economy and American businesses truly need?
The QE2 policy is hugely irresponsible and should be stopped before it gets rolling.
Global Crisis Blog
Made in China America:
It’s NOT Their Labor Costs!
By Shlomo Maital
An American steelmaker, Bill Hickey, who runs Lapham-Hickey Steel Co., explains on BBC’s Business Daily why China is competing unfairly with his company. It’s NOT about the cheap labor, he says.
The price of steel on world markets today is about $235 per ton. The cost of shipping steel from China to the U.S., for instance, is $70-$80 per ton, even at today’s depressed shipping costs. The remaining costs are labor and materials. Materials cost about the same on world markets, and give China no advantage. The cost of labor per ton of steel is no more than $35/ton. Labor is an almost negligible input. So China faces a disadvantage of $80/ton in shipping its steel to the U.S., while US-located steel companies have no such costs. Suppose, now, that Chinese labor costs nothing at all, it is absolutely free. It still would not give China a sufficient cost advantage to enable them to export steel in massive amounts to the U.S.
What then does give China the advantage? Capital, not labor! China’s government subsidizes the capital used by steel producers in many ways. Chinese banks are largely government-run and supply cheap credit. Land is subsidized. And above all, China’s government offers up to a 40 per cent subsidy per ton, by ensuring that the Chinese currency, the renminbi, is undervalued, meaning that you pay fewer dollars for a unit of Chinese money, in order to buy Chinese steel. China uses its capital to buy U.S. dollars, which is directly equivalent to paying a 40 per cent subsidy to its steel exporters, equivalent to about 40 percent of the price of steel, or about $100/ton.
Of course these numbers apply not only to America, but to other countries as well – all the countries who make steel, or who used to, before China blew their plants out of the market.
Why doesn’t America fight back? Why don’t other countries? In an era of high and rising unemployment, when jobs are scarce, why are countries importing unemployment when they import steel?
It is a mystery.
Global Crisis Blog
Three Reasons to Be Very Very Scared
By Shlomo Maital
On a long flight, I read today’s (Oct. 28) Financial Times, then fell asleep. But I did not sleep well at all. Here is why.
- UBS’s managing director of foreign exchange strategy, Mansoor Mohl-uddin, predicts that foreign exchange turnover in global forex markets (mostly dollars, perhaps 80%-90%) will reach a staggering $10 trillion a day by the year 2020, compared with $4 trillion a day today, and only about $1.5 trillion a day in 2000. Why? A massive flood of dollars pouring out of the U.S., as America’s Ben Bernanke, head of the Fed, engages in a risky experiment called Quantitative Easing (buying bonds in an effort to lower the long-term interest rate, after finding that the close-to-zero short-term rate was ‘disconnected’ from the crucial longer rates, so vital for investment). Mohl-uddin says that currency markets will see much higher volatility in the coming decade, because investors will need to hedge their foreign bets against currency risk, and speculators, he might have added, will be in there as well, enjoying the rising volatility and placing strategic bets. The size of the global forex market is so huge, no single country or even group of countries can hope to manipulate exchange rates. Experience and history shows, in markets where volatility grows, speculators are attracted, further increasing volatility and ultimately creating a ‘doom loop’ – a market crash when all the market players think a major currency is heading down, and all race for the exits screaming “fire”, dumping the currency in a market with few buyers. As the G20 leaders meet on an isolated island in the Han River, near Seoul, Korea, they will enjoy caviar and roast duck – but will for certain not address the key issue of how the global system can survive without a stable global money, and how the looming unstable forex market can be brought under control, before it is too late.
- American President Obama is about to lose some 50 seats in the House, the biggest loss in a mid-term election since Bill Clinton lost about 52 in the 1994 mid-term election. As his advisors tell him to slash budget deficits, America’s fiscal policy arm is neutralized. That leaves only monetary policy. But short term interest rates are rock bottom. So what can be done? The already near-zero short term rates have not been effective in pulling down long term rates much. Then, why not try to lower long-term rates? But how? Well, by massive purchases of bonds by the Fed, which raises their price and lowers their yield. This is called quantitative easing. Problem is, the massive amounts of dollars spilling out of the Fed are finding their way to emerging markets’ capital markets, lowering long-term rates in Indonesia and elsewhere in Asia, rather than in the U.S. The yield on a 10-year Indonesian sovereign bond is only one per cent above that of a U.S. 10-year bond, notes James Mackintosh, FT columnist. True, Indonesia’s economy is doing well. But – is that a realistic risk premium, 1 per cent? And if quantitative easing does not work, and fails to stimulate consumer spending and investment in the U.S., what is Plan B?
- Credit default swaps almost destroyed the world. AIG and other financial institutions sold CDS ‘insurance’, at around 2 per cent premiums, and when the assets they insured collapsed and they had to pay up, bankruptcy was inevitable. That bad movie shows some signs of returning. According to the LEX column in FT, the CDS spread (i.e. the insurance premium rate) on Brazilian and Mexican sovereign bonds is now only about one per cent. If you have one dollar, you can place a bet that $100 worth of Brazilian or Mexican bonds will be in default. In other words, the market is saying that if we live for 100 years, only in one of those 100 years will Mexico or Brazil be forced to default. Really? Something is radically wrong with risk assessment systems in global capital markets. We knew that during the 2007-9 crisis, and it is clear today that risk assessment has not been substantially changed or improved.
There is a simple solution to these scary scenarios. Stop reading the Financial Times. We can then live in blissful ignorance, and when the next crash comes, at least we will have slept well before it happens.
