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EJ
09-20-07, 02:06 AM
http://www.itulip.com/images/saudihu.jpgDidn't take long for US creditors to figure out that whether the US economy sinks from the economic impact of the collapsing housing, private equity, and other bubbles or is kept afloat by inflation, they lose either way.
Fears of dollar collapse as Saudis take fright (http://www.telegraph.co.uk/money/main.jhtml;jsessionid=BYRFMD0QYRQTVQFIQMFSFF4AVCBQ 0IV0?xml=/money/2007/09/19/bcnsaudi119.xml)
Sept. 20, 2007 (Ambrose Evans-Pritchard - Telegraph UK)

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
AntiSpin: Here at iTulip we call this process "Poom" and it ain't pretty. "Poom" is the back end of the Ka-Poom Theory (http://www.itulip.com/kapoomtheory.htm) disinflation/inflation cycle that is both monetary cause and effect of the bubble cycle. The bubble cycle replaced the business cycle as the focus of monetary policy since the finance-based economy, popularly mis-labeled the "service economy," aka the FIRE Economy, became the centerpiece of US national industrial/economic policy starting around 1980.

The first Ka-Poom was 2000 - 2006, with disinflation 2000 - 2001 following the crash of the stock market bubble and inflation in everything from oil to gold to houses during the re-inflation cycle 2002 - 2006.

The disinflation phase of the current bubble cycle started after the housing bubble peaked in mid 2005. As the disinflation was gradual due to the nature of the market for houses, which are not marked to market all at once like stock portfolios but only gradually, wealth and employment and thus demand were not suddenly hit. There was little spill-over into the so-called "real economy" such as occurred after the crash of the stock market bubble, so only a muted disinflationary phase occurred. Until May, that is, when the credit markets got the idea to price the creative securities that had for years been the engine of all of the credit for the housing, private equity, and other bubbles. The markets priced them at zero and the credit markets seized up. Then, after a brief pause–quite suddenly and with great force–the demand implosion began in August.

Anyone paying attention could see this coming a mile away. A leading indicator we've been tracking is housing permits (http://www.itulip.com/forums/showthread.php?p=8323#post8323), which by plunging 25% below last year's issuance early this year and staying there confirmed, with other data, our Oct. 2006 projection of a recession Q4 2007. Then in August we noted iTulip Prosper Lending Group default rates soaring along with duration of unemployment numbers (http://www.itulip.com/images/durationunemp090707.gif), a leading indicator of future unemployment.

The cascading economic impact of simultaneously collapsing housing, private equity, and other bubbles is The Iceberg. As recently as two weeks ago the Fed had apparently not spotted it as Bernanke continued to give speeches indicating a focus on inflation, which is in our view well justified. In fact, we actually thought he was serious, and the iTulip ShadowFed (http://itulip.com/forums/showthread.php?p=16186#post16186) predicted a .25% cut. We thought the Fed's worry about US creditors would trump concerns about the economy. After spotting the iceberg, the Fed re-calculated: if the US economy is sinking like the Titanic, no one is going to want to lend the US money anyway. That is probably true. But lenders may not want to buy anything denominated in dollars if they believe that the only thing really supporting the dollar is their purchases of dollar assets, that the US isn't willing to accept the consequences of the asset bubbles and instead wants to dump them on its creditors. Just ask the Saudis.

That is what "Poom" is about. The no-win choice after a bubble pops between re-inflation to hold off a run-away debt deflation and even more inflation and dollar depreciation as a side effect of re-inflation policy.

1999 Ka-Poom Theory also posits that a final "Poom" happens–the terminal bubble in the bubble cycle–when the Fed attempts to re-inflate the economy via rate cuts and dollar depreciation when the dollar is weak and inflation is already running high–as it is now. Instead of causing long rates to fall, the cuts have the opposite result: long rates rise as the bond market prices in inflation fueled by dollar depreciation. Mortgage rates rise and the housing market tanks some more. A self-reinforcing cycle starts.

The IMF warned of this last year:
IMF Identifies Risk of `Disorderly' U.S. Dollar Drop (http://www.bloomberg.com/apps/news?pid=20601085&sid=aYXu7ScpRXC4&refer=europe)
September 13, 2006 (Bloomberg)

A "disorderly'' drop in the dollar is the biggest risk to world financial markets, the International Monetary Fund said, urging policy makers to prepare and act quickly when asset prices slump.

Investors are buying U.S. bonds under the assumption that the dollar won't slide, and a drop in the currency might turn into a rout as foreign investors and central banks move to cut losses, the global financial watchdog said.

"A low-probability but potentially high-cost risk to the global financial system is that a dollar decline could become self-reinforcing and hence disorderly,'' the IMF said in its Global Financial Stability Report today.

Last week, IMF Managing Director Rodrigo De Rato singled out lopsided global trade and investment flows, protectionist sentiment and high energy prices as sources of concern to an otherwise benign outlook for the global economy. The IMF says the U.S. current account deficit, running at a record rate, needs to narrow.
Will hitting the iceberg at 4.75 knots versus 5.25 knots make the difference between sinking and staying afloat? Will it matter if the US economy floats but the trade-weighted dollar is half or a quarter of what it is today?

We await the next Fed Flow of Funds report, due out Dec. 7, for our answer.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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trex
09-20-07, 04:44 AM
December 7? Interesting date.

Uncle Jack
09-20-07, 07:07 AM
I'd like to hear more about those Prosper.com default rates. I have zero in 18 loans, and the default rate for the whole of Prosper.com has not increased that significantly - I've been watching.

The problem may lie in the ability of certain lenders to successfully screen borrowers, or a matter of bad luck on a small sample size. Let's see some stats before we conclude that there is trouble at Prosper.

You can plug anyone's user id into this site and find stats on borrowers and lenders at Prosper.com, and stats on all of Prosper.

http://lendingstats.com/

RebbePete
09-20-07, 09:57 AM
It's interesting to see a spark of independence from the House of Saud, which has traditionally depended so much on US good will to stay in power. I wonder if they haven't cut a deal with another major power that allows them to stray a bit from the US script, or if they see that they need to go their own way in order not to create too much trouble for even the US to be able preserve their rule. If so, that has far-reaching implications for all sorts of things, including oil prices.

- Pete

BiscayneSunrise
09-20-07, 09:57 AM
This Saudi announcement portends the answer that is asked by Fred on a different thread. Are the Chinese dumping US Treasuries? I think the answer now has to be unquestionably, yes. The Chinese will unwind slowly, to be careful not to trash the US economy too badly while they develop other export markets around the world.

As you probably figured out, in the short to medium term I like uranium along with gold and other resources. But I am beginning to wonder that in the very long term, if a beaten down dollar will lead to the rejuevenation of the US manufacturing and export industries.

GRG55
09-20-07, 11:11 AM
It's interesting to see a spark of independence from the House of Saud, which has traditionally depended so much on US good will to stay in power. I wonder if they haven't cut a deal with another major power that allows them to stray a bit from the US script, or if they see that they need to go their own way in order not to create too much trouble for even the US to be able preserve their rule. If so, that has far-reaching implications for all sorts of things, including oil prices.

- Pete

The Saudi's have been inching away from the American orbit since the first Gulf War. For example, at the request of the House of Saud, the US abandoned the Prince Sultan Air Base near Riyadh (their main air operations centre for the region) to a new facility in State of Qatar a few years ago. Although Saddam didn't cross the border into Saudi Arabia, when the war started the expatriate community bailed out en mass, and nearly brought the entire economy to collapse. The Saudi's implimented a "Saudization" program to make sure that never happened again. This has had several consequences - an even more conservative Islamic society than before the war, and increased political confidence independent of the West. This will continue to have significant global ramifications beyond just energy supply in the years to come.

metalman
09-20-07, 11:27 AM
The Saudi's have been inching away from the American orbit since the first Gulf War. For example, at the request of the House of Saud, the US abandoned the Prince Sultan Air Base near Riyadh (their main air operations centre for the region) to a new facility in State of Qatar a few years ago. Although Saddam didn't cross the border into Saudi Arabia, when the war started the expatriate community bailed out en mass, and nearly brought the entire economy to collapse. The Saudi's implimented a "Saudization" program to make sure that never happened again. This has had several consequences - an even more conservative Islamic society than before the war, and increased political confidence independent of the West. This will continue to have significant global ramifications beyond just energy supply in the years to come.

thanks. it's fantstic to have smart guys like GRG55 and c1ue and Christopher and Chris Coles and on and on from all over the planet giving their local take on news like this. awesome!

FRED
09-20-07, 11:47 AM
I'd like to hear more about those Prosper.com default rates. I have zero in 18 loans, and the default rate for the whole of Prosper.com has not increased that significantly - I've been watching.

The problem may lie in the ability of certain lenders to successfully screen borrowers, or a matter of bad luck on a small sample size. Let's see some stats before we conclude that there is trouble at Prosper.

You can plug anyone's user id into this site and find stats on borrowers and lenders at Prosper.com, and stats on all of Prosper.

http://lendingstats.com/

We went by a survey of iTulip Prosper members who responded to our request for data who are using the automatic lending function versus hand-picking borrowers. This helps reduce the skewing of results for lenders such as yourself who may be especially good at avoiding higher risk borrowers. Also, one can trade off risk for yield on prosper.com by only lending to borrowers with high credit ratings, low loan to asset ratings, and so on. Defaults across such a lender's portfolio of loans will be low, but the average interest rate paid will also be below the mean.

The data on the lendingstats.com shows some trending in the distribution of defaults as the number of loans that are one or two months late are higher than they were a few months ago, the last time we looked.

Breakdown of late payments and defaults (http://www.lendingstats.com/loanPerformance?lenderId=&lenderId=&keyword=&loanAgeFilter=0&loanStatusFilter=-1&creditGrade=0&dtiLow=0&dtiHigh=-1&loanAmountLow=0&loanAmountHigh=25000&locationFilter=&accountVerified=&homeOwner=&automaticFunding=&submit=Generate): 10.85% of all loans


http://www.itulip.com/images/lendingstats.gif

dbarberic
09-20-07, 12:14 PM
I do not think one needs to wait till December 7th for the answer. We already know what the response is going to be. Either the other foriegn central banks will enter a round of Fed maching competitive devaluations, or they are going to pack up their bags, say F-you to the USA, and allow the US$ to circle down the drain.

In either scenerio, the outcome is all the same, poom inflation big-time for the United States.

FRED
09-20-07, 12:26 PM
I do not think one needs to wait till December 7th for the answer. We already know what the response is going to be. Either the other foriegn central banks will enter a round of Fed maching competitive devaluations, or they are going to pack up their bags, say F-you to the USA, and allow the US$ to circle down the drain.

In either scenerio, the outcome is all the same, poom inflation big-time for the United States.

Absolutely. We'll know because the stock markets will dive. But the Flow of Funds report will give us the details of who did and didn't go along with the program. Unless the Fed messes with the report. I know that sounds paranoid, but given the reformulation of the CPI and unemployment numbers, the elimination of M3, it can't be ruled out.

bill
09-20-07, 12:46 PM
Will hitting the iceberg at 4.75 knots versus 5.25 knots make the difference between sinking and staying afloat? Will it matter if the US economy floats but the trade-weighted dollar is half or a quarter of what it is today?

As the US economy crashes into the tip of the iceberg (sub prime below) and the Fed throwing interest rate reduction switches, and the economy goes threw the months ahead as seen in the graph below the results will be a weaker dollar and higher inflation. How many more icebergs are still out there looming in the fog?
<!-- toctype = X-unknown --><!-- toctype = text --><!-- text -->

http://www.itulip.com/images/armadjust.gif

c1ue
09-20-07, 02:31 PM
But I am beginning to wonder that in the very long term, if a beaten down dollar will lead to the rejuevenation of the US manufacturing and export industries.

I wouldn't hold your breath.

Just on the labor front - China's 7x advantage isn't going away anytime soon.

The rise of national commodity champions as well as international (i.e. non-US) commodity oligopolies, plus BRIC demand increase means at least flat and probably increasing raw material prices - especially for dollars.

Unless the dollar does a peso while simultaneously not wrecking the US system - I'm not seeing any major bounceback for decades.

GRG55
09-20-07, 03:31 PM
I wouldn't hold your breath.

Just on the labor front - China's 7x advantage isn't going away anytime soon.

The rise of national commodity champions as well as international (i.e. non-US) commodity oligopolies, plus BRIC demand increase means at least flat and probably increasing raw material prices - especially for dollars.

Unless the dollar does a peso while simultaneously not wrecking the US system - I'm not seeing any major bounceback for decades.

No doubt about it, things look pretty challenging for the good ol' U.S. of eh right now. But I can recall similar sentiments about US competitiveness compared to Japan in the late 1980's. Remember back then when the business section book shelves were full of tomes endorsing the manifold benefits of Japanese management systems? And every hack "management consultant" was lecturing about the "Art of War" or some such allegedly Oriental nonsense. In a few short (but perhaps economically tough) years this may happen again, only the books and lectures will be about China (you won't hear anything else at any conference). When the Chinese make a bid for Rockefeller Centre that will the signal to sell Asia and buy America.

ASH
09-20-07, 05:31 PM
I wanted to comment upon the topic of the competetiveness of America's manufacturing relative to that of China, and the 7x figure mentioned by c1ue. (The same observations also relate to immigration.)

It strikes me that labor is in the process of equilibrating. To the extent that the capital equipment and technical skills required to produce a given good can be assembled in multiple labor markets, then the driving force for movement of that manufacturing activity between labor markets is the total difference in labor costs, transportation costs for shipping raw materials to the point of manufacture and finished goods to the point of sale, and any tax or regulatory expenses imposed by local governments. Local standard of living and available manpower underly the labor and government-imposed tax and regulatory costs. In short, there's a built-in diffusion gradient that transports manufacturing jobs from high-stand-of-living countries to the third world (at least those parts of the third world which have the requisite political stability to safeguard capital). I cannot deny that currency valuations help determine the pattern of trade, but -- and I think this was c1ue's point about the factor of 7 -- it is only one variable. The dollar would have to drop very low indeed for it to be cheaper to manufacture plastic toys in the US rather than China, because of the large difference in standard of living (including worker protections and so forth). In falling this far, the dollar would surely cease to be a reserve currency, and our ability to borrow to support our standard of living would be impaired. Yes, we would gain a price advantage over foreign labor markets -- but those are the same markets which have insulated us from inflation in the costs of manufactured goods. Faced with the real costs of making big screen TVs using American labor (because the cost of using Chinese motherglass is now out of reach, thanks to a weak currency), we would be able to afford far less materially. The end result may be more Americans employed in manufacturing, but still with a lower standard of living.

In short, my view is that equilibration of labor by trade in goods implies long-term equilibration of standard of living. China, and the third world generally, represent an enormous reservoir of labor with a low standard of living, whereas we represent a much smaller pool of labor with a comparatively high standard of living. Equilibration means that things in China get a little better, and things in America get a lot worse.

The tie-in with immigration is that there are jobs which don't produce tradeable goods. If you can't do the jobs with third world labor in the third world, then immigration allows you to import the third world labor to do the jobs locally. Of course, this only has an economic benefit if the cost of the imported third world labor is lower than the cost of the domestic labor. It turns out that living as working poor in America is frequently a better deal than living as jobless poor in the third world, so there is in fact a motive for immigration into the lowest-paid rung of America's labor market. But what is the net effect? The net effect is to import a third world standard of living within our borders, in order to enjoy third world labor costs. Again, the costs paid for labor go down, but so does the overall standard of living of society. (The beauty is that the standard of living of the natives at the top of the economy doesn't go down immediately, because they aren't the ones signing up to live in quasi-third-world conditions; their standard of living actually goes up in the short term because they benefit from the cheap labor. It's only the gradual growth of low-income neighborhoods and stress on public services which manifest for those lucky natives.) In the end, you can't get anything for free. If you want to pay someone minimum wage (or, off the records, less than minimum wage) to build your house or mow your lawn, then you'd best be prepared to live next to him. If you want him to maintain a middleclass lifestyle, volunteer with the PTA, and send his children to college, then you'd best be prepared to pay him a middleclass wage.

I know I must be coming off like a trade and immigration Luddite. My discussion thus far has failed to address issues of efficiency and overall economic growth. It isn't that I think this is a zero-sum game. Ideally, the extra cost efficiency associated with trade and immigration would increase total economic activity so that everybody benefits. My point is that the size of the populations involved -- and the magnitude of the disparity in standard of living -- is such as to invite skepticism that the outcome is good for the average American. The way I see it is that trade and immigration DOES increase the size of the pie, but that we currently have so much more of the pie than anyone else, that when the bigger pie gets divided (by the long-term equilibration process) Americans will ultimately end up with smaller slices. If nothing else, much of the pie we have now is illusory, since it has been purchased on credit... if the dollar drops, then our ability to buy luxuries with the savings of foreigners will be substantially curtailed.

-- Andrew Huntington

GRG55
09-21-07, 04:35 AM
I wanted to comment upon the topic of the competetiveness of America's manufacturing relative to that of China, and the 7x figure mentioned by c1ue. (The same observations also relate to immigration.)

It strikes me that labor is in the process of equilibrating. To the extent that the capital equipment and technical skills required to produce a given good can be assembled in multiple labor markets, then the driving force for movement of that manufacturing activity between labor markets is the total difference in labor costs, transportation costs for shipping raw materials to the point of manufacture and finished goods to the point of sale, and any tax or regulatory expenses imposed by local governments. Local standard of living and available manpower underly the labor and government-imposed tax and regulatory costs. In short, there's a built-in diffusion gradient that transports manufacturing jobs from high-stand-of-living countries to the third world (at least those parts of the third world which have the requisite political stability to safeguard capital). I cannot deny that currency valuations help determine the pattern of trade, but -- and I think this was c1ue's point about the factor of 7 -- it is only one variable. The dollar would have to drop very low indeed for it to be cheaper to manufacture plastic toys in the US rather than China, because of the large difference in standard of living (including worker protections and so forth). In falling this far, the dollar would surely cease to be a reserve currency, and our ability to borrow to support our standard of living would be impaired. Yes, we would gain a price advantage over foreign labor markets -- but those are the same markets which have insulated us from inflation in the costs of manufactured goods. Faced with the real costs of making big screen TVs using American labor (because the cost of using Chinese motherglass is now out of reach, thanks to a weak currency), we would be able to afford far less materially. The end result may be more Americans employed in manufacturing, but still with a lower standard of living.

In short, my view is that equilibration of labor by trade in goods implies long-term equilibration of standard of living. China, and the third world generally, represent an enormous reservoir of labor with a low standard of living, whereas we represent a much smaller pool of labor with a comparatively high standard of living. Equilibration means that things in China get a little better, and things in America get a lot worse.

The tie-in with immigration is that there are jobs which don't produce tradeable goods. If you can't do the jobs with third world labor in the third world, then immigration allows you to import the third world labor to do the jobs locally. Of course, this only has an economic benefit if the cost of the imported third world labor is lower than the cost of the domestic labor. It turns out that living as working poor in America is frequently a better deal than living as jobless poor in the third world, so there is in fact a motive for immigration into the lowest-paid rung of America's labor market. But what is the net effect? The net effect is to import a third world standard of living within our borders, in order to enjoy third world labor costs. Again, the costs paid for labor go down, but so does the overall standard of living of society. (The beauty is that the standard of living of the natives at the top of the economy doesn't go down immediately, because they aren't the ones signing up to live in quasi-third-world conditions; their standard of living actually goes up in the short term because they benefit from the cheap labor. It's only the gradual growth of low-income neighborhoods and stress on public services which manifest for those lucky natives.) In the end, you can't get anything for free. If you want to pay someone minimum wage (or, off the records, less than minimum wage) to build your house or mow your lawn, then you'd best be prepared to live next to him. If you want him to maintain a middleclass lifestyle, volunteer with the PTA, and send his children to college, then you'd best be prepared to pay him a middleclass wage.

I know I must be coming off like a trade and immigration Luddite. My discussion thus far has failed to address issues of efficiency and overall economic growth. It isn't that I think this is a zero-sum game. Ideally, the extra cost efficiency associated with trade and immigration would increase total economic activity so that everybody benefits. My point is that the size of the populations involved -- and the magnitude of the disparity in standard of living -- is such as to invite skepticism that the outcome is good for the average American. The way I see it is that trade and immigration DOES increase the size of the pie, but that we currently have so much more of the pie than anyone else, that when the bigger pie gets divided (by the long-term equilibration process) Americans will ultimately end up with smaller slices. If nothing else, much of the pie we have now is illusory, since it has been purchased on credit... if the dollar drops, then our ability to buy luxuries with the savings of foreigners will be substantially curtailed.

-- Andrew Huntington

Andrew: I very much enjoyed reading your post (and certainly did not come away with the impression it was authored by a "Luddite"). A few thoughts/questions, in no particular order, related to highlighted parts above:

Why is it a given that the rate of increase of "the pie" is constrained such that the US experiences a trend decline in absolute standard-of-living, instead of perhaps a slower rate of increase compared to other, faster growing parts of the world? If the rest of the world benefits most from a bigger pie, is it not in everyone's interests to keep expanding it as fast as practical (protectionist Congressmen excepted)?
Although the "equilibration of labour" (Steve Roach calls it the global labour arbitrage) will continue for some years, like any arbitrage it cannot go on forever. As Chinese (or Indian, or Vietnamese, or...) relative labour costs close in on US levels does this not present an even bigger challenge? Those nations will be priced out of making low value goods like plastic toys, and will necessarily be competing with the USA in the manufacture of more and more higher-value, higher-technology goods. Isn't this one reason that Americans should object to the devaluing of the Dollar and the closing of the 7X gap? Do Americans really want to go back to making plastic toys while the Asians make jet engines? :eek: You suggest this is the way to more manufacturing jobs and a lower standard of living for the US - hard to disagree.
Might we see a societal shift in the way that US citizens perceive the measurement of "standard-of-living"? You note acquiring luxuries (like Toll Brothers McMansions?) with the savings of foreigners. Perhaps this will give way to a new paradigm about what it means to live well? Failing that, maybe they just change the method of measurement since nobody likes the results (hey, it worked for CPI and the BLS statistics). :)One area where I disagree is "...then you'd best be prepared to pay him a middleclass wage". Paying anyone more than a competitive wage for the work performed is simply private-sector welfare, and if performed on a wide scale as destructive as state sector welfare in the form of a minimum wage. Why do I think this? My parents were near-pennyless immigrants (from a third-world country) to North America 50 years ago (as, eventually, were most of my aunts and uncles). Immigrants are among the most motivated, risk-taking slice of their societies (the rest stay home and wait for the government to do something for them). They uproot themselves, move to an alien country, leave their family support system behind, often face prejudice and discrimination - all in an effort to improve economic circumstances for themselves and their kids. In my family every one of my generation has at least one university degree and none of us work for a minimum wage - just one example: one of my nieces is a accomplished surgeon (just try that back in the old country). We didn't get here because someone overpaid us for low value work. The low wages are the incentive to learn a trade, get a skill, go to school, whatever it takes to compete for a higher-paying job and better one's economic circumstances. We were extraordinarily fortunate that our parents chose (lucked out?) to move to a nation that offered such enormous opportunity and a culture of meritocracy - not wage subsidies.

Most immigrants are economic migrants. Modern day North America was built by economic migrants. Despite bin Laden, Chirac and other detractors, it seems to have been a pretty damn successful experiment so far (perma-doomsters might want to think about that).

I am no supporter of illegal immigration, but I have a firm conviction that illegals are largely a symptom of a chronically dysfunctional immigration policy. I simply cannot express enough my profound distress every time I hear about "The Fence" being built along the US - Mexico border. Whether it is "high-net-worth" Americans isolating themselves behind the walls of a gated community, or the nation itself walling out its neighbours, it strikes me as the complete antithesis of what made America such a successful, and widely admired nation. If this insanity continues it will have a lot more influence over America's economy than anything the FOMC ever does.

Which is the real ghetto? A vibrant low-income immigrant neighbourhood or a wealthy, walled-in enclave where residents spend their days inventing new rules, to be imposed on their neighbours by the homeowner association, in a ridiculous effort to "maintain their property values". The "land of the free" indeed...

My apologies to everyone for the rant.

c1ue
09-21-07, 11:38 AM
No doubt about it, things look pretty challenging for the good ol' U.S. of eh right now. But I can recall similar sentiments about US competitiveness compared to Japan in the late 1980's.

G,

The difference is that in the '80s (actually started in the '70s) the US as an overall economy was in much better shape. The deficit was growing due to Reagan, but was not at a 3rd world economy level.

The US economy and trade balance was also much more healthy.

Today - very little is made in the USA anymore. And as I've said many times - while Japan has an even higher deficit, they as an economy have a positive current account (and growing). Thus currency issues can (and are) isolated from the internal population.

Here in the USA, we have the opposite situation. Just paying our interest on existing debt is something like $1B/day.

If we could pay the debt off by cash, that would be fine. But the USA cannot and thus letting inflation rise will push all those foreign lenders away.

What happens then when no more money is forthcoming to pay the interest on our debt?

It is a nouveau riche collapse on macro scale.

Chris Coles
09-21-07, 11:44 AM
Ash, GR,

In a way, you are both wrong, but in the nicest way.:)

What made the US successful in the past was investment of capital that made those higher paid jobs available in the first place. I like to quote Adam Smith on this as he put it very well:

"It will hereinafter appear that all jobs are created in direct relationship to the capital employed."

What has gone wrong is that everyone, not just the US, moved from the Victorian principal of investment of capital into shares of new businesses which were then traded on stock exchanges by anyone BUT either a bank or a government.... to governments and banks getting into making themselves the largest players in such stock and then, finding that they needed to keep better control, changed the rules to favour their needs.

Now, whomever starts a new business gets to be given the absolute minimum capital and the absolute maximum loan. So the immediate benefits of what we used to call capitalism, a stable capital base upon which to found a new long term business, (GR, I bet the companies you and your family worked for and prospered from were founded during the period 1960-1970), disappeared. Ergo the dot.com bubble crash; caused by one thing alone in my humble opinion, insufficient capital available to permit the initial start ups to survive the first ten years or so.

That process of the evolution of capital away from investment for the long term into funding loans from banks then led to their having to find other ways of lending which in turn leads to inflation.

Your long term prosperity must be founded upon long term capital investment into industries that you have not even heard of. That is the only way forward. Capital. Invested capital causes the local employment to increase and from that you get competition, (That wonderful aspect of capitalism), in your labour markets which in turn raises the long term income of the employed.

Immigration is just another aspect of a fully competitive market, better incomes attract labour to the place they can get paid better wages. The US succeeded precisely because they invested capital in new industry.

The only way forward is through long term investment into industry. Look at Canada. No trade imbalance. Long term policy led by all the nation, (not a minority), to invest into new high tech industry.

Ergo? SUCCESS!!

There is no other way, long term, Capital investment into new industry, a new, free enterprise raft of free businessmen, and businesswomen.

The only thing that held the whole together was success from the employees working their asses off to succeed for themselves.

You are good at your job and a competitor starts up alongside your company, you can walk out and better yourself, or stay for more money. That is capitalism. Wonderful competition. Nothing more needed but capital investment. The employees do the rest for the whole nation.

But since the 1970's, the banks, governments, (because they needed to borrow ever more money to spend on stupidities like funding hidden wars against small countries), and the financial institutions, (who made much more money from lending to the governments than capitalising industry.. because the governments made sure that was so), got the idea that success came from boosting the value of fixed assets and the rest is, as they say, history......

Now, regardless of the great boost I get from being credited with giving my own view from the sidelines here in the UK, I am going to pass for a few days as I have my own book to finish and this is a wonderful, but must be resisted deflection from my work.

Catch you all later in October,
_________
Chris.

c1ue
09-21-07, 11:53 AM
Although the "equilibration of labour" (Steve Roach calls it the global labour arbitrage) will continue for some years, like any arbitrage it cannot go on forever. As Chinese (or Indian, or Vietnamese, or...) relative labour costs close in on US levels does this not present an even bigger challenge?

Foreign labor in IC (out of BRIC) will not EVER even approach US levels in cost.

As a scholar from the Chinese Academy of Sciences noted - it would require the resources of 4 Earths to permit all of the Chinese population to achieve a US-like standard of living at present economic/material efficiencies.

Thus the labor cost advantage will mitigate over time, but it will never go away or even approach a reasonable (i.e. 2x) ratio barring the invention of both fusion power and Star Trek-like molecular fabrication.

You are correct in that the ICs have a huge challenge - but the challenge is not economic - it is social.

The present unspoken social compact is that if you work hard and save, your kids will be better off, and some later generation - presumably soon - will have the life you see on TV and movies in America.

What happens when these populations collectively realize that even in America life is not like TV or the movies? And never will be?

Finally,


The end result may be more Americans employed in manufacturing, but still with a lower standard of living.

This end result won't happen unless the trade barriers go up. I also am not certain that the lower standard of living is necessarily guaranteed; I believe that the problem today is that the true societal cost of a good is not calculated.

My thesis is that having a cheaper $ cost widget can actually hurt an overall economy if the $'s spent in production are not available for recycling through more of the economy.

For example - making a $10 widget in the US vs. a $3 widget in China.

The $10 widget translates into $7 in labor vs. $1 in labor; however the $7 in labor then ripples through the American economy starting at the American manufacturing worker. The $1 is gone and replaced with $.75 in profit for Wal Mart and $.75 in profit for some nameless manufacturing corporation.

The base concept is like the velocity in money supply calculations.

Is the American economy better off with the $10 or $3 widget? Note I am not talking about the manufacturing company nor Wal-Mart specifically.

Finally I believe that the US does have 1 major world advantage: farmland.

The big beneficiaries of this entire fiasco will be the American Farmer.

I just hope the vast amounts of budget devoted to subsidies will now cease.

donalds
09-21-07, 07:17 PM
Three related points to the discussion:

1. Since the beginning in the early 70's and the dramatic rise in the Fed interest rate (Volcher) we have witnessed a gradual decline in US wages. This coincided of course with the decline in manufacturing. In any case, with a decline in wages for US workers (and with it a decline in leisure time), we also witnessed the beginning of a gradual and significant increase in the stock markets, up to 2000. All this coincided with the financialization of the US (and global) economy. In this and other ways we have seen the gradual shift of more and more social wealth away from workers to the well-to-do. As compensation for declining wages, the finance economy grows increasingly dependent on ever increasing debt to fund consumption (tied of course to imported deflation from China, etc., which is just another way of saying cheap labor).

2. This is so obvious is goes without saying: capitalism has exceeded by light years any economic system in searching out and exploiting (developing if you prefer) new makets, including labor markets. One could argue that the US war in Iraq was, among many factors, aimed at opening the M. East to US (and in the process cutting out its competitors: France, Russia, etc.) capital penetration. As for developing new markets, capitalism has succeeded in doing so through disaccumulation elsewhere (call it creative destruction if you prefer); think of the decline of US industrial base and the shift to Asia as an example: can't have one without the other.

3. So often economic analysis fails to come close in fully appreciating the role of Nature. Here I am talking of oil, wood, metals, etc. After all, any and all products originate from the earth. So what's the significance of this obvious statement? There are limits to material exploitation. Humanity can go on looting nature at the expense of future generations for only so long. Eventually we begin to hit the wall. For eventually the externalities of development, i.e. pollution, effects on health, loss of species diversity, even biological de-volution, create a feed back loop that can't be ignored. We are being confronted with this today, climate warming being the most obvious example. Nature always bats last.

ASH
09-22-07, 12:34 AM
GRG55 -- Thank you for your comments on my post. In response to your remarks...

1. I don't want to give the impression that I think it is a certainty that the US is doomed to experience a decline in its absolute standard of living, as opposed to merely a reduction in its rate of growth. I just think it is very likely, given the sort of calculation that c1ue cites regarding 4 Earths. I'm afraid one of my rhetorical faults is phrasing opinions as though they were facts!

2. Regarding global labor arbitrage spreading to higher-end manufacturing and other "first world" economic activities -- you bet I'm worried! I have pretty much concluded that living off the value of one's labor is going to be a losing proposition in the long run. I work in a somewhat protected corner of the economy (I have a Ph.D. in the physical sciences, and work on projects which require American citizenship), but I have more-or-less concluded that my (future) children's labor won't be as valuable in their time as mine is now, even if they have the same level of ability and training. The unofficial plan is to amass enough capital while my labor is still valuable so that I -- and perhaps my children -- won't have to survive by labor alone down the road.

3. One thing working in our favor is that the psychological perception of wealth is relative (or so I've heard). If we're fated to climb down from our material excesses, then at least the pressures are such that we'll mostly do it together. That should take the edge off in the long run. In the short term, though, I see problems. As you remarked, labor arbitrage started at the low end of the spectrum of skill, and it has been operating for a long time. Easy credit has allowed many families to continue living in the style to which they were accustomed, even after the value of their labor had dropped below the level at which doing so was affordable. If it becomes harder to borrow to finance such luxuries, then the gap in material wealth will widen suddenly between those who were paying cash and those who were buying on credit. That might sting a bit!

4. Just for the record -- I don't actually support any level of minimum wage. I was trying to point out that the absence of ghettos -- and, in the extreme case, civil order -- are luxuries which must be paid for. You can pick any two of efficient labor, lack of slums, or low taxes -- but not all three. It's a bit of a tricky question which two you pick, though. My preference is to have no minimum wage, thereby allowing market forces to establish an efficient labor market, which will create a larger volume of economic activity to tax (and then redistribute so I don't have to look at slums, or face riots in the street). Here we have market efficiency on the revenue generation side, but unless you're redistributing cash, then you've got to face goverment innefficiency on the payout. On the other hand, if you enforce a minimum wage, the labor market is inefficient and there is less tax revenue to collect, but maybe the working poor do a better job of employing the subsidy. (Also, I do agree with your point about inequality of outcome being a great motivator for effort.) Anyway, what I was trying to say is that when you're importing labor from someplace hopelessly poor, the free market value of labor equilibrates with whereever the labor came from. Thus, if you don't want to live in the third world, you need to either pay more than what a third worlder will work for, or redistribute the fruits of the economy through taxation.


Cheers,
Andrew

ASH
09-22-07, 12:54 AM
Hi Chris. I agree entirely with your observations about how the concept of 'investment' has been corrupted. I may have misunderstood the sense of your post, but I got the impression you feel this is the only story here. Are you really trying to reduce this to a single-variable problem determined by productive versus non-productive investment of capital? Labor arbitrage is partly about the investment of capital (third world countries investing in education for their workers and infrastructure, capitalists investing in physical manufacturing facilities, etc.) but it seems extreme to deny the role played by the supply of labor and the motivations which price it when talking about the migration of manufacturing jobs. In my defense, the phrase "To the extent that the capital equipment and technical skills required to produce a given good can be assembled in multiple labor markets..." was, in fact, a nod to capital investment -- and fair warning that my piece wasn't going to be talking about its role in the equation.

Cheers,
Andrew

GRG55
09-22-07, 05:08 AM
Foreign labor in IC (out of BRIC) will not EVER even approach US levels in cost.

As a scholar from the Chinese Academy of Sciences noted - it would require the resources of 4 Earths to permit all of the Chinese population to achieve a US-like standard of living at present economic/material efficiencies.

Thus the labor cost advantage will mitigate over time, but it will never go away or even approach a reasonable (i.e. 2x) ratio barring the invention of both fusion power and Star Trek-like molecular fabrication.

You are correct in that the ICs have a huge challenge - but the challenge is not economic - it is social.

The present unspoken social compact is that if you work hard and save, your kids will be better off, and some later generation - presumably soon - will have the life you see on TV and movies in America.

What happens when these populations collectively realize that even in America life is not like TV or the movies? And never will be?

Finally,



This end result won't happen unless the trade barriers go up. I also am not certain that the lower standard of living is necessarily guaranteed; I believe that the problem today is that the true societal cost of a good is not calculated.

My thesis is that having a cheaper $ cost widget can actually hurt an overall economy if the $'s spent in production are not available for recycling through more of the economy.

For example - making a $10 widget in the US vs. a $3 widget in China.

The $10 widget translates into $7 in labor vs. $1 in labor; however the $7 in labor then ripples through the American economy starting at the American manufacturing worker. The $1 is gone and replaced with $.75 in profit for Wal Mart and $.75 in profit for some nameless manufacturing corporation.

The base concept is like the velocity in money supply calculations.

Is the American economy better off with the $10 or $3 widget? Note I am not talking about the manufacturing company nor Wal-Mart specifically.

Finally I believe that the US does have 1 major world advantage: farmland.

The big beneficiaries of this entire fiasco will be the American Farmer.

I just hope the vast amounts of budget devoted to subsidies will now cease.

C1ue: Great food for thought! Not sure I can keep up with you but here's my best shot...
Regards the closing of the labour gap, my original post was trying to promote discussion by taking it to a logical, if not practical, conclusion. I agree the gap may never close - but let's also remember that forever is a looooong time.

On a productivity adjusted basis I don't think the real gap will be as large as the apparent gap visible on the surface. Taking your argument that the USA no longer manufactures much of anything, I assume then you agree that it has largely become what everyone calls a "service economy"?

Following on that logic, the opportunities to achieve dramatic labour productivity improvements would appear much less in a service economy than in a manufacturing economy. Capital to automate a factory is useless without any factories. Similarly, most service sector businesses involve somewhat "linear" labour improvement - e.g. the only way a lawyer or haircutter can increase their income, in the absence of the ability to raise prices, is to work proportionately more hours. Yes, automation and technology such as voice mail, word processors, on-line databases and Blackberries, have made big strides improving service sector productivity. But I am not sure how much more of that is left. Hence, in aggregate, I would think the industrializing economies (your IC) should be able to improve labour productivity at a much faster rate than service sector economies like the USA, and the gap will steadily narrow.

I agree completely with your point that there are major social implications, especially given such large labour forces. However, these are the same societal stresses that gave rise to the Luddites during the Industrial Revolution, and the western trade unions in the 20th century. In those instances capital eventually won over labour, and it probably will again in IC.

As for the $10 vs $3 widget, I can only respond by asking another question - If the American economy is better off with the $10 widget, would a $100 widget not be better, and a $1000 widget better still?

I don't know the answer frankly (does anyone really?). But will reveal my own bias by admitting that my opinions on the subject are somewhat influenced by "The Competitive Advantage of Nations" (Michael E. Porter, 1990, the Free Press Division of Macmillan, Inc. NY).

GRG55
09-22-07, 07:16 AM
G,

The difference is that in the '80s (actually started in the '70s) the US as an overall economy was in much better shape. The deficit was growing due to Reagan, but was not at a 3rd world economy level.

The US economy and trade balance was also much more healthy.

Today - very little is made in the USA anymore. And as I've said many times - while Japan has an even higher deficit, they as an economy have a positive current account (and growing). Thus currency issues can (and are) isolated from the internal population.

Here in the USA, we have the opposite situation. Just paying our interest on existing debt is something like $1B/day.

If we could pay the debt off by cash, that would be fine. But the USA cannot and thus letting inflation rise will push all those foreign lenders away.

What happens then when no more money is forthcoming to pay the interest on our debt?

It is a nouveau riche collapse on macro scale.

C1ue: I lived through the '70s and it wasn’t that great. Watergate, an impeached President, two oil shocks, gasoline line-ups, people writing letters to the editor about their neighbour’s "wasteful" Christmas lights, the 55 mph speed limit (the dumbest law since Prohibition), high unemployment (unless you were in oil-soaked Texas), hostages in Tehran, and Carter telling everyone to turn down the thermostat and knit a sweater.

<O:p</O:pAfter Volker’s chemotherapy 21% interest rates, things looked pretty bleak from the bottom of that recession. <O:p</O:pYes, I agree the US and global economies had not been driven to the gargantuan excesses we have today, since the FIRE economy was in its infancy. However, pessimism was pretty high. Now once again things look pretty bleak, and “shorting” America </ST1:pmay be an excellent timed trade, but for 200 years it’s not been a very good investment strategy.

<O:p</O:pI remain supremely confident that at some point (hopefully soon) the American people will have had enough and WILL seize their Republic back from the Goldman Gang apparatchiks and sycophants that populate the Wall Street-Washington axis of snivel.

<O:p</O:pAs the crisis deepens I expect to be inundated with articles and books pronouncing:<O:p</O:p
- the end of the “American Empire”;<O:p</O:p
- the inexorable unfolding of the “Asian Century”;<O:p</O:p
- the coming “global dominance” of <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:pChina</ST1:p</st1:country-region>;<O:p</O:p
- the virtues of <st1:country-region><ST1:pRussia</ST1:p</st1:country-region> (kleptocratic Kremlin capitalism);<O:p</O:p
- the disappearance of the very last barrel of oil (likely into a Hummer);<O:p</O:p
- blah, blah, blah...
All will be based on a kernel of fact so each particular apocalypse will sound plausible. Finally we can look forward to the inevitable Business Week cover. This will no doubt feature the Economic “Death of America” (not to be confused with the jihadist “Death to <st1:country-region><ST1:pAmerica</ST1:p</st1:country-region>”). By then the crisis will be over.

<O:p</O:pIn the meantime, to deal with the issue of paying the debt, I confess the only idea that readily comes to mind is to have Hank and Ben call the IMF and negotiate a work out to buy some more time… <O:p</O:p

GRG55
09-22-07, 08:27 AM
...Regarding global labor arbitrage spreading to higher-end manufacturing and other "first world" economic activities -- you bet I'm worried! I have pretty much concluded that living off the value of one's labor is going to be a losing proposition in the long run. I work in a somewhat protected corner of the economy (I have a Ph.D. in the physical sciences, and work on projects which require American citizenship), but I have more-or-less concluded that my (future) children's labor won't be as valuable in their time as mine is now, even if they have the same level of ability and training. The unofficial plan is to amass enough capital while my labor is still valuable so that I -- and perhaps my children -- won't have to survive by labor alone down the road...

...Easy credit has allowed many families to continue living in the style to which they were accustomed, even after the value of their labor had dropped below the level at which doing so was affordable. If it becomes harder to borrow to finance such luxuries, then the gap in material wealth will widen suddenly between those who were paying cash and those who were buying on credit. That might sting a bit!

...Thus, if you don't want to live in the third world, you need to either pay more than what a third worlder will work for, or redistribute the fruits of the economy through taxation.

Cheers,
Andrew

Gosh Andrew. Look what we started...

Just touching on what I've highlighted, it strikes me that the natural human tendency is to extrapolate trends from recent experience. For some 25 odd years we have lived through the ascendence of the FIRE economy where capital trumped labour. I sense in your comment about your kids future, that you think this trend will not change. I am not so sure that amount of pessimism is warranted. I think the incredible excesses we have witnessed in the past couple of years could mark the blow-off end of that phenomenal time.

It's not just "ordinary" consumers who are suffering from the fact it is now "harder to borrow". All manner of overlevered hedge funds, bank shareholders, and high-rolling FIRE economy participants are suddenly seeing the "gap in material wealth...widen" as creditors move in and seize their assets. Although I am disappointed with the Bernanke Fed's behaviour and the capitulation by the BoE, I still can't help but think that these breathtaking excesses mark some sort of turning point in the credit cycle, capital will be destroyed (and who holds most of the capital!), and those who toil in the creation and provision of things the world needs will be the value creators for the next cycle. Maybe I'm just talking my own book...

On the matter of redistribution, PIMCO's Bill Gross had an interesting perspective. Here's the link:

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+August+2007.htm

GRG55
09-22-07, 08:59 AM
Three related points to the discussion:

1. Since the beginning in the early 70's and the dramatic rise in the Fed interest rate (Volcher) we have witnessed a gradual decline in US wages. This coincided of course with the decline in manufacturing. In any case, with a decline in wages for US workers (and with it a decline in leisure time), we also witnessed the beginning of a gradual and significant increase in the stock markets, up to 2000. All this coincided with the financialization of the US (and global) economy. In this and other ways we have seen the gradual shift of more and more social wealth away from workers to the well-to-do. As compensation for declining wages, the finance economy grows increasingly dependent on ever increasing debt to fund consumption (tied of course to imported deflation from China, etc., which is just another way of saying cheap labor).

2. This is so obvious is goes without saying: capitalism has exceeded by light years any economic system in searching out and exploiting (developing if you prefer) new makets, including labor markets. One could argue that the US war in Iraq was, among many factors, aimed at opening the M. East to US (and in the process cutting out its competitors: France, Russia, etc.) capital penetration. As for developing new markets, capitalism has succeeded in doing so through disaccumulation elsewhere (call it creative destruction if you prefer); think of the decline of US industrial base and the shift to Asia as an example: can't have one without the other.

3. So often economic analysis fails to come close in fully appreciating the role of Nature. Here I am talking of oil, wood, metals, etc. After all, any and all products originate from the earth. So what's the significance of this obvious statement? There are limits to material exploitation. Humanity can go on looting nature at the expense of future generations for only so long. Eventually we begin to hit the wall. For eventually the externalities of development, i.e. pollution, effects on health, loss of species diversity, even biological de-volution, create a feed back loop that can't be ignored. We are being confronted with this today, climate warming being the most obvious example. Nature always bats last.

No denying what you have observed, but I wonder a bit about the cause and effect. In 1. for example, are the declining wages dependent on debt and cheap Chinese labour, or is the newly available cheap global labour pool the reason for the declining wages, and the ascendence of capital over labour ("financialization")?

The war in Iraq is a touchy subject around these parts too, but I will venture the opinion that since the Arab Gulf sheikhdoms depend on US/UK military sponsorship (several of the Ruling Families would fall immediately if the military were to depart) there were no effective barriers to US capital penetration in the Middle East. Even in the case of Iran, removing the sanctions and funnelling the money through intermediary financial centers such as London and Tokyo would have allowed Wall St. to invest to their heart's content. The problem is Wall St. doesn't want to invest in plant and equipment; they want to "invest" in exotic credit derivatives. And until very, very recently there wasn't much of a market for that stuff out this way.

It doesn't pay to fool with Mother Nature - no argument from me.

donalds
09-22-07, 12:17 PM
GRG55 says, in response to my post:

No denying what you have observed, but I wonder a bit about the cause and effect. In 1. for example, are the declining wages dependent on debt and cheap Chinese labour, or is the newly available cheap global labour pool the reason for the declining wages, and the ascendence of capital over labour ("financialization")?

MY RESPONSE: PERHAPS THIS IS LESS A CAUSE/EFFECT RELATION THAN A DIALECTICAL ONE, IN WHICH RELATIONSHIP BETWEEN TWO FORCES RE-PRODUCE EACH OTHER.

The war in Iraq is a touchy subject around these parts too, but I will venture the opinion that since the Arab Gulf sheikhdoms depend on US/UK military sponsorship (several of the Ruling Families would fall immediately if the military were to depart) there were no effective barriers to US capital penetration in the Middle East. Even in the case of Iran, removing the sanctions and funnelling the money through intermediary financial centers such as London and Tokyo would have allowed Wall St. to invest to their heart's content. The problem is Wall St. doesn't want to invest in plant and equipment; they want to "invest" in exotic credit derivatives. And until very, very recently there wasn't much of a market for that stuff out this way.

MY RESPONSE: I DON'T THINK THERE IS ANY DOUBT THAT THE M. EAST HAS BEEN LESS OPEN TO NEO-LIBERAL EXPANSION THAN OTHER AREAS OF THE GLOBE. THIS IS NOT TRUE ACROSS THE BORDER BUT IT IS WITH ENOUGH OF THE AREA, AT LEAST RELATIVELY SPEAKING. IN ANY CASE, NONE OF THIS WOULD MATTER EXCEPT THAT THE AREA CONTAINS THE BULK OF THE GLOBE'S OIL. THE US, AS REFLECTED IN THE PROJECT FOR A NEW AMERICAN CENTURY, PERCEIVED FUTURE COMPETITION FOR THE OIL COMING FROM THE LIKES OF CHINA AS POSING A LONG TERM THREAT TO US HEGEMONY. NOW THAT THE US WAR IN IRAQ HAS SPEEDED UP THE SPEED OF DECLINE OF US MILITARY HEGEMONY AS A CONSEQUENCE OF OVER REACH AND BLOW BACK, THE QUESTION NOW MUST BE POSED: ARE WE ALSO SEEING CLEAR EVIDENCE OF THE DECLINE OF US ECONOMIC AND FINANCIAL HEGEMONY? SHOULD THE US REAL ECONOMY SLIDE INTO A SEVERE RECESSION (WHICH SEEMS INCREASINGLY LIKELY) AND SHOULD THE CREDIT CRUNCH REDUCE THE POWER OF US FINANCE CAPITAL (A SITUATION IN WHICH FINANCE DRIVES THE REAL ECONOMY IS NOW BEING REVERSED, WHERE THE REAL ECONOMY RECLAIMS ITS PREVIOUS DOMINANCE, THANKS TO SUBPRIME AND OTHER TOXIC DEBT MATTER), THEN WE MIGHT BE WITNESSING THE COMPOUNDED DECLINE OF US HEGEMONY ON BOTH ACCOUNTS: MILITARY AND ECONOMIC/FINANCE, RE-INFORCING EACH OTHER IN A FEED BACK LOOP. A FLIGHT OF CAPITAL FROM THE US (WITH RISING LONG TERM INTEREST RATES), FAST DECLINING DOLLAR AND SUBSEQUENT STAGFLATION WOULD SEEM TO SUPPORT THE LATER, AS DOES THE WAR IN IRAQ SUPPORT THE FORMER.

It doesn't pay to fool with Mother Nature - no argument from me.

c1ue
09-22-07, 03:26 PM
On a productivity adjusted basis I don't think the real gap will be as large as the apparent gap visible on the surface. Taking your argument that the USA no longer manufactures much of anything, I assume then you agree that it has largely become what everyone calls a "service economy"?

If you include financial engineering as services, then I absolutely agree

As for living through the '70s, while people were pessimistic, they weren't in actual jeapordy of going hungry. There is a huge difference between lack of hope for the present/future and no food on the table.

Where we're at is more towards the latter than former - just witness middle class living standards. And this is BEFORE the big inflation push starts.


Following on that logic, the opportunities to achieve dramatic labour productivity improvements would appear much less in a service economy than in a manufacturing economy. Capital to automate a factory is useless without any factories. Similarly, most service sector businesses involve somewhat "linear" labour improvement - e.g. the only way a lawyer or haircutter can increase their income, in the absence of the ability to raise prices, is to work proportionately more hours. Yes, automation and technology such as voice mail, word processors, on-line databases and Blackberries, have made big strides improving service sector productivity. But I am not sure how much more of that is left. Hence, in aggregate, I would think the industrializing economies (your IC) should be able to improve labour productivity at a much faster rate than service sector economies like the USA, and the gap will steadily narrow.

GRG, you are equating productivity with wages. As we have seen in the US in the past 10 years, increasing productivity does not always mean increased wages.

Furthermore if there are resource limitations - the higher productivity may just go toward paying the higher relative cost for a larger share of the limited resource. As mentioned previously - it is not that China/India cannot yet have a 2007 US standard of living, it is that without major technological changes, they CANNOT.


I agree completely with your point that there are major social implications, especially given such large labour forces. However, these are the same societal stresses that gave rise to the Luddites during the Industrial Revolution, and the western trade unions in the 20th century. In those instances capital eventually won over labour, and it probably will again in IC.

The difference between the Luddite era and today are several - I'll just talk about 2:

1) Farmers and artisans actually grow and create things. Service jobs by and large don't create anything physical. Hence the difference between rural poverty and urban poverty - a poor farmer may have to work a lot and be hungry when there is a drought, but by and large can survive independently. A poor urban citizen without work or welfare, dies.

2) The Luddite movement failed because ultimately it was a small number of artisans fighting the market forces of capital plus industrialization. Today the battle is between Western middle classes vs. capital plus labor cost arbitrage. As I've mentioned previously, it is not that there is a fundamentally better way to do what the middle classes have been employed to do in the past, it is that capital has found a way to make it cheaper. Thus many more people as a portion of the population are affected by this than the artisans of the Luddite era - which leads to political upheavel.


As for the $10 vs $3 widget, I can only respond by asking another question - If the American economy is better off with the $10 widget, would a $100 widget not be better, and a $1000 widget better still?


The specific value of the widget is actually irrelevant. Were it $100 or $1000, so long as everything else were proportionately worthy (or worthless ;)), the economy would balance out.

However, when you arbitrage labor outside of your immediate environs, there can be no balance. When the arbitrage occurs outside of your national borders, your government doesn't even get the payroll taxes.

I'm not saying we should become France with its myriad protected industries and labor, however, I am saying that the short sighted behavior of capital today is killing the host.

As much as I am critical of huge accumulations of wealth - in the first Gilded Age it was at least a result of creation: new industries, large standard of living increases across the board, etc.

In our present Gilded Age, the vast majority of wealth accumulation lies in financial manipulation, tax gamesmanship, and similar 'robbing Peter to pay Paul' behaviors. Labor offshoring is just one of many examples.

GRG55
09-23-07, 07:43 AM
...GRG, you are equating productivity with wages...

Not correct. They don't equate, but they certainly do relate. It may be, as you say, that increased productivity doesn't always lead to higher wages, but it is almost certain that increases in real unit wages across an economy will not occur in the absence of increases in aggregate productivity.

I tried to illustrate the point that in a service economy it is perhaps more difficult to raise labour productivity, and therefore the only way to improve "standard of living" is the "linear" response of working proportionately more hours - i.e. more output from more input, instead of more output per unit of input. Isn't this exactly what has happened in recent decades as the US shifted to a services economy - longer hours, more working spouses, etc?


...The difference between the Luddite era and today are several - I'll just talk about 2:

1) Farmers and artisans actually grow and create things. Service jobs by and large don't create anything physical. Hence the difference between rural poverty and urban poverty - a poor farmer may have to work a lot and be hungry when there is a drought, but by and large can survive independently. A poor urban citizen without work or welfare, dies.

2) The Luddite movement failed because ultimately it was a small number of artisans fighting the market forces of capital plus industrialization. Today the battle is between Western middle classes vs. capital plus labor cost arbitrage. As I've mentioned previously, it is not that there is a fundamentally better way to do what the middle classes have been employed to do in the past, it is that capital has found a way to make it cheaper. Thus many more people as a portion of the population are affected by this than the artisans of the Luddite era - which leads to political upheavel...

Pardon me if you think I was equating England 200 years ago exactly with America today - but I stand by my observation that the societal stresses are pretty much the same. A "small number of artisans fighting the market forces of capital and industrialization" in pre-Victorian England is just a microcosm of today's global "...battle...between Western middle classes vs. capital plus"...industrialization. Only today the industrialization that seems so threatening is going on in China, and India, and Korea, and Brazil, instead of just down the canal at the textile mill in the next town.

And it's not just Western middle classes that feel threatened. The BBC recently did a news documentary within which they interviewed a small sample of rural India. The universally fearful sentiments expressed about Indian urbanization, industrialization and globalization sounded (to me) a great deal like those I would imagine the acolytes of Ned Ludd would have expressed in their day. And some of the solutions proposed smacked of "a small group of artisans fighting the market forces..." and most definitely were worthy successors to Ghandi's advocacy of the charkha.

c1ue
09-23-07, 01:37 PM
it is almost certain that increases in real unit wages across an economy will not occur in the absence of increases in aggregate productivity.


I think we could go down an extended discussion on terms - but I will assume you mean purchasing power.

I have no idea whether the last 10 years of clearly above average productivity growth has been accompanied by similar increases in purchasing power.

In this case wages themselves are not relevant - it is the wage vs. prices and adjusted for inflation which matters. It is thus possible that the recent decades of 0 real wage growth has simulaneously been a time of significant purchasing power increase.

Something to keep an eye out for.


Pardon me if you think I was equating England 200 years ago exactly with America today - but I stand by my observation that the societal stresses are pretty much the same.

GRG,

Actually I was not faulting you at all - you are absolutely correct that the societal stresses are the same.

My point was two-fold: that the percentage of population involved is much greater now than before hence the likelihood of a different outcome is increased, and furthermore that the absolute effect on people (i.e. poor but productive as a farmer, vs. poor and with nothing and no prospects as urban unsubsized poor) is similarly greater.

I don't think we're going to have a revolution in America, but I do think we are now much closer than many people think.

Going back to the income graphs and look at many many are 'average' or 'below average' - it is not a small number.

GRG55
09-23-07, 03:53 PM
...I don't think we're going to have a revolution in America, but I do think we are now much closer than many people think.

Going back to the income graphs and look at many many are 'average' or 'below average' - it is not a small number.

Frankly C1ue, a little revolution may not be such a bad thing...

I suspect that many more people, than either of us might imagine, out in the rest of the world are waiting and watching for the American people to take back their Republic. I continue to be surprised that almost every time I have coffee with any of my Arab friends they inevitably steer the conversation over to that topic in one form or another. To my amazement a few actually express a considerable amount of despair over the state of US political leadership (you'd almost think they had...a vote) Dem and GOP alike.

Sometimes the stuff that humourist Andy Borowitz puts out hits pretty close to home: "...after a new study showed that only one in 1,000 Americans knows what the First Amendment is, Vice President Dick Cheney said, "Good, then no one will notice when it’s gone."

Spartacus
09-23-07, 07:28 PM
Just one anecdotal data point, my younger brother (in banking operations) and a family friend (PhD in biochem, does completely new drug investigation, not designing analogs to take market share from existing drugs) have gotten job offers from Indian companies paying the same wage (one in US dollars, the other in Canadian dollars) that Canadians/USians get

I don't know exactly what that entails - whether these companies are trying hard for a short period to get important knowledge, and once that knowledge is obtained, they'll reduce the pay back to normal Indian levels,

or
whether this is a permanent state of affairs, that beyond a certain level of expertise they'll always be willing to pay a premium for those job titles.


Foreign labor in IC (out of BRIC) will not EVER even approach US levels in cost.

As a scholar from the Chinese Academy of Sciences noted - it would require the resources of 4 Earths to permit all of the Chinese population to achieve a US-like standard of living at present economic/material efficiencies.



Would it be possible to get 90% of the US standard of living while using far fewer resources?

I suspect that most resource use does not produce a lot of happiness,

so,

If one could apply an 80/20 analysis to the things that make people happy (which 20% of resource use produces 80% of happiness), then do all the things in the 20% that are cheap to do, could you get a very high standard of living at 1/2 or 1/4 the resource use?

Just one example - bike commuters score much higher on happiness than car commuters - how about designing communities that encourage bike use, and have work close to home? (I write this knowing that most of the world is going the opposite route, increasing their dependence on the auto and reducing bikes ... this is, after all, a "what if" question)

Rajiv
09-23-07, 10:59 PM
Just one example - bike commuters score much higher on happiness than car commuters - how about designing communities that encourage bike use, and have work close to home? (I write this knowing that most of the world is going the opposite route, increasing their dependence on the auto and reducing bikes ... this is, after all, a "what if" question)

See Portland: Celebrating America’s Most Livable City (http://www.streetfilms.org/archives/portland-celebrating-americas-most-livable-city/)

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zoog
09-24-07, 01:01 AM
Just one example - bike commuters score much higher on happiness than car commuters - how about designing communities that encourage bike use, and have work close to home? (I write this knowing that most of the world is going the opposite route, increasing their dependence on the auto and reducing bikes ... this is, after all, a "what if" question)

See Portland: Celebrating America’s Most Livable City (http://www.streetfilms.org/archives/portland-celebrating-americas-most-livable-city/)


I would say that all of the things featured in the video do contribute to making Portland a happy place. It can be difficult to narrow down just what it is exactly that makes a place "livable", and hard to put a price on how that affects people's mood and wellbeing. If you are interested in making your city/town more livable, especially with regards to transportation alternatives, I would encourage you to look at what has been done here.

That said, the video paints a rosy picture that suggests that everyone here is completely supportive. In reality, there is a very vocal minority who constantly complain about public money going towards mass transit, bike lanes, etc. Voters have repeatedly rejected paying for extensions to our light rail system. Our urban growth boundary has been a contentious issue since it was established in the late 1970's. Also, at times there is considerable conflict between bicyclists and drivers, with bad apples on both sides.

c1ue
09-24-07, 12:46 PM
Would it be possible to get 90% of the US standard of living while using far fewer resources?


I'd like to see how you'd built 90% of a house with fewer resources.

Ditto food consumption.

Even fuel - were everything to switch to something with an efficiency of a hybrid - we're still only talking about 75% reduction in fuel.

Since there are a lot of people already on and using this one Earth besides Chinese, not sure where they'd all go if the 'only' 1 Earth needed were expropriated by China :rolleyes:

Think of this another way: India with everyone living in a suburb.

Is this possible? I think not.

Or conversely: India with 60% of the population living in a New York style city.

Is this possible? Somewhat more so, but you're talking about a shift that makes the population shift from the creation of Pakistan seem like a walk in the park - even excluding the cost aspects. Just think of the infrastructure building and industrialization India would need to do to achieve US style food production efficiency...if it is even possible with the land there (I don't have any idea so this is not a value judgement)

As I said - unless we get Star Trek, it ain't gonna happen.

As for your example of your siblings and friends are getting US style wages in India:

Ex-patriates in Japan in the bubble, even myself from 1998-2001, were getting US wages PLUS benefits equalling 3x to 5x US standard of living.

Even today there are companies and governments willing to (often foolishly) pay extra for perceived talent needs. It is, however, true that the superstars in any profession get premium pay.

Not to belittle your sibling, friend, or myself as a former ex-pat, but honestly I just don't see how much delta almost ANY individual can contribute to the bottom line.

As an example - while I was pretty cheap being single at the time, one (of several) of my ex-pat co-workers brought his 4 kids and wife. He was costing upwards of $1.5M/year between his own pay and his ex-pat benefits. Was he really generating $1M net profit over and above what anyone else could do? I think not. Note this is not even a President/Vice President type executive.

I personally cost the company around 500K/year, of which more than half was ex-pat compensation. Despite closing 3 - $1M plus deals, the 30% or so margin on the 2 deals which probably would not have occurred without my contribution barely pays for my ex-pat costs.

In any case, the issue is the average wage - and I don't see that reaching parity in my lifetime.

ASH
09-25-07, 05:08 AM
[QUOTE=GRG55;16467]Gosh Andrew. Look what we started...

Just touching on what I've highlighted, it strikes me that the natural human tendency is to extrapolate trends from recent experience.

=======================

Hi GRG. There are elements of extrapolation in my gloomy prediction, but I prefer to think that I'm mainly calculating equilibrium rather than extrapolating a trend. The distinction I'd make is that when one extrapolates from a trend, one observes the recent rate of change and assumes that it will obtain far out into the future. When trying to calculate equilibrium, one thinks about the forces driving the process, and tries to determine the configuration of the system in which those forces balance. If my conclusion is wrong, it's because I don't actually understand how things work -- not because I'm blindly extrapolating a trend. ;-)

My supposition about the long-term value of my labor (or that of my as-yet hypothetical kids) is a supply-and-demand proposition. I think that in the long term, the supply of workers with my cognitive ability and education will increase faster than the demand for the associated labor. I think the supply will increase because the raw material is there (underutilized smart people in other countries) and because there are clear national and personal economic motives to develop it (economic growth and a leg up). On the other hand, I think demand won't keep pace because you can't increase the rate of innovation arbitrarily. Past a certain point, you've picked all the low-hanging fruit, and your return on investment in R&D drops.

For instance, I presume that there are about four times as many Chinese as Americans who have my basic cognitive ability because there are about four times as many Chinese total as Americans -- but most haven't had the opportunity to train to the Ph.D. level, so right now my labor is valued against a smaller pool of labor than the potential size of the market. However, just judging from my observations in graduate school, both individual Chinese and their government are working pretty hard to close that gap in education. The same is true of Indians, and all sorts of other nationalities. Thus, I assume the pool of laborers with my skill set will expand as the developing world develops, until either everyone with my general level of ability has been educated to my skill level, or the ratio of supply to demand drops to the point that training to this level is no longer economically attractive. (Here enters the extrapolation -- I'm assuming the Chinese will be able to continue to train their people, but maybe their built-in demographic problem will hit before this goes to completion.)

What about demand? I do expect demand for high-tech workers to rise over time as the economy grows, but I don't expect it to be linear with the increase in market participants. Briefly, if your market for cell phones increases by 50%, that doesn't mean you need 50% more engineers to design cell phones -- you probably just need 50% more cell phone manufacturing capacity. In order to generate demand for 50% more engineering capacity, you actually need 50% more engineering problems worth working on. (Worth it to whatever company or society is funding the research; not every good idea leads to a product in a time horizon agreeable to investors, and with the world's governments facing huge entitlement liabilities, it is reasonable to suppose that the public money available for research may decrease as we live hand-to-mouth supporting the retired.) I'm a big cheerleader for innovation and the fruits of investment in better mousetraps, but -- and maybe this is cynicism from working at a high-tech startup -- you can't increase the rate of good ideas arbitrarily just by throwing money at nerds.

Now, I admit I may have this wrong. None of my arguments actually prove that supply will go up faster than demand -- I've really only illustrated my intuitive sense of the relative importance of the effects in play. Maybe it will turn out that even though the raw material exists, the world will perpetually lack the capacity to educate people for high tech as fast as they are required. That's actually sort of plausible, since in the near-term there's likely to be an increase in demand for engineers (and workers of all varieties) as the baby-boomers retire. Still, my underlying assumption seems pretty safe: there are a bunch of people who are like me in ability, but whom I haven't had to compete with yet in the labor market. One day they will be competing, and my labor will be less rare -- and therefore less valuable.

Cheers,
Andrew

c1ue
09-25-07, 04:17 PM
For instance, I presume that there are about four times as many Chinese who have my basic cognitive ability as there are Americans, but most haven't had the opportunity to train to the Ph.D. level

Good thread and discussion.

I just wanted to point out that there are more than 4 Chinese for every one of you or me - the demographic differences when considering population, education preferences, etc lead to a much higher ratio.

Then there's India...

Another good point is that volume growth is not predicated on engineering talent growth. The corollary I drew from this conclusion long ago is that the offshoring we are seeing in the technical fields (and now increasingly finance) is not due to a lack of talent or inability to deliver, it is a pure cost reduction play.

This again feeds into my thesis that the multi-nationals who offshore are really just disintermediating the local economy where there former employees worked - not actually creating any new value.

While this is perfectly understandable from a selfish corporate perspective - it is not a net gain from a societal or governmental perspective.