View Full Version : FIRE Economy turns turtle
http://www.itulip.com/images/turtles.jpgFIRE Economy turns turtle
by Dave CohenAnd a man's foes [shall be] they of his own household
— Mark's Gospel, 10:36
"What you have told us is rubbish. The world is really a flat plate supported on the back of a giant tortoise." The scientist replied, "What is the tortoise standing on?" "You're very clever, young man, very clever," said the old lady. "But it's turtles all the way down!"
— comments made (perhaps (http://en.wikipedia.org/wiki/Turtles_all_the_way_down)) to Bertrand Russell
Today I will make the crucial link between our unsound economy and the future of manufacturing in the United States. I will focus on the auto industry, which has been so crucial to our past economic health and figures greatly in our future oil consumption. In Should We Save General Motors? (http://www.aspousa.org/index.php/2009/03/should-we-save-general-motors/) I pointed out the important difference between "productive works" like the Chevy Volt and derivatives like credit default swaps (CDS), which enabled gambling (not hedging) leading to pointless but profitable exchanges of paper money in the finance industry.
In No, We Can't? (http://www.aspousa.org/index.php/2009/03/no-we-cant/) I described the tragic misallocation of capital flowing from the Treasury and the Central Bank into the private banking system. Substantial amounts of money have been funneled through AIG to their CDS counterparties (http://www.scribd.com/doc/13294757/AIGs-Biggest-Counterparties), which are the same banks (like Goldman Sachs) receiving TARP money and loan guarantees. This ultimately self-defeating behavior emanates from the cozy relationship between the Federal government and our out-sized finance sector, which was recently described at length in The Quiet Coup (http://www.theatlantic.com/doc/200905/imf-advice/) by Simon Johnson (The Atlantic, May, 2009). (See: The Big Bet (http://www.itulip.com/forums/showthread.php?p=4486#post4486))
Tim Geithner has now revealed his extremely dangerous (http://finance.yahoo.com/tech-ticker/article/216311/Part-I-Geithner%27s-Plan-%22Extremely-Dangerous%22-Economist-Galbraith-Says?tickers=%5Egspc,%5Edji,c,bac,jpm,WFC?sec=topS tories&pos=2&asset=TBD&ccode=TBD) plan to bribe private equity and hedge funds to buy up toxic bank assets with the public taking almost all of the risk (http://www.reuters.com/article/newsOne/idUSTRE52N1IW20090324). Apparently I used the wrong wording and punctuation the last time around—it should have been called No We Won't! Obama met with the bankers last Friday. His spokesman Robert Gibbs described the meeting's agenda (http://www.reuters.com/article/businessNews/idUSTRE52O6QR20090325?feedType=RSS&feedName=businessNews).
Spokesman Robert Gibbs said the president would seek the executives' input on how the economy is developing. "The president looks forward to getting an update on what they're seeing happening in the economy," Gibbs said on Wednesday of the banking chief executives who are slated to meet with the president later this week.
He said Obama's message at the meeting would be to say that what is good for Wall Street is good for Main Street.
"We're all in the same boat," Gibbs said. "We have to understand that ... what is good for one has to be also good for the other [emphasis added]
Plainly, we are not all in the same boat. Gibbs has delivered the kiss of the death (http://en.wikipedia.org/wiki/The_kiss_of_Judas) to Main Street. This phrase derives from Judas' identification of Jesus in the Garden of Gethsemane. Jesus goes on to suffer The Passion, but working Americans are being crucified (sacrificed) this time around. In the Gospels, Judas' kiss is a betrayal.
Only the oldest among you will remember the words (http://www.freep.com/article/20080914/BUSINESS01/809140308/) of General Motors' CEO "Engine" Charlie Wilson in 1953.
In his closed hearing on Jan. 15, 1953, Wilson defended his investments and his integrity, saying he never could have risen to the top of GM if he had been crooked. Sen. Robert Hendrickson, R-N.J., asked whether, given his investments in GM, he could make a decision that would hurt the company... [Wilson replied as follows]
"I cannot conceive of one, because for years I thought what was good for our country was good for General Motors and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country."
Fast forward 56 years later. Try this quote on for size: "Asked whether he could make a decision that would hurt the company (http://www.bloggingstocks.com/2007/10/29/merrill-lynchs-stan-oneal-will-be-well-rewarded-for-his-failur/), CEO Stan O'Neal replied `I can not conceive of one, because for years I thought what was good for our country was good for Merrill Lynch and vice versa´." Just doesn't ring true, does it? A lot has changed since Charlie Wilson's day, and not much of it for the better from our perspective in 2009.
Finance Versus Manufacturing
Today the President got tough with General Motors and Chrysler (http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aVDIaVI6j6MA), Bloomberg, March 30, 2009).
President Barack Obama said General Motors Corp. and Chrysler LLC. must survive without becoming “wards of the state” and the companies have one last, limited chance to “fundamentally restructure.”
...“We cannot and must not, and we will not let our auto industry simply vanish,” the president said at the White House, announcing new and final deadlines for the No. 1 and No. 3 U.S. automakers to remake themselves “we cannot continue to excuse poor decisions. We cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars.”
Obama is adamant that General Motors and Chrysler should not become "wards of the state." And what of an unending flow of taxpayer dollars? And poor decision-making? This all sounds very familiar. Where have we heard this before (http://www.nytimes.com/2009/03/16/business/16rescue.html)?
In his description of America's rebirth as a Banana Republic, Simon Johnson touches on the expansion of finance in recent decades.
The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the de-regulatory policies of the Clinton and George W. Bush administrations....
Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically...
Johnson is right about the influence of the banks, but Wall Street's galling takeover of our economy (Figure 1) is not the whole story.
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa1ffd1970b-pi
Figure 1 — Taken from How might the current financial crisis shape financial sector regulation and structure? (http://www.bis.org/speeches/sp081119.htm) by Már Gudmundsson, Deputy Head of the Monetary and Economic Department of the Bank for International Settlements. Also shown are similar rises in Japan and some EU countries. This speech is worth reading.
Gudmundsson's graph displays the growing share of GDP appropriated by what iTulip's Eric Janszen calls the FIRE economy (http://www.harpers.org/archive/2008/02/0081908) (Finance, Insurance and Real Estate). This alarming growth came at the expense of manufacturing in the United States. The following passage is taken from Manufacturing continues to shrink as a percentage of U.S. economic activity (http://www.allbusiness.com/manufacturing/computer-electronic-product-manufacturing/1182847-1.html). The analysis was done in 2006 at the height of the madness.
Manufacturing's share of the U.S. economy continues its 50-year decline. Last year, manufacturing GDP fell to an all-time low of just 12 percent of the economy, according to a Manufacturers Alliance/MAPI analysis of recent data from the Commerce Department.
"Both major segments of manufacturing--durable and nondurable industries--declined," according to MAPI. Durable manufacturing accounted for 7 percent of the economy last year, down from 9.2 percent in 1995. Nondurable manufacturing fell to just 5 percent of the economy, from 6.7 percent in 1995.
Manufacturing represented only 12% of GDP while the categories finance and insurance taken together with real estate, rental and leasing3 million manufacturing jobs (http://www.epi.org/publications/entry/briefingpapers_bp149/) between 1998 and 2003.
The BEA's final revision (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm) indicates that U.S. GDP fell 6.3% in the final quarter of 2008. How did manufacturing fare over the entire year?
According to the measure of profits before tax with inventory valuation adjustment, domestic profits of financial and non-financial corporations decreased in 2008. The decrease in non-financial corporations reflected decreases in all industries shown (http://www.bea.gov/newsreleases/national/gdp/2009/pdf/gdp408f.pdf). The largest decrease was in manufacturing, and within manufacturing, the largest decreases were in “other” durable goods and in motor vehicles. [emphasis added]
President Obama rightly says that "we will not let our auto industry simply vanish," but he continues to coddle finance while chastising the car companies for making poor decisions. The now decrepit state of the auto industry is not just a result of their own mismanagement or the strength of the UAW—it is mostly a direct result of "poor" decisions made by bloated plutocrats on Wall Street. Greed-driven, non-productive investments in credit derivatives have now brought down Main Street, which binged on all the new credit the banks made available.
GM did not make bad or the wrong cars in recent years. However we view it, the domestic automakers gave the people what they wanted. Dubious enterprises like GMAC (http://www.gmacfs.com/us/en/index.html) dispensed loads of credit to grease the wheels. At least General Motors made something instead of selling AAA-rated collateralized debt obligations based on pools of lousy mortgages (http://www.bloomberg.com/apps/news?pid=20601087&sid=aiDvsS.mvE0A&refer=home).
In his State of Union speech (http://www.whitehouse.gov/the_press_office/remarks-of-president-barack-obama-address-to-joint-session-of-congress/), the president asserted that "new plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea." Those new Chevy Volts (http://auto.theglobeandmail.com/servlet/story/RTGAM.20090326.whAutoBuzz0326/GAStory/specialGlobeAuto/home) aren't rolling off our assembly lines yet, but they will certainly have batteries made by LG Chem of South Korea if and when they do. But who will buy them? What is the prognosis for domestic car sales?
[B]How is Main Street Doing?
President Obama laid out guarantees (http://wheels.blogs.nytimes.com/2009/03/30/understanding-obamas-auto-warranty-plan/?hp) for car buyers in his speech on the fate of automakers.
“If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always,” President Obama said during a speech from the White House. “Your warranty will be safe. In fact, it will be safer than it’s ever been, because starting today, the United States government will stand behind your warranty.”
"If you buy a car anytime this year, you may be able to deduct the cost of any sales and excise taxes," the president promised (http://voices.washingtonpost.com/44/2009/03/30/obamas_unbelievable_offer.html?wprss=44).
"We are working intensively with the auto finance companies (http://media.gmacfs.com/index.php?s=43&item=300) to increase the flow of credit to both consumers and dealers," Obama pledged.
How are car sales doing? Economist James Hamilton, who appreciates the role of an ever-diminishing manufacturing sector in America's economic health, gave us his latest update (http://www.econbrowser.com/archives/2009/03/update_on_the_a.html) on March 8, 2009.
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa33997970b-pi
Figure 2 — Taken from Hamilton's excellent Econbrowser (http://www.econbrowser.com/) blog. Sales in the first two months of 2009 were approximately half of what they were in 2004. The good years were 2004-2007.
Why are cars sales in the dumper? Listening to the president, you might assume that only a weak flow of credit is preventing brisk new car sales. Once illiquid—not insolvent (http://www.rgemonitor.com/roubini-monitor/255507/it_is_time_to_nationalize_insolvent_banking_system s)—banks start making loans again, everything will be fine as auto sales just pick up where they left off a few years ago.
The president's story is seriously incomplete. It's as though he has blinders on, but we know the reason why. Obama can only see the credit extension problem on Wall Street, not the debt obligation problem on Main Street. Pictures tell part of the story. I will rely on some data posted by Calculated Risk (http://www.calculatedriskblog.com/2009/03/fed-household-net-worth-cliff-dives-in.html) based on the Fed's 2008 Q4 Flow of Funds report (http://www.federalreserve.gov/releases/z1/Current/). (See Flow of Funds Q4 2008: Debt Deflation confirmation - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=8698))
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156ea9d92d970c-pi
Figure 3 — From Calculated Risk. Annotated to reflect his comment: "This is the Households and Nonprofit Net Worth as a percent of GDP.This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). This ratio was relatively stable for almost 50 years, and then ... bubbles!" A FIRE economy can not "thrive" without bubbles.
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156ea9d937970c-pi
Figure 4 — Taken from Tim Iacono's Seeking Alpha report (http://seekingalpha.com/article/125722-z1-flow-of-funds-report-household-net-worth-declines-11-2-trillion) on March 12, 2009. Bubbly total household assets are now starting to revert back to their pre-2002 level. How far will they fall in 2009?
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156ea9d925970c-pi
Figure 5 — From Calculated Risk. His comment: "This graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP is now declining rapidly. Mortgage debt as a percent of GDP was up slightly in Q4, and is only declining slowly. It's an old lesson: Assets values can fall quickly, but debt lingers!" [emphasis added]
These graphs show the staggering loss of wealth in American households. This trend is far from complete. Today's Case-Shiller index of house values in 20 cities dropped a record 19% year-over-year (http://www.bloomberg.com/apps/news?pid=20601087&sid=amN9MrcX5IkY&refer=home) in January, 2009. (Economic indicators lag the present.) U.S. News & World Report posted a story (http://www.usnews.com/blogs/capital-commerce/2009/3/12/americans-net-worth-down-155-trillion.html) about wealth losses in 2008.
The numbers from the Fed's Flow of Funds report for the fourth quarter are ugly:
The showstopper in today's report was the larger-than-expected $5.1 trillion decline in household net worth. The 9% decline in wealth was easily the largest on record and pushes the much-watched wealth-to-income ratio for the household sector down to 4.83, the lowest since 95Q1.
Since peaking in the second quarter of 2007, household wealth is down almost $13 trillion. Given where the S&P500 is now (around 740) and recent house price data, we estimate consumers have lost about another $2.5 trillion in the first quarter of the year.
These numbers are absolute death for workers who are more and more dependent on assets rather than incomes for long-term wealth building. This is why the White House can't dismiss the stock market as some sort of mere tracking poll. In terms of wealth destruction, this downturn is already like a half a Great Depression. [emphasis added. Assets rather than wages have been important to workers because real wages have been flat for most of the last decade.]
To make a long story short, people bought cars (and houses) in large numbers between 2004-2007 because they felt rich. Now all that inflated paper wealth is dwindling away as house and stock market prices continue to fall, despite the recent dead cat bounce in the Dow and S&P 500. Most alarmingly, Figure 5 demonstrates that "asset values can fall quickly but debt lingers!"
Americans are thus increasingly squeezed between their declining net worth and their overlarge debt. At what rate will they be buying new cars, let alone those made domestically, in the future? The outlook does not look good. There are a lot of fairly new cars out there that don't have to be replaced for years. And if you absolutely have to have one, you can always buy something used. Even a restructured General Motors will have trouble surviving as sales tumble in the short-term and remain low for several years to come. It is hard to see how Obama's sales pitch will work if Americans follow their own best interests.
These are the real consequences for manufacturing in an out-of-control FIRE economy. It will not be possible to pile more debt upon too much debt to jump start the economy. Americans must pay off (http://www.itulip.com/forums/showthread.php?p=83348#post83348) their debt before any new spending spree can begin again. General Motors may need life-support for several years if they are to stay in business. If we had given them even half the money (after a bankruptcy (http://online.wsj.com/article/SB123841609048669495.html) and restructuring) that has been laundered through AIG to its counter-parties the banks since last September, that would have been a good start—if you want to ever see a $40,000 Chevy Volt, that is.
Liquid Fuels Efficiency in a Prolonged Downturn
The downturn on Main Street accompanying our maintenance of a FIRE economy also has severe consequences for U.S. energy policy.The saving grace for Obama's administration is that global oil demand will likely stay low for several years.
Unfortunately, so will oil prices. Where is the incentive to buy those pricey Chevy Volts (with their Korean batteries) when they start rolling off our assembly lines? iTulip takes a particularly grim view of the timing of new alternative energy projects (Figure 6).
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa4407e970b-pi
Figure 6 — iTulip's prediction (http://www.itulip.com/forums/showthread.php?p=60856) for an alternative energy bull market.
On this view, even if large-scale 2nd-generation biofuels production from cellulosic feedstocks were technically and logistically feasible—it's not (http://i-r-squared.blogspot.com/2008/03/cellulosic-ethanol-is-dead.html) and might never be—we would not see that production until at least 2020 based on the shaky economy alone.
In Steve Chu's Energy Miscalculations (http://www.aspousa.org/index.php/2009/03/steven-chus-energy-miscalculations/), I demonstrated that Energy Secretary Chu's vision for increased liquid fuels efficiency in the U.S. depends almost entirely on higher CAFE standards. A prolonged downturn poses many problems for an already inadequate strategy.
If few are buying new cars, which lowers the turnover rate for a fleet of 250 million vehicles, CAFE standards have much weaker effects on fuel efficiency over time.
New technology companies who want to make HEV or PHEV vehicles will be hesitant to enter a very slow global market.
Even when new companies do start-up, sales for new types of products (like PHEVs) always follow an S-shaped curve. Thus achieving significant market penetration would take more than a decade even without a depressed economy. (See my Energy Miscalculations.)
Now deposed GM CEO Rick Wagoner is aware of the problems (http://www.weeklystandard.com/weblogs/TWSFP/2009/03/gm_ceo_carbon_regulation_a_hug.asp).
Wagoner hinted that government may want to consider designing new negative incentives for consumers to purchase highly fuel-efficient vehicles.
He noted that hybrid sales have fallen off a cliff this year due to the relatively high price of hybrid automobiles and the low price of fuel. "Consumers don't have an incentive themselves" to purchase vehicles that stray from the traditional petroleum model, said Wagoner, and he pointed to Europe as an example of governments creating incentives for consumers. (In Western Europe, government taxes push gas prices past $5 per gallon.)
In a prolonged downturn, it will surely be impossible to stimulate spending by means of "negative incentives" like raising gasoline taxes. That would just make a bad situation worse.
The central dogma of every government since Jimmie Carter—ever-greater debt fueling economic growth—is dead. We can not overlay too much debt with more debt—it is not turtles all the way down. We can not buy new cars we can not afford. Sorry, Mr. President, even you can not resurrect the dead.
See also:
USA, Inc. Common Shares: Long or Short? (http://www.itulip.com/forums/showthread.php?p=7131#post7131)
Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=7246)
Pop goes the Globaloney Economy - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=7057)
Dave Cohen writes for The Association for the Study of Peak Oil and Gas (ASPO-USA (http://www.aspousa.org/)). Contact the author at dave.aspo@gmail.com
(Photo credit: gomichild (http://gomichild.vox.com/library/photo/6a00c225292c5a8fdb00d4144b6dff3c7f.html))
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
__________________________________________________
To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List (http://ui.constantcontact.com/d.jsp?m=1101238839116&p=oi)
Copyright © iTulip, Inc. 1998 - 2009 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/forums/../GeneralDisclaimer.htm)
Liquid Fuels Efficiency in a Prolonged Downturn
The downturn on Main Street accompanying our maintenance of a FIRE economy also has severe consequences for U.S. energy policy.The saving grace for Obama's administration is that global oil demand will likely stay low for several years.
Unfortunately, so will oil prices. Where is the incentive to buy those pricey Chevy Volts (with their Korean batteries) when they start rolling off our assembly lines? iTulip takes a particularly grim view of the timing of new alternative energy projects (Figure 6).
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa4407e970b-pi
Figure 6 — iTulip's prediction (http://www.itulip.com/forums/showthread.php?p=60856) for an alternative energy bull market.
On this view, even if large-scale 2nd-generation biofuels production from cellulosic feedstocks were technically and logistically feasible—it's not (http://i-r-squared.blogspot.com/2008/03/cellulosic-ethanol-is-dead.html) and might never be—we would not see that production until at least 2020 based on the shaky economy alone.
In Steve Chu's Energy Miscalculations (http://www.aspousa.org/index.php/2009/03/steven-chus-energy-miscalculations/), I demonstrated that Energy Secretary Chu's vision for increased liquid fuels efficiency in the U.S. depends almost entirely on higher CAFE standards. A prolonged downturn poses many problems for an already inadequate strategy.
If few are buying new cars, which lowers the turnover rate for a fleet of 250 million vehicles, CAFE standards have much weaker effects on fuel efficiency over time.
New technology companies who want to make HEV or PHEV vehicles will be hesitant to enter a very slow global market.
Even when new companies do start-up, sales for new types of products (like PHEVs) always follow an S-shaped curve. Thus achieving significant market penetration would take more than a decade even without a depressed economy. (See my Energy Miscalculations.)
Now deposed GM CEO Rick Wagoner is aware of the problems (http://www.weeklystandard.com/weblogs/TWSFP/2009/03/gm_ceo_carbon_regulation_a_hug.asp).
Wagoner hinted that government may want to consider designing new negative incentives for consumers to purchase highly fuel-efficient vehicles.
He noted that hybrid sales have fallen off a cliff this year due to the relatively high price of hybrid automobiles and the low price of fuel. "Consumers don't have an incentive themselves" to purchase vehicles that stray from the traditional petroleum model, said Wagoner, and he pointed to Europe as an example of governments creating incentives for consumers. (In Western Europe, government taxes push gas prices past $5 per gallon.)
In a prolonged downturn, it will surely be impossible to stimulate spending by means of "negative incentives" like raising gasoline taxes. That would just make a bad situation worse.
"The low price of fuel" is not the only factor driving the sales volumes of hybrid cars, and it may not even be the most important factor.
USA hybrid vehicle sales fell off a cliff in 2008 months before the price of gasoline peaked, and have never come close to their all time peak of 45,000 units in May of 2007.
http://bioage.typepad.com/photos/uncategorized/2009/03/05/us_hybrid_sales_2009021.png
rabot10
04-01-09, 05:02 PM
"We can not overlay too much debt with more debt—it is not turtles all the way down. We can not buy new cars we can not afford. Sorry, Mr. President, even you can not resurrect the dead."
A truer statement could not have been made. I started a referral service for bankruptcy attorneys a year or so ago – OMG you guys would not believe the stories.
rick
RebbePete
04-01-09, 05:02 PM
What makes the statistic on the decline of manufacturing even more terrifying is the Government's definitiion of "manufacturing," which includes things like flour, cheese, animal slaughtering, chocolate and coffee. :eek: Funny how these expansions were added when things I'd define as "manufacturing" hit the skids several years ago. What a coincidence.
The full, eye-popping list is here:
http://www.census.gov/indicator/www/m3/appendixb.pdf
Its the END of the UK-USA-Euro-........Ah HELL, WHITE MANS EMPIRE.....not even ISREAL can save it now!
The "Buzz" out of London is "They" are going to PRINT!
Mike
Can FIRE change its Nature :rolleyes:
The Fire Scorpion needed to cross the river. He had no chance on his own.
The turtle, nearby, crossed the river every day.
"Turtle, can you carry me to the other side?"
"No', said the turtle, "you will sting me when my head is exposed."
The fire scorpion assured the turtle that would never happen.
The turtle, after a long deliberation, decided to take that chance.
Across the river they went, the turtle stretched out from his shell, swimming steadily toward the far shore.
The scorpion, true to his word, rode peacefully on the turtle's shell just behind his neck.
As they reached the far shore and the scorpion was out of danger, he struck the turtle a killing sting to the neck.
"Why", asked the dying turtle, "you promised me you wouldn't sting me."
"I know", said the scorpion, "but I couldn't help myself. You see by nature I'm a scorpion."
charliebrown
04-01-09, 05:47 PM
I agree with most of this post. Here are some comments.
1. Short sighted financial planning had a lot to do with GM's demise. I think the business model was, we can't compete with small/medium sized car imports, so lets create large vehicles with high profit margins. That worked real well until gas hit 4.00+ a gallon, and financing or the desire to own a 30K+ SUV no longer existed.
2. I'm in the market to replace my small commuter car (1995 mazda). First as the article says Hybrids are too expensive, i also dont know how the repairs on these will be once they are off warranty. Can my local shop guy fix it if its electrical/drive train? Or will I have to take it to the dealer and be soaked with 120$/hr repair costs? I will buy used, who knows if I will have a job next month?? I compared ford focus, saturn ion, toyota echo, nissan sentra, honda civic.
Using govt fuel data scion, honda, and toyota all have significantly higher fuel economy than the ford/saturn vehicles (upper 20's vs. lower 20's). I also looked up the consumer's reports reliability records on these models, and scion, toyota, honda are significantly better in reliability. maybe that is why ford/chrysler/gm are where they are today. they still dont get.
J6P (me) needs a reliable fuel efficient car.
http://www.itulip.com/images/turtles.jpgFIRE Economy turns turtle
by Dave CohenAnd a man's foes [shall be] they of his own household
— Mark's Gospel, 10:36
"What you have told us is rubbish. The world is really a flat plate supported on the back of a giant tortoise." The scientist replied, "What is the tortoise standing on?" "You're very clever, young man, very clever," said the old lady. "But it's turtles all the way down!"
— comments made (perhaps (http://en.wikipedia.org/wiki/Turtles_all_the_way_down)) to Bertrand Russell
Today I will make the crucial link between our unsound economy and the future of manufacturing in the United States. I will focus on the auto industry, which has been so crucial to our past economic health and figures greatly in our future oil consumption. In Should We Save General Motors? (http://www.aspousa.org/index.php/2009/03/should-we-save-general-motors/) I pointed out the important difference between "productive works" like the Chevy Volt and derivatives like credit default swaps (CDS), which enabled gambling (not hedging) leading to pointless but profitable exchanges of paper money in the finance industry.
In No, We Can't? (http://www.aspousa.org/index.php/2009/03/no-we-cant/) I described the tragic misallocation of capital flowing from the Treasury and the Central Bank into the private banking system. Substantial amounts of money have been funneled through AIG to their CDS counterparties (http://www.scribd.com/doc/13294757/AIGs-Biggest-Counterparties), which are the same banks (like Goldman Sachs) receiving TARP money and loan guarantees. This ultimately self-defeating behavior emanates from the cozy relationship between the Federal government and our out-sized finance sector, which was recently described at length in The Quiet Coup (http://www.theatlantic.com/doc/200905/imf-advice/) by Simon Johnson (The Atlantic, May, 2009). (See: The Big Bet (http://www.itulip.com/forums/showthread.php?p=4486#post4486))
Tim Geithner has now revealed his extremely dangerous (http://finance.yahoo.com/tech-ticker/article/216311/Part-I-Geithner%27s-Plan-%22Extremely-Dangerous%22-Economist-Galbraith-Says?tickers=%5Egspc,%5Edji,c,bac,jpm,WFC?sec=topS tories&pos=2&asset=TBD&ccode=TBD) plan to bribe private equity and hedge funds to buy up toxic bank assets with the public taking almost all of the risk (http://www.reuters.com/article/newsOne/idUSTRE52N1IW20090324). Apparently I used the wrong wording and punctuation the last time around—it should have been called No We Won't! Obama met with the bankers last Friday. His spokesman Robert Gibbs described the meeting's agenda (http://www.reuters.com/article/businessNews/idUSTRE52O6QR20090325?feedType=RSS&feedName=businessNews).
Spokesman Robert Gibbs said the president would seek the executives' input on how the economy is developing. "The president looks forward to getting an update on what they're seeing happening in the economy," Gibbs said on Wednesday of the banking chief executives who are slated to meet with the president later this week.
He said Obama's message at the meeting would be to say that what is good for Wall Street is good for Main Street.
"We're all in the same boat," Gibbs said. "We have to understand that ... what is good for one has to be also good for the other [emphasis added]
Plainly, we are not all in the same boat. Gibbs has delivered the kiss of the death (http://en.wikipedia.org/wiki/The_kiss_of_Judas) to Main Street. This phrase derives from Judas' identification of Jesus in the Garden of Gethsemane. Jesus goes on to suffer The Passion, but working Americans are being crucified (sacrificed) this time around. In the Gospels, Judas' kiss is a betrayal.
Only the oldest among you will remember the words (http://www.freep.com/article/20080914/BUSINESS01/809140308/) of General Motors' CEO "Engine" Charlie Wilson in 1953.
In his closed hearing on Jan. 15, 1953, Wilson defended his investments and his integrity, saying he never could have risen to the top of GM if he had been crooked. Sen. Robert Hendrickson, R-N.J., asked whether, given his investments in GM, he could make a decision that would hurt the company... [Wilson replied as follows]
"I cannot conceive of one, because for years I thought what was good for our country was good for General Motors and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country."
Fast forward 56 years later. Try this quote on for size: "Asked whether he could make a decision that would hurt the company (http://www.bloggingstocks.com/2007/10/29/merrill-lynchs-stan-oneal-will-be-well-rewarded-for-his-failur/), CEO Stan O'Neal replied `I can not conceive of one, because for years I thought what was good for our country was good for Merrill Lynch and vice versa´." Just doesn't ring true, does it? A lot has changed since Charlie Wilson's day, and not much of it for the better from our perspective in 2009.
Finance Versus Manufacturing
Today the President got tough with General Motors and Chrysler (http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aVDIaVI6j6MA), Bloomberg, March 30, 2009).
President Barack Obama said General Motors Corp. and Chrysler LLC. must survive without becoming “wards of the state” and the companies have one last, limited chance to “fundamentally restructure.”
...“We cannot and must not, and we will not let our auto industry simply vanish,” the president said at the White House, announcing new and final deadlines for the No. 1 and No. 3 U.S. automakers to remake themselves “we cannot continue to excuse poor decisions. We cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars.”
Obama is adamant that General Motors and Chrysler should not become "wards of the state." And what of an unending flow of taxpayer dollars? And poor decision-making? This all sounds very familiar. Where have we heard this before (http://www.nytimes.com/2009/03/16/business/16rescue.html)?
In his description of America's rebirth as a Banana Republic, Simon Johnson touches on the expansion of finance in recent decades.
The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the de-regulatory policies of the Clinton and George W. Bush administrations....
Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically...
Johnson is right about the influence of the banks, but Wall Street's galling takeover of our economy (Figure 1) is not the whole story.
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa1ffd1970b-pi
Figure 1 — Taken from How might the current financial crisis shape financial sector regulation and structure? (http://www.bis.org/speeches/sp081119.htm) by Már Gudmundsson, Deputy Head of the Monetary and Economic Department of the Bank for International Settlements. Also shown are similar rises in Japan and some EU countries. This speech is worth reading.
Gudmundsson's graph displays the growing share of GDP appropriated by what iTulip's Eric Janszen calls the FIRE economy (http://www.harpers.org/archive/2008/02/0081908) (Finance, Insurance and Real Estate). This alarming growth came at the expense of manufacturing in the United States. The following passage is taken from Manufacturing continues to shrink as a percentage of U.S. economic activity (http://www.allbusiness.com/manufacturing/computer-electronic-product-manufacturing/1182847-1.html). The analysis was done in 2006 at the height of the madness.
Manufacturing's share of the U.S. economy continues its 50-year decline. Last year, manufacturing GDP fell to an all-time low of just 12 percent of the economy, according to a Manufacturers Alliance/MAPI analysis of recent data from the Commerce Department.
"Both major segments of manufacturing--durable and nondurable industries--declined," according to MAPI. Durable manufacturing accounted for 7 percent of the economy last year, down from 9.2 percent in 1995. Nondurable manufacturing fell to just 5 percent of the economy, from 6.7 percent in 1995.
Manufacturing represented only 12% of GDP while the categories finance and insurance taken together with real estate, rental and leasing3 million manufacturing jobs (http://www.epi.org/publications/entry/briefingpapers_bp149/) between 1998 and 2003.
The BEA's final revision (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm) indicates that U.S. GDP fell 6.3% in the final quarter of 2008. How did manufacturing fare over the entire year?
According to the measure of profits before tax with inventory valuation adjustment, domestic profits of financial and non-financial corporations decreased in 2008. The decrease in non-financial corporations reflected decreases in all industries shown (http://www.bea.gov/newsreleases/national/gdp/2009/pdf/gdp408f.pdf). The largest decrease was in manufacturing, and within manufacturing, the largest decreases were in “other” durable goods and in motor vehicles. [emphasis added]
President Obama rightly says that "we will not let our auto industry simply vanish," but he continues to coddle finance while chastising the car companies for making poor decisions. The now decrepit state of the auto industry is not just a result of their own mismanagement or the strength of the UAW—it is mostly a direct result of "poor" decisions made by bloated plutocrats on Wall Street. Greed-driven, non-productive investments in credit derivatives have now brought down Main Street, which binged on all the new credit the banks made available.
GM did not make bad or the wrong cars in recent years. However we view it, the domestic automakers gave the people what they wanted. Dubious enterprises like GMAC (http://www.gmacfs.com/us/en/index.html) dispensed loads of credit to grease the wheels. At least General Motors made something instead of selling AAA-rated collateralized debt obligations based on pools of lousy mortgages (http://www.bloomberg.com/apps/news?pid=20601087&sid=aiDvsS.mvE0A&refer=home).
In his State of Union speech (http://www.whitehouse.gov/the_press_office/remarks-of-president-barack-obama-address-to-joint-session-of-congress/), the president asserted that "new plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea." Those new Chevy Volts (http://auto.theglobeandmail.com/servlet/story/RTGAM.20090326.whAutoBuzz0326/GAStory/specialGlobeAuto/home) aren't rolling off our assembly lines yet, but they will certainly have batteries made by LG Chem of South Korea if and when they do. But who will buy them? What is the prognosis for domestic car sales?
[B]How is Main Street Doing?
President Obama laid out guarantees (http://wheels.blogs.nytimes.com/2009/03/30/understanding-obamas-auto-warranty-plan/?hp) for car buyers in his speech on the fate of automakers.
“If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always,” President Obama said during a speech from the White House. “Your warranty will be safe. In fact, it will be safer than it’s ever been, because starting today, the United States government will stand behind your warranty.”
"If you buy a car anytime this year, you may be able to deduct the cost of any sales and excise taxes," the president promised (http://voices.washingtonpost.com/44/2009/03/30/obamas_unbelievable_offer.html?wprss=44).
"We are working intensively with the auto finance companies (http://media.gmacfs.com/index.php?s=43&item=300) to increase the flow of credit to both consumers and dealers," Obama pledged.
How are car sales doing? Economist James Hamilton, who appreciates the role of an ever-diminishing manufacturing sector in America's economic health, gave us his latest update (http://www.econbrowser.com/archives/2009/03/update_on_the_a.html) on March 8, 2009.
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa33997970b-pi
Figure 2 — Taken from Hamilton's excellent Econbrowser (http://www.econbrowser.com/) blog. Sales in the first two months of 2009 were approximately half of what they were in 2004. The good years were 2004-2007.
Why are cars sales in the dumper? Listening to the president, you might assume that only a weak flow of credit is preventing brisk new car sales. Once illiquid—not insolvent (http://www.rgemonitor.com/roubini-monitor/255507/it_is_time_to_nationalize_insolvent_banking_system s)—banks start making loans again, everything will be fine as auto sales just pick up where they left off a few years ago.
The president's story is seriously incomplete. It's as though he has blinders on, but we know the reason why. Obama can only see the credit extension problem on Wall Street, not the debt obligation problem on Main Street. Pictures tell part of the story. I will rely on some data posted by Calculated Risk (http://www.calculatedriskblog.com/2009/03/fed-household-net-worth-cliff-dives-in.html) based on the Fed's 2008 Q4 Flow of Funds report (http://www.federalreserve.gov/releases/z1/Current/). (See Flow of Funds Q4 2008: Debt Deflation confirmation - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=8698))
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156ea9d92d970c-pi
Figure 3 — From Calculated Risk. Annotated to reflect his comment: "This is the Households and Nonprofit Net Worth as a percent of GDP.This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). This ratio was relatively stable for almost 50 years, and then ... bubbles!" A FIRE economy can not "thrive" without bubbles.
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156ea9d937970c-pi
Figure 4 — Taken from Tim Iacono's Seeking Alpha report (http://seekingalpha.com/article/125722-z1-flow-of-funds-report-household-net-worth-declines-11-2-trillion) on March 12, 2009. Bubbly total household assets are now starting to revert back to their pre-2002 level. How far will they fall in 2009?
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156ea9d925970c-pi
Figure 5 — From Calculated Risk. His comment: "This graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP is now declining rapidly. Mortgage debt as a percent of GDP was up slightly in Q4, and is only declining slowly. It's an old lesson: Assets values can fall quickly, but debt lingers!" [emphasis added]
These graphs show the staggering loss of wealth in American households. This trend is far from complete. Today's Case-Shiller index of house values in 20 cities dropped a record 19% year-over-year (http://www.bloomberg.com/apps/news?pid=20601087&sid=amN9MrcX5IkY&refer=home) in January, 2009. (Economic indicators lag the present.) U.S. News & World Report posted a story (http://www.usnews.com/blogs/capital-commerce/2009/3/12/americans-net-worth-down-155-trillion.html) about wealth losses in 2008.
The numbers from the Fed's Flow of Funds report for the fourth quarter are ugly:
The showstopper in today's report was the larger-than-expected $5.1 trillion decline in household net worth. The 9% decline in wealth was easily the largest on record and pushes the much-watched wealth-to-income ratio for the household sector down to 4.83, the lowest since 95Q1.
Since peaking in the second quarter of 2007, household wealth is down almost $13 trillion. Given where the S&P500 is now (around 740) and recent house price data, we estimate consumers have lost about another $2.5 trillion in the first quarter of the year.
These numbers are absolute death for workers who are more and more dependent on assets rather than incomes for long-term wealth building. This is why the White House can't dismiss the stock market as some sort of mere tracking poll. In terms of wealth destruction, this downturn is already like a half a Great Depression. [emphasis added. Assets rather than wages have been important to workers because real wages have been flat for most of the last decade.]
To make a long story short, people bought cars (and houses) in large numbers between 2004-2007 because they felt rich. Now all that inflated paper wealth is dwindling away as house and stock market prices continue to fall, despite the recent dead cat bounce in the Dow and S&P 500. Most alarmingly, Figure 5 demonstrates that "asset values can fall quickly but debt lingers!"
Americans are thus increasingly squeezed between their declining net worth and their overlarge debt. At what rate will they be buying new cars, let alone those made domestically, in the future? The outlook does not look good. There are a lot of fairly new cars out there that don't have to be replaced for years. And if you absolutely have to have one, you can always buy something used. Even a restructured General Motors will have trouble surviving as sales tumble in the short-term and remain low for several years to come. It is hard to see how Obama's sales pitch will work if Americans follow their own best interests.
These are the real consequences for manufacturing in an out-of-control FIRE economy. It will not be possible to pile more debt upon too much debt to jump start the economy. Americans must pay off (http://www.itulip.com/forums/showthread.php?p=83348#post83348) their debt before any new spending spree can begin again. General Motors may need life-support for several years if they are to stay in business. If we had given them even half the money (after a bankruptcy (http://online.wsj.com/article/SB123841609048669495.html) and restructuring) that has been laundered through AIG to its counter-parties the banks since last September, that would have been a good start—if you want to ever see a $40,000 Chevy Volt, that is.
Liquid Fuels Efficiency in a Prolonged Downturn
The downturn on Main Street accompanying our maintenance of a FIRE economy also has severe consequences for U.S. energy policy.The saving grace for Obama's administration is that global oil demand will likely stay low for several years.
Unfortunately, so will oil prices. Where is the incentive to buy those pricey Chevy Volts (with their Korean batteries) when they start rolling off our assembly lines? iTulip takes a particularly grim view of the timing of new alternative energy projects (Figure 6).
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa4407e970b-pi
Figure 6 — iTulip's prediction (http://www.itulip.com/forums/showthread.php?p=60856) for an alternative energy bull market.
On this view, even if large-scale 2nd-generation biofuels production from cellulosic feedstocks were technically and logistically feasible—it's not (http://i-r-squared.blogspot.com/2008/03/cellulosic-ethanol-is-dead.html) and might never be—we would not see that production until at least 2020 based on the shaky economy alone.
In Steve Chu's Energy Miscalculations (http://www.aspousa.org/index.php/2009/03/steven-chus-energy-miscalculations/), I demonstrated that Energy Secretary Chu's vision for increased liquid fuels efficiency in the U.S. depends almost entirely on higher CAFE standards. A prolonged downturn poses many problems for an already inadequate strategy.
If few are buying new cars, which lowers the turnover rate for a fleet of 250 million vehicles, CAFE standards have much weaker effects on fuel efficiency over time.
New technology companies who want to make HEV or PHEV vehicles will be hesitant to enter a very slow global market.
Even when new companies do start-up, sales for new types of products (like PHEVs) always follow an S-shaped curve. Thus achieving significant market penetration would take more than a decade even without a depressed economy. (See my Energy Miscalculations.)
Now deposed GM CEO Rick Wagoner is aware of the problems (http://www.weeklystandard.com/weblogs/TWSFP/2009/03/gm_ceo_carbon_regulation_a_hug.asp).
Wagoner hinted that government may want to consider designing new negative incentives for consumers to purchase highly fuel-efficient vehicles.
He noted that hybrid sales have fallen off a cliff this year due to the relatively high price of hybrid automobiles and the low price of fuel. "Consumers don't have an incentive themselves" to purchase vehicles that stray from the traditional petroleum model, said Wagoner, and he pointed to Europe as an example of governments creating incentives for consumers. (In Western Europe, government taxes push gas prices past $5 per gallon.)
In a prolonged downturn, it will surely be impossible to stimulate spending by means of "negative incentives" like raising gasoline taxes. That would just make a bad situation worse.
The central dogma of every government since Jimmie Carter—ever-greater debt fueling economic growth—is dead. We can not overlay too much debt with more debt—it is not turtles all the way down. We can not buy new cars we can not afford. Sorry, Mr. President, even you can not resurrect the dead.
See also:
USA, Inc. Common Shares: Long or Short? (http://www.itulip.com/forums/showthread.php?p=7131#post7131)
Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=7246)
Pop goes the Globaloney Economy - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=7057)
Dave Cohen writes for The Association for the Study of Peak Oil and Gas (ASPO-USA (http://www.aspousa.org/)). Contact the author at dave.aspo@gmail.com
(Photo credit: gomichild (http://gomichild.vox.com/library/photo/6a00c225292c5a8fdb00d4144b6dff3c7f.html))
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
__________________________________________________
To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List (http://ui.constantcontact.com/d.jsp?m=1101238839116&p=oi)
Copyright © iTulip, Inc. 1998 - 2009 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/forums/../GeneralDisclaimer.htm)
The good news is that we're fucked!
The bad news is there's plenty more where that came from.
Diarmuid
04-01-09, 06:09 PM
I have just read the linked article at the BIS concerning regulation
http://www.bis.org/speeches/sp081119.htm
Quote
The current financial crisis was triggered by increasing defaults on subprime mortgages and the turn of the housing cycle in the United States
And there I was thinking that it was due to the dismantling of existing regulation like Glass / Steagal and the fradulent packaging of these loans into derivatives which also would have been illegal up to the late nineties until Rubin, Summers and co. dismantled said legisilation for the benefit of their friends in Goldmans and elsewhere
Quote
Let me end by saying that the financial industry and its regulators face big challenges. The regulatory weaknesses that came to the fore during the crisis need to be fixed. This is also an opportunity to reduce the procyclical tendencies in the financial system and its regulatory framework.
I think I have heard this some where before! was this not the same reasoning for the establishment of the FED? Can not wait to see what they offer us this time round to reduce "the procyclical tendencies"
The downturn on Main Street accompanying our maintenance of a FIRE economy also has severe consequences for U.S. energy policy.The saving grace for Obama's administration is that global oil demand will likely stay low for several years.
Unfortunately, so will oil prices.
Interesting viewpoint FRED. It's quite divergent from itulip's past prognostications. EJ has said prior that he felt commodity and oil prices would not stay low for long in interviews. Also, you recently said that oil investment would be a central tenant in your new allocation update. How do these two sentiments jive with the above statement?
vdhulla
04-01-09, 06:55 PM
Probably not significant, but interesting. As soon as I saw the Total Household Net Worth as % of GDP curve, it's similarity to DJIA curve striked me, and so I compared. The years of tops and bottoms match in both.
For some reason could not upload the image file, hence attached the word doc.
strittmatter
04-01-09, 07:02 PM
Can FIRE change its Nature :rolleyes:
The Fire Scorpion needed to cross the river. He had no chance on his own.
The turtle, nearby, crossed the river every day.
"Turtle, can you carry me to the other side?"
"No', said the turtle, "you will sting me when my head is exposed."
The fire scorpion assured the turtle that would never happen.
The turtle, after a long deliberation, decided to take that chance.
Across the river they went, the turtle stretched out from his shell, swimming steadily toward the far shore.
The scorpion, true to his word, rode peacefully on the turtle's shell just behind his neck.
As they reached the far shore and the scorpion was out of danger, he struck the turtle a killing sting to the neck.
"Why", asked the dying turtle, "you promised me you wouldn't sting me."
"I know", said the scorpion, "but I couldn't help myself. You see by nature I'm a scorpion."
http://www.youtube.com/watch?v=-P70hbHBdl0
1:02 minutes
http://www.youtube.com/watch?v=-P70hbHBdl0
1:02 minutes
Like the frozen credit analogy!
"The low price of fuel" is not the only factor driving the sales volumes of hybrid cars, and it may not even be the most important factor.
USA hybrid vehicle sales fell off a cliff in 2008 months before the price of gasoline peaked, and have never come close to their all time peak of 45,000 units in May of 2007.
http://bioage.typepad.com/photos/uncategorized/2009/03/05/us_hybrid_sales_2009021.png
It may be that people just got smarter about it. I considered a hybrid when looking for a new car, but by my calculations the price of gas needed to be over $7 per gallon for it to make financial sense to pay the premium. My theory is that once the earlier adopters and environmentalists with a little extra dough made their purchases, there was not really that large a market for your average price-conscious consumer.
audrey_girl
04-01-09, 08:04 PM
"In a prolonged downturn, it will surely be impossible to stimulate spending by means of "negative incentives" like raising gasoline taxes. That would just make a bad situation worse."
and yet thats the plan to raise taxes, raise taxes some more, and then raise them again...
what the gov't will not take upfront in higher taxes, they will do through the hidden tax of inflation...
ugggh
It may be that people just got smarter about it. I considered a hybrid when looking for a new car, but by my calculations the price of gas needed to be over $7 per gallon for it to make financial sense to pay the premium. My theory is that once the earlier adopters and environmentalists with a little extra dough made their purchases, there was not really that large a market for your average price-conscious consumer.
Exactly. I have a friend with a hybrid Camry. Mine isn't. We compared mileage, and use. This was when gas was about $3.50 or so. He couldn't except that he paid too much.
It seems to me that the main reason manufacturing jobs are disappearing in the US is because factory workers in many other parts of the world will work for a fraction of the US factory worker wage.
This problem can only be solved by an equalization of wages, or deglobalizing the world economy so there's no competition . . . .
LargoWinch
04-01-09, 09:26 PM
JT, why did you copy the entire article for a 18-word reply?
My scrolling mouse finger hurts...
I considered a hybrid when looking for a new car, but by my calculations the price of gas needed to be over $7 per gallon for it to make financial sense to pay the premium.
I used to drive a Prius, and I heard this argument all the time. To me, it was more than just a cost issue. My counter argument:
If there was a sudden dislocation in the price or availability of gasoline, including things like a currency crisis, war or rationing, what makes you think that you will be able to buy a high-mileage car at that time, regardless of what you're willing to pay?
I used to drive a Prius, and I heard this argument all the time. To me, it was more than just a cost issue. My counter argument:
If there was a sudden dislocation in the price or availability of gasoline, including things like a currency crisis, war or rationing, what makes you think that you will be able to buy a high-mileage car at that time, regardless of what you're willing to pay?
If the power goes out it doesn't matter if your home is filled with energy efficient light bulbs. You're still in the dark.
If there is a sudden dislocation in the availability of gasoline, what real difference does having a high mileage car make? You go another week before you run dry?
If it's not available, it's not available to anyone [unless you have real good connections]. Isn't that the argument for having a contingency for a fuel crunch that is independent of a hydrocarbon fuel supply...like a good bicycle?
JT, why did you copy the entire article for a 18-word reply?
My scrolling mouse finger hurts...
Sorry, the whole economic mess and "solutions" are just too rich, couldn't help myself.
It seems to me that the main reason manufacturing jobs are disappearing in the US is because factory workers in many other parts of the world will work for a fraction of the US factory worker wage.
This problem can only be solved by an equalization of wages, or deglobalizing the world economy so there's no competition . . . .
aka...protectionism here we come (deglobalization as you call it).
I'm starting to believe more and more that, in spite of current calls for cooperation amongst nations, the most likely path is toward escalating levels of protectionism. Our elected officials typically take the actions that are most apt to get them re-elected thus, hello protected electorate and screw-you non-voting foreigner.
Surprisingly, the more I consider this alternative, the more I warm-up to it. The U.S. is well-suited to be a self-sufficient economy and, with import tariffs creating an uneven playing field, a protected manufacturing sector may be able to repair and strengthen itself. It could be good for the U.S. even if not good for the world.
I recognize that this is a selfish, short-sighted view, but that doesn't mean our political leaders, of every nation, won't pursue it. Let the finger-pointing, blame, and retaliation begin.
santafe2
04-01-09, 11:13 PM
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa4407e970b-piFigure 6 — iTulip's prediction (http://www.itulip.com/forums/showthread.php?p=60856) for an alternative energy bull market.Tactical alt-energy opportunities started in late 2007 as the economic depression began. By the time this chart predicts a beginning, opportunities in stationary alt-energy will be in full bloom. Were this chart to distinguish between stationary and mobile energy it would be more interesting and more useful. As it stands, I can assure you, it's at best incorrect.
If there is a sudden dislocation in the availability of gasoline, what real difference does having a high mileage car make? You go another week before you run dry?
If it's not available, it's not available to anyone [unless you have real good connections].
You make it sound so black-and-white: either all the gas you need, or none at all. I suspect the none at all case is actually the least likely -- but there are a lot of other possibilities. What about rationing or shortages? I'm old enough to remember waiting in lines during the oil embargo in the 70's. There's no reason why something as bad or worse couldn't happen again.
The advantage of a high-mileage car should be obvious: for every gallon of fuel you can get your hands on -- through rationing, black market, your own storage or whatever -- you can travel that many more miles.
One advantage of living in a small town is that I don't need to drive much any more. One tank of gas lasts me about a month. Cutting back to essential travel only and adding 20 or 30 gallons in emergency storage with a high-mileage car would be enough to weather a significant storm. If even a little rationing was available, I probably wouldn't have to cut back my current driving habits much, if at all.
Isn't that the argument for having a contingency for a fuel crunch that is independent of a hydrocarbon fuel supply...like a good bicycle?
Of course. Good walking shoes and backpacks, too. But my guess is that serious shortages will most likely be short-lived. And if they aren't, those affected will have much worse things to be worried about.
iTulip takes a particularly grim view of the timing of new alternative energy projects (Figure 6).
http://peakwatch.typepad.com/.a/6a00d83452403c69e201156fa4407e970b-pi
Figure 6 — iTulip's prediction (http://www.itulip.com/forums/showthread.php?p=60856) for an alternative energy bull market.
On this view, even if large-scale 2nd-generation biofuels production from cellulosic feedstocks were technically and logistically feasible—it's not (http://i-r-squared.blogspot.com/2008/03/cellulosic-ethanol-is-dead.html) and might never be—we would not see that production until at least 2020 based on the shaky economy alone.
How would these predictions change if in the 2009-2020 framework, there is a food crisis, followed by a medical epidemic that causes a population collapse in two densely populated regions of the world? I am talking of a "Black Swan" event. I am leaving the names of these two areas to be filled in by the reader.
Lukester
04-02-09, 12:59 AM
My thoughts also.
I'm willing to bet we have an alt energy bull market already several years elapsed by the time iTulip's above formulated kickoff date arrives in the late part of the next decade. How does the above more pessimistic timeline fit in with iTulip's very recent call that the USD would go into renewed sharp decline going into 2010, and that energy would rebound and begin a concerted rise in the same time frame?
I cannot wrap my understanding around this: If petroleum goes back up to $100 on it's way back up to $150 within the next 24 months all the world's energy producers will start looking healthy all over again. A renewed soaring of the oil price installs an immediate "conveyor belt" redistributing remaining wealth from OECD countries to the fast growth potential emerging economies.
This sort of driver to the oil price is immune to globally stagnant GDP growth OR depression like conditions - it is acelerating global production shortfal kicking off now, not in four to five years.
I cannot imagine oil rising here again, without dragging the entire commodities complex along with it. Meanwhile, iTulip has just recently forecast a weakening USD and rising petroleum - in a time frame far shorter than this timetable for the kickoff of alt energy's bull market out in 2020. There is what appears to be a full decade's discrepancy!
Either the iTulip prognosis has changed sharply for the next two to three years, or I am struggling to add this all up. I frankly cannot believe in 2009, that petroleum can linger under $100 for more than another scant 18 months - someone correct me if I'm completely wrong, but isn't production plummeting 5%-6% rather than 3% a year now?
I believe the same ASPO group which hosts Mr. Cohen's articles, plus multiple other sources already refer routinely to projected decline rates in this range as of now, due to non OPEC production having already manifestly peaked and already commencing a decline.
Any thesis which posits global depression extending out another five years has to contend with what happens to the balance sheets of all the oil exporter nations when oil once again ramps up to $80-$100-$120. The idea being that this time, for real - real geological constraint steps in and summarily truncates the "normal" slower global growth recovery cycle described above - by several years.
How can the world plausibly stage a continuing global depression when the coffers of all the old energy exporter actors begin to fill up again from a renewed oil rise? Is the above geologically produced event (long hyped, now quite real) simply going to "wait another five years" for the global depression to play out in more sedate terms?
I guess what I'm saying is that I simply do not believe that 5% - 6% global net production declines in petroleum (if real) will require anywhere near four to five years to summarily overcome even the above described weakness in oil prices - and when oil starts to rise in serious terms here again, the current depression-like global GDP conditions must change drastically.
As the conveyor belt of forcibly exported capital from the OECD nations once again starts to funnel non-discretionary oil purchase money towards all the world's oil producers. these are all fast growing economies. They start a conveyor belt of that renewed oil wealth circulating in the world. A rising price of oil due to collapsing production should be a powerful and non-discretionary event.
I therefore count myself an early skeptic of the above alt energy bull market timeline. This timeline with a long drawn out global depression, suggests that inflation or the renewed plumetting of the oil currency itself, must be held in suspended animation for another five to seven years. How about this instead - we turn around and look back in just one year, and realise the alt-energy bull market had already kicked off (mutedly, but a real kickoff) in the spring of 2009?
Tactical alt-energy opportunities started in late 2007 as the economic depression began. By the time this chart predicts a beginning, opportunities in stationary alt-energy will be in full bloom. Were this chart to distinguish between stationary and mobile energy it would be more interesting and more useful. As it stands, I can assure you, it's at best incorrect.
Penguin
04-02-09, 05:54 AM
aka...protectionism here we come (deglobalization as you call it).
Surprisingly, the more I consider this alternative, the more I warm-up to it...
Why not? It sure as hell hasn't hurt the Chinese and Japanese has it?
As has been oft stated, free trade is an ideal not a policy. We don't have any free traders in our country, we have sell outs. A true free trader would have put his foot down and gone after C&J and Europe for their VAT protectionist schemes and import tariffs, both hidden and brazenly out in the open, long ago.
Wage arbitrage was a fact of life. Could not be avoided. But the prudent way to accomplish this would have been to put in place policies to guide us through the painful adjustment period gradually and in a fair and open way. Instead we had an open door, and mostly one sided at that, policy for the US that unleashed the beast on American workers. The growth of debt and the FIRE economy masked the problem for years. Many years.
Now we have a weakened, maybe even enfeebled, American manufacturing sector. An American worker head over heels in debt. A financial sector draining any and all capital out of productive enterprise. A national fiscal debt that reaches to Mars. And, most importantly, an entire generation of Americans who have never known anything else.
How do you cure that? I really don't know.
Will
flintlock
04-02-09, 06:59 AM
I agree with most of this post. Here are some comments.
1. Short sighted financial planning had a lot to do with GM's demise. I think the business model was, we can't compete with small/medium sized car imports, so lets create large vehicles with high profit margins. That worked real well until gas hit 4.00+ a gallon, and financing or the desire to own a 30K+ SUV no longer existed.
2. I'm in the market to replace my small commuter car (1995 mazda). First as the article says Hybrids are too expensive, i also dont know how the repairs on these will be once they are off warranty. Can my local shop guy fix it if its electrical/drive train? Or will I have to take it to the dealer and be soaked with 120$/hr repair costs? I will buy used, who knows if I will have a job next month?? I compared ford focus, saturn ion, toyota echo, nissan sentra, honda civic.
Using govt fuel data scion, honda, and toyota all have significantly higher fuel economy than the ford/saturn vehicles (upper 20's vs. lower 20's). I also looked up the consumer's reports reliability records on these models, and scion, toyota, honda are significantly better in reliability. maybe that is why ford/chrysler/gm are where they are today. they still dont get.
J6P (me) needs a reliable fuel efficient car.
Ditto on the long term aspect of Hybrid ownership. Repairs and replacement of batteries on these vehicles could end up being very expensive. The real cost of these vehicles must be factored in. Initial cost, fuel, repairs, and resale. You see the same thing with complex luxury vehicles. At some point the resale plummets because nobody wants to face replacing a $10,000 transmission. Meanwhile people buy up high mileage traditional powered Camrys because they know even if a repair is needed, it won't cost a fortune.
As far as making generalizations about mpg and reliability of American vs foreign cars, people need to realize there is a huge difference between individual models. Lumping them all into one rating by manufacturer is a gross oversimplification. American cars generally are inferior in most ways, if not horrible. Their trucks on the other hand still dominate the market. And GM trucks generally have some of the best MPG of any make. I've learned to beware of Consumer Reports and the way it rates reliability. A broken ashtray counts off as much as a busted main seal. When I look at their ratings of vehicles I've owned, their results just don't jibe with mine. And they fail to factor in the cost of repairs, which can be vastly higher on some foreign cars. The differences in reliability between most modern vehicles are not that large anyway. I've owned dozens of vehicles and only one has ever left me stranded, a Toyota Land Cruiser. That doesn't make all Toyotas junk. Just that one. :D
American and European car makers tend to be innovators. The Japanese tend to be excellent at taking their ideas and perfecting them, simplifying them, and making them work more reliably. But I agree, in the small car market, Japanese is still the way to go.
Tactical alt-energy opportunities started in late 2007 as the economic depression began. By the time this chart predicts a beginning, opportunities in stationary alt-energy will be in full bloom. Were this chart to distinguish between stationary and mobile energy it would be more interesting and more useful. As it stands, I can assure you, it's at best incorrect.
Consider the graphic in its original context: The Next Bull Market (http://www.itulip.com/forums/showthread.php?p=60856#post60856).
You make it sound so black-and-white: either all the gas you need, or none at all. I suspect the none at all case is actually the least likely -- but there are a lot of other possibilities. What about rationing or shortages? I'm old enough to remember waiting in lines during the oil embargo in the 70's. There's no reason why something as bad or worse couldn't happen again.
The advantage of a high-mileage car should be obvious: for every gallon of fuel you can get your hands on -- through rationing, black market, your own storage or whatever -- you can travel that many more miles.
One advantage of living in a small town is that I don't need to drive much any more. One tank of gas lasts me about a month. Cutting back to essential travel only and adding 20 or 30 gallons in emergency storage with a high-mileage car would be enough to weather a significant storm. If even a little rationing was available, I probably wouldn't have to cut back my current driving habits much, if at all.
Of course. Good walking shoes and backpacks, too. But my guess is that serious shortages will most likely be short-lived. And if they aren't, those affected will have much worse things to be worried about.
All fair points.
And there is no argument that the oil importing countries, particularly the USA, need to reduce their dependence on imported oil for purely sovereign economic reasons. And that is unlikely to happen without a major improvement in transportation fuel economy.
dave_cohen
04-02-09, 08:51 AM
I've posted the slightly updated final version of this article The Kiss of Death (http://www.aspousa.org/index.php/2009/04/the-kiss-of-death/). I just read (WSJ) that Geithner's PPIP is closed to all but the big bond funds and a few other favored parties (e.g. Goldman Sachs). I included that in the first section where I'm talking about what is good for Wall Street is not good for the rest of us. Now I see that Bridgewater has opted not to participate (http://www.reuters.com/article/bondsNews/idUSBNG43455220090402).
At first blush Tim Geithner’s extremely dangerous (http://finance.yahoo.com/tech-ticker/article/216311/Part-I-Geithner%27s-Plan-%22Extremely-Dangerous%22-Economist-Galbraith-Says?tickers=%5Egspc,%5Edji,c,bac,jpm,WFC?sec=topS tories&pos=2&asset=TBD&ccode=TBD) plan for clearing the “toxic” credit derivatives market appeared to offer bribes to private equity and hedge funds to bid on these assets with the public taking almost all of the risk (http://www.reuters.com/article/newsOne/idUSTRE52N1IW20090324). As further details are revealed, it appears that only a select few (http://online.wsj.com/article/SB123854120033275659.html) will be allowed to participate in the plan (Wall Street Journal, April 1, 2009).
While dozens of banks and insurance companies today hold more than $10 billion in toxic securities, the vast majority are trying to get these assets off their books — not lining up to buy more. As for asset management firms that hold such a big portfolio — and are also healthy enough to serve as fund managers — there is only a small pool, such as Black Rock, Pimco, Goldman Sachs or Legg Mason, as well as a titan or two of the hedge fund industry, such as Bridgewater.
“This is ugly,” says Joshua Rosner, the managing director of Graham, Fisher & Co., an independent research firm. “As long as they are experienced, there is no rational reason for creating limitations on who becomes a bidder and manager of assets. It doesn’t serve the public good, though it may serve those few large firms that appear to have a privileged relationship with Treasury.”
[You must already hold $10 billion of "toxic" securities to be a fund manager. Most hedge funds are too small to participate. Thus Geithner is giving a taxpayer-funded gift to big bond funds like Pimco (http://www.bloomberg.com/apps/news?pid=20601087&sid=aKm0M7RHXDoQ&refer=home).]
Apparently I used the wrong wording and punctuation the last time around—it should have been called No We Won’t! Obama met with the bankers last Friday. His press secretary Robert Gibbs described the meeting’s agenda (http://www.reuters.com/article/businessNews/idUSTRE52O6QR20090325?feedType=RSS&feedName=businessNews).
Spokesman Robert Gibbs said the president would seek the executives’ input on how the economy is developing. “The president looks forward to getting an update on what they’re seeing happening in the economy,” Gibbs said on Wednesday of the banking chief executives who are slated to meet with the president later this week.
He said Obama’s message at the meeting would be to say that what is good for Wall Street is good for Main Street.
“We’re all in the same boat,” Gibbs said.
“We have to understand that … what is good for one has to be also good for the other [emphasis added]
Plainly, we are not all in the same boat. Plainly, what transpired before and after the collapse of the Housing Bubble demonstrates beyond any reasonable doubt that what is good for Wall Street is not good for Main Street.
The different treatment of the banks (finance) as opposed to GM (manufacturing) is stunning. I still can't quite believe that things are this far out of control. Recent events indicate (almost) unprecedented levels of corruption.
Domestic sales will no doubt be in the dumper for many years to come. It's not clear to me that GM will ever be viable again.
Retired Commish
04-02-09, 09:05 AM
Some buyers of vehicles (likely those still with the ability to pay for one) go beyond the mileage factor in figuring the cost of ownership. A mechanic friend of mine yesterday reminded me that it was possible that all the savings from less gas would likely be wiped out by the replacement cost of a new battery, which he thought could cost upwards of $7000.
Most of his customers are living from hand to mouth and struggling with simply keeping their older vehicle running. Few ever contemplate buying anything new...let alone a more expensive hybred.
Surprisingly, the more I consider this alternative, the more I warm-up to it. The U.S. is well-suited to be a self-sufficient economy and, with import tariffs creating an uneven playing field, a protected manufacturing sector may be able to repair and strengthen itself. It could be good for the U.S. even if not good for the world.
Yes, the nation with a currency account deficit of $673B in 2008 - and a run rate of $400B+ as of the last monthly update (with a strong dollar) is going to be well suited to a trade war.
That plus an official government policy of devaluing the dollar.
Surely China will just give us back all those factories that were sent there.
After all, they don't have enough dollars.
If the knock-on effects of the $500B (give or take) are only 3x to one, that's only 10% of the GDP disappearing for the year or three needed to ramp up new factories which we can build with printed money.
Oh and the oil and other raw materials? Why we won't have to worry about those prices either.
Everything can be built with coal, natural gas, and biofuels.
santafe2
04-02-09, 09:51 AM
Consider the graphic in its original context: The Next Bull Market (http://www.itulip.com/forums/showthread.php?p=60856#post60856).
Thanks for the pointer Fred but I stand by my assertion that the tactical opportunities started with, (or shortly after), the depression and not, as the chart points to, 2010-2011. From the text of the above link..."In the mean time, there will be tactical opportunities primarily driven by government spending programs."
Those [Federal] government spending programs for renewable energy started in October 2008 just after the financial system shut down. The Emergency Economic Stabilization Act extended the 30% income tax credit for renewable energy expenditures through 2016. It also increased the allowable income tax credit from $2,000 for a home owner to 30% of the entire system cost.
February's $787B stimulus package, contained additional spending for renewable energy. The 30% ITC for business was changed to a grant to be paid within 60 days. For business, the 30% tax credit has effectively morphed into a rebate. Also, we've found that many home owners would run into the AMT as they took the 30% tax credit. That's been removed for 2009. There are also federal loan guarantees in the Stim I package that will allow businesses and utilities to get low interest loans for their renewable energy projects.
At the state and utility level, many locations have begun rebate and tax incentive programs to lessen their exposure to future federally mandated carbon offset programs. We expect our biggest growth area in 2009 to be the South Eastern US.
This administration is "ushering in our clean energy future". I'll be surprised if we don't continue to see grant and tax credits driving the adoption of renewable energy while on the other end, fossil fuel energy, especially coal, will be driven up in cost through carbon taxes of various types.
As all of these structural changes are being made, the cost of renewable energy is falling and it will continue to move down in cost through the remainder of this year.
There has also been a breakthrough in PV energy harvesting this year. Most of our dealers have been installing these systems for about six months and we are finally getting data back for the full winter quarter. In one fairly typical commercial system in Florida, the energy harvest is 26% greater than would be predicted by NREL insulation tables. There is much more field research to complete before this can be declared a breakthrough, but we're hopeful.
All of these forces are coming together today to drive renewable energy adoption. I don't expect the rate of change to slow over the next few years and I don't expect it to be more than 2-3 years before this spills over into publicly traded companies.
I've posted the slightly updated final version of this article The Kiss of Death (http://www.aspousa.org/index.php/2009/04/the-kiss-of-death/). I just read (WSJ) that Geithner's PPIP is closed to all but the big bond funds and a few other favored parties (e.g. Goldman Sachs). I included that in the first section where I'm talking about what is good for Wall Street is not good for the rest of us. Now I see that Bridgewater has opted not to participate (http://www.reuters.com/article/bondsNews/idUSBNG43455220090402)...
Geithner’s Non-Recourse Gift Keeps on Giving to Gross (http://www.bloomberg.com/apps/news?pid=20601109&sid=aEDHFtFqc_ko&refer=home)
April 2 (Bloomberg) -- Treasury Secretary Timothy Geithner (http://search.bloomberg.com/search?q=Timothy%0AGeithner&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1)’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross (http://search.bloomberg.com/search?q=Bill+Gross&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1).
The plan may reward investors with 20 percent annual returns on “really ‘toxic’” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz (http://search.bloomberg.com/search?q=Carl+Lantz&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) and Dominic Konstam (http://search.bloomberg.com/search?q=Dominic+Konstam&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money...
...Since Geithner unveiled the plan on March 23, Pacific Investment (http://www.bloomberg.com/apps/quote?ticker=PTTRX%3AUS), or Pimco, which manages the world’s biggest bond fund, and New York-based BlackRock Inc. (http://www.bloomberg.com/apps/quote?ticker=BLK%3AUS), the largest publicly traded U.S. asset manager, said they may be interested in participating in PPIP. Others include New York-based Apollo Global Management LLC (http://www.bloomberg.com/apps/quote?ticker=APOLLZ%3AUS), the private-equity firm run by Leon Black (http://search.bloomberg.com/search?q=Leon%0ABlack&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), and Los Angeles-based Colony Capital LLC, which has invested more than $39 billion since it was founded in 1991.
“This is perhaps the first win/win/win policy to be put on the table,” Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an e-mailed statement last week...
...Nobel prize-winning economists Paul Krugman (http://search.bloomberg.com/search?q=Paul+Krugman&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz (http://search.bloomberg.com/search?q=Joseph%0AStiglitz&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success.
“The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.”
Krugman wrote in the Times last month that “Obama is squandering his credibility” with the plan.
Pimco’s other co-chief investment officer, Mohamed El- Erian (http://search.bloomberg.com/search?q=Mohamed+El-%0AErian&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), said today that the plan’s economic benefits outweigh its flaws. Those benefits include helping to remove toxic assets from bank balance sheets, reestablishing a functioning market and attracting private capital.
“It is a price that society has to pay because, for doing that, it gets a few things that are important,” El-Erian said in an interview with Bloomberg Radio.
Democratic Representative Carolyn Maloney (http://search.bloomberg.com/search?q=Carolyn+Maloney&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) of New York, who chairs the congressional Joint Economic Committee, said in an April 1 interview that she didn’t have much concern about investors profiting from the program.
“It’s a way to get the assets off the books,” she said...
Had enough? :rolleyes:
vanvaley1
04-02-09, 01:44 PM
I've posted the slightly updated final version of this article The Kiss of Death (http://www.aspousa.org/index.php/2009/04/the-kiss-of-death/). I just read (WSJ) that Geithner's PPIP is closed to all but the big bond funds and a few other favored parties (e.g. Goldman Sachs). I included that in the first section where I'm talking about what is good for Wall Street is not good for the rest of us. Now I see that Bridgewater has opted not to participate (http://www.reuters.com/article/bondsNews/idUSBNG43455220090402).
The different treatment of the banks (finance) as opposed to GM (manufacturing) is stunning. I still can't quite believe that things are this far out of control. Recent events indicate (almost) unprecedented levels of corruption.
Domestic sales will no doubt be in the dumper for many years to come. It's not clear to me that GM will ever be viable again.
Amen. Maybe there'll be a tranference of intent soon. Folks talkin' bout 'clean' alternative energy program to make us independent now so maybe we can get a 'clean' alternative political party to make us independent too. Though I fear the latter will be more difficult to achieve than the former.
babbittd
04-02-09, 02:10 PM
My thoughts also.
[..]
I cannot wrap my understanding around this: If petroleum goes back up to $100 on it's way back up to $150 within the next 24 months all the world's energy producers will start looking healthy all over again. A renewed soaring of the oil price installs an immediate "conveyor belt" redistributing remaining wealth from OECD countries to the fast growth potential emerging economies.
In full agreement and when the conveyor belt resumes running doesn't this help U.S. exports?
ThePythonicCow
04-02-09, 02:41 PM
2. I'm in the market to replace my small commuter car
I've been quite pleased with my Hyundai. I had to replace the clutch (its a stick shift) and brakes after my teenage son put lots of miles on it, but otherwise it's been solid as a rock for the first 80,000 miles or so. I much prefer driving it over the Saturn and PT Cruiser that I've also used in recent years. Its an Elantra that I got new for $9,990 (listed for something like $14,000). The Hyundai Accent costs even less.
To get the price down, I went in not expecting to buy, with a low ball price in mind that I wouldn't tell the sales guy, but for which I would buy if offered. The sales critter would ask what I wanted to pay, I'd grunt that I wanted to buy from the other dealer who was closer to my home, he'd name a price, I'd look annoyed at how high it was, and walk out. He'd chase me down ... rinse, lather, repeat. Each iteration was about $1000 cheaper. Each iteration took about 30 minutes. Pretty good hourly rate :).
The Hyundai's and Honda's are fairly well rated in U. S. News and World Reports "Car Rankings: Affordable Small Cars", at http://usnews.rankingsandreviews.com/cars-trucks/rankings/Affordable-Small-Cars/, and the Accent has one of the lowest prices of any car on that list.
Lukester
04-02-09, 03:27 PM
No comment yet from the Tulip on this idea.
In full agreement and when the conveyor belt resumes running doesn't this help U.S. exports?
Some buyers of vehicles (likely those still with the ability to pay for one) go beyond the mileage factor in figuring the cost of ownership. A mechanic friend of mine yesterday reminded me that it was possible that all the savings from less gas would likely be wiped out by the replacement cost of a new battery, which he thought could cost upwards of $7000.
Most of his customers are living from hand to mouth and struggling with simply keeping their older vehicle running. Few ever contemplate buying anything new...let alone a more expensive hybred.
I wouldn't want to cast aspersions regards a "mechanic friend's" expertise ;) but here's another perspective for consideration on the car that everyone loves to dis . . . .
"While Toyota's Prius (http://consumerguideauto.howstuffworks.com/all-toyota-priuss.htm) wasn't the first hybrid to be sold in the U.S. (that honor goes to the low-volume two-seat Honda Insight (http://consumerguideauto.howstuffworks.com/all-honda-insights.htm)), it was certainly the first to sell in reasonable numbers. Introduced in the U.S. for the 2001 model year, it was redesigned for 2004, offering more room, more power, and even better fuel-economy figures.
Helped by rising fuel costs, sales of the second-generation Prius took off. Toyota built about 52,000 of the first-generation cars, and so far has added more than 214,000 of the latest version. That means there have been well over a quarter-million Prius Hybrids sold in the U.S., making it by far the country's most popular hybrid.
And Toyota claims that not one has required a battery replacement due to malfunction or "wearing out." The only replacement batteries sold--at the retail price of $3000--have been for cars that were involved in accidents. Toyota further claims that the nickel-metal hydride (NiMH) battery packs used in all Prius models are expected to last the life of the car with very little to no degradation in power capability.
For those of us who have cell phones and other devices with NiMH batteries, that claim may sound unrealistic. Over time, the battery's charge longevity seems to wane, resulting in shorter and shorter usage between charges. Eventually, the battery becomes worthless and we buy a replacement.
But in the case of most electronic devices, the batteries tend to get fully charged, then nearly fully discharged before being charged again. For the power pack in the Prius, at least, Toyota says this would greatly shorten the life span of the battery.
<table style="width: 150px;" align="right" border="0" cellpadding="1" cellspacing="1"> <tbody> <tr style="background-image: none; vertical-align: top; background-color: rgb(204, 204, 204); text-align: left;"> <td>
</td> </tr> </tbody> </table> To get maximum life out of the Prius battery pack, the car's computer brain does not allow the battery to fully charge or discharge. Toyota says that for the best service life, the Prius battery likes to be kept at about a 60 percent charge. In normal operation, the system usually lets the charge level vary only 10-15 percentage points. Therefore, the battery is rarely more than 75 percent charged, or less than 45 percent charged.
If you're familiar with the Prius, you know there's a battery-charge indicator on the instrument panel. Toyota says this isn't the charge level per se, but rather a state-of-charge window. The top of the window represents about a 75 percent charge, the bottom about 45 percent charge.
According to Toyota, the life of the Prius battery pack is determined more by mileage than by time, and it has been tested to 180,000 miles. Supporting this are first- and second-generation Prius taxis in Canada that have reportedly traveled more than 200,000 miles without suffering any battery problems.
Scott4139
04-02-09, 05:01 PM
actually we don't have to have the same wages because you need to compare "landed" costs. For example an auto part from China may require a 12% premium to get it out of the country ship it and get it into US and ship it to the asm plant. If you can design a process that falls within this 12% cost penalty you are ok for US manufacturing.
actually we don't have to have the same wages because you need to compare "landed" costs. For example an auto part from China may require a 12% premium to get it out of the country ship it and get it into US and ship it to the asm plant. If you can design a process that falls within this 12% cost penalty you are ok for US manufacturing.
raja is also not taking into account factors like real productivity, including the quality [e.g. 1 - the amount of wastage] of the products.
Labour in the Arabian Gulf is very cheap. And there's a reason. Because it's extraordinarily poor quality labour compared to what North Americans or Northern Europeans are used to. I came to the conclusion that anywhere in the world where labour is cheap, it is wasted. Work is done poorly, workers have no training, no concept of "quality", and a lot of stuff has to be thrown out and done over again, sometimes more than twice. That's my personal experience...
Holds with my experience as well. Coupled with an aversion to working with their hands by anybody who is educated, and trained -- education and training are viewed as a ticket to stop engaging in real productive labour.
ThePythonicCow
04-02-09, 11:00 PM
<table style="width: 150px;" align="right" border="0" cellpadding="1" cellspacing="1"> <tbody> <tr style="background-image: none; vertical-align: top; background-color: rgb(204, 204, 204); text-align: left;"> <td>
</td> </tr> </tbody> </table> To get maximum life out of the Prius battery pack, the car's computer brain does not allow the battery to fully charge or discharge. Toyota says that for the best service life, the Prius battery likes to be kept at about a 60 percent charge. In normal operation, the system usually lets the charge level vary only 10-15 percentage points. Therefore, the battery is rarely more than 75 percent charged, or less than 45 percent charged.
Dang - I'd gladly pay $20 or $30 for someway to do this with my laptop battery. They cost about $100 each, and only last a year or three at best. Most of the time I have the laptop plugged into the mains, and can anticipate those infrequent times when I will need a full battery charge (such as when taking the occassional trip.) I enjoy purchasing new laptop batteries almost as much as I enjoy purchasing inkjet toner cartridges, but less than I enjoy purchasing root canals.
wayiwalk
04-03-09, 10:48 AM
...... I've learned to beware of Consumer Reports and the way it rates reliability. A broken ashtray counts off as much as a busted main seal. .......
Terrific Point about what constitutes a flaw.
I also am skeptical of "resale value". I see it as a way for the manufacturer's to convince you to buy a product for more money now with the hopes of recouping that money down the road.
How many people consider for the same 2500 lbs of metal, plastic, glass, etc, depending on how the manufacture configures it, depending on which make of car you choose -for the cars with higher resale value, you basically pay for by paying a higher price up front, is also basically an interest free loan to the auto manufacturer for that privilege sometime in the future to get your money back from the advance you give the manufacture when you sell your now used car.
Yeah I know, twisted, convoluted way of looking at things, but I like to look at every angle. I prefer to keep my cash as close to me as possible, and not count on the future resale value to recoup the higher price of purchase, especially when we're talking about something that just "gets you around" and ultimately is disposable....
Scott4139
04-03-09, 04:32 PM
Haven't had a quality problem with Chinese auto parts, but you don't really know what is going on behind the scenes. You can afford to have 5 people quality checking every part at the Chinese labor rate. The real issue, IMO, is there could be all kinds of non-western work conditions. We've seen shiny happy equipment and workers in the powerpoint presentation only to find out later the actual working conditions when you force (hold back a payment) a site visit.
flintlock
04-04-09, 07:21 AM
That reminds me of another flaw in Consumer Reports and some other car ratings. They report on resale values as a percentage of MSRP. Retail prices. Only we all know that most people don't actually pay full retail. And I know from experience that you can generally expect a much larger reduction from retail on an American vehicle than on most foreign ones. Huge rebates, zero percent financing, etc. So the reported resale percentage is way off from reality in some cases. Especially trucks and SUVs.
raja is also not taking into account factors like real productivity, including the quality [e.g. 1 - the amount of wastage] of the products.
Labour in the Arabian Gulf is very cheap. And there's a reason. Because it's extraordinarily poor quality labour compared to what North Americans or Northern Europeans are used to. I came to the conclusion that anywhere in the world where labour is cheap, it is wasted. Work is done poorly, workers have no training, no concept of "quality", and a lot of stuff has to be thrown out and done over again, sometimes more than twice. That's my personal experience...
I don't think the issue of quality negates my point . . . .
The stores are filled with Chinese goods. People buy them. Corporations choose to have these products manufactured there because wages are lower than those of comparable American workers.
If there was some quality difference that somehow made American products better or even equal, corporations wouldn't offshore because of shipping costs, right?
I don't think the issue of quality negates my point . . . .
The stores are filled with Chinese goods. People buy them. Corporations choose to have these products manufactured there because wages are lower than those of comparable American workers.
If there was some quality difference that somehow made American products better or even equal, corporations wouldn't offshore because of shipping costs, right?
I think you misunderstand the term quality. It has nothing to do with the comparative quality of the finished product.
This is what you said:
"...This problem can only be solved by an equalization of wages, or deglobalizing the world economy so there's no competition..."
My point is that this is incorrect, because it assumes that every unit of labour is of equal quality. It is not.
The other common fallacy is that all labour is of roughly equal value [this is the argument that unions and international labour leaders try to make]. Once again this is false. There is no intrinisic value for labour. Labour is only valuable if the end product or service is something that someone is willing to pay for. And the more "desirable" the end product or service to the buyer, the more the price is likely to be bid up, and therefore the more the labour input to create it will be valued. Why else is it that Hollywood entertainers chronically make more money than teachers?
So expecting there will be, or even needs to be, some equalization of wages is incorrect.
vanvaley1
04-05-09, 06:33 PM
Being a member of the FIRE industry I have a natural sympathy for some of it. Bearing in mind that most folks don't want it to be the principal engine of the economy...and rightly so... and assuming nobody wants to eliminate it completely from being a player in the economy, what percent should the FIRE industry play as a positive contributor to the economy's GDP? 5%, 10% 15%?
Scott4139
04-05-09, 07:33 PM
I think there's two issues you're combining. Companies will go to the lowest cost labor that provides the best cost for the product. This doesn't always mean China as I've noted above.
Regarding Hollywood and teachers: this isn't the same at all. Movie stars sell not only labor, but image which has the higher value. Teachers do not have this and thus no pics in People mag.
But again there will be no equalization of wages for products that have to be delivered to the consumer.
Scott4139
04-05-09, 07:38 PM
without the banks the modern world ends. Without GM people buy Fords or Toyotas. Big difference.
From a military perspective, the government has to keep GM alive. Like it or not, the auto industry has the means to make the war machines if ever again needed.
mcgurme
04-06-09, 09:18 AM
Dang - I'd gladly pay $20 or $30 for someway to do this with my laptop battery. They cost about $100 each, and only last a year or three at best. Most of the time I have the laptop plugged into the mains, and can anticipate those infrequent times when I will need a full battery charge (such as when taking the occassional trip.) I enjoy purchasing new laptop batteries almost as much as I enjoy purchasing inkjet toner cartridges, but less than I enjoy purchasing root canals.
The new Apple MacBook claims to do exactly this.
So far, mine has 3X longer battery life on a single charge than previous models. We'll see how this translates to overall charge/discharge cycle life....
ThePythonicCow
04-06-09, 07:16 PM
The new Apple MacBook claims to do exactly this.
So far, mine has 3X longer battery life on a single charge than previous models. We'll see how this translates to overall charge/discharge cycle life....
Good news - thanks. The odds of there a being an Apple in my future just went up a notch.
I think you misunderstand the term quality. It has nothing to do with the comparative quality of the finished product.
This is what you said:"...This problem can only be solved by an equalization of wages, or deglobalizing the world economy so there's no competition..."
My point is that this is incorrect, because it assumes that every unit of labour is of equal quality. It is not.
The other common fallacy is that all labour is of roughly equal value [this is the argument that unions and international labour leaders try to make]. Once again this is false. There is no intrinisic value for labour. Labour is only valuable if the end product or service is something that someone is willing to pay for. And the more "desirable" the end product or service to the buyer, the more the price is likely to be bid up, and therefore the more the labour input to create it will be valued. Why else is it that Hollywood entertainers chronically make more money than teachers?
So expecting there will be, or even needs to be, some equalization of wages is incorrect.
So . . . to what do you attribute the loss of jobs out of the U.S., and what would the fix be?
So . . . to what do you attribute the loss of jobs out of the U.S., and what would the fix be?
The continued loss of jobs is not difficult to understand. Let's look at just one example. Let's suppose you are in California. Your workers must have a place to live. When you have to pay a productive worker an outsized wage just so he/she can afford the mortgage on an egregiously inflated house [that provides no more real housing utility than it did in 1960], how do you expect to be competitive? Fewer workers, and each must be much more productive. Thank your government sponsored housing bubble for distorting the labour market, and putting more of the least productive, least capable, out of work.
Describing it another way...the problem is not some wholesale export of every job in the Union. Even if the real unemployment rate hits 20%, eight out of ten people are still working, and presumably the majority of those are doing something useful and doing it well [we'll leave Geithner and Bernanke out of this discussion :rolleyes: ]. Like many places we are in a housing downturn where I live. Many housing construction trades are out of work. But I have noticed that I am still having great difficulty securing the specific people that I want to hire. They still have plenty of work. One of my brothers is building a home on the west coast, where the housing market is cratering. He's run into the exact same situation. Why? Because the most productive [the ones that produce the highest value] will always find work.
...Regarding Hollywood and teachers: this isn't the same at all. Movie stars sell not only labor, but image which has the higher value. Teachers do not have this and thus no pics in People mag.
But again there will be no equalization of wages for products that have to be delivered to the consumer.
Creating the "image" still requires their labour. They have to put in the time [sell their labour] even for that People Mag photoshoot. [I]It's all the same stuff.
In aggregate people willingly part with more of their discretionary disposable income to be entertained than to be educated. That's why, say, a songwriter who may never perform any of his/her own compositions, and whose picture may never appear in People Magazine, and is therefore generally unknown to the buyers of the CDs of the performers of those songs, can still earn far, far more than virtually any teacher.
As for products that have to be delivered to customers, I think it comes down to how much that incremental cost to deliver is compared to the value of the product itself. If the product is of "high value" [and many luxury goods may fit that description], and the cost to deliver it to the customer is a small fraction of that value, then the geographical location of production vs market becomes a lot less important.
Because the most productive [the ones that produce the highest value] will always find work.
That's a very good point, and one that I think government regularly ignores. Minimum wage is a case in point. As minimum wages go up, it's the unproductive that suffer first.
When you have to pay a productive worker an outsized wage just so he/she can afford the mortgage on an egregiously inflated house [that provides no more real housing utility than it did in 1960], how do you expect to be competitive?
Glad to see you finally agree with me ;)
My original post: "It seems to me that the main reason manufacturing jobs are disappearing in the US is because factory workers in many other parts of the world will work for a fraction of the US factory worker wage.
This problem can only be solved by an equalization of wages, or deglobalizing the world economy so there's no competition . . . ."
Perhaps equalization of wages must come through lowering housing costs, as you suggest, but equalization still must occur for manufacturing jobs to return to the US.
Glad to see you finally agree with me ;)
My original post:
"It seems to me that the main reason manufacturing jobs are disappearing in the US is because factory workers in many other parts of the world will work for a fraction of the US factory worker wage.
This problem can only be solved by an equalization of wages, or deglobalizing the world economy so there's no competition . . . ."
Perhaps equalization of wages must come through lowering housing costs, as you suggest, but equalization still must occur for manufacturing jobs to return to the US.
Sorry, but I don't agree with you, and you appear not to understand why. You'll be waiting a long time for equalization of wages.
And you better hope it never occurs, for if it does it means this Administration has decided to take "the easy way out", down a path of protectionism and nationalisation. This is the path that Great Britian took in the middle of the last century after it's previously unassailable economic position had been under relentless attack from the USA for decades. And I will admit this is a real risk given the proclivities of this Administration [so far].
But I remain very optimistic that the USA won't repeat that mistake. That we will see a rebuilding of the economy on a new model, and it will happen long before average US worker productivity [and wages] fall to the same level as Mexico, or Ukraine, or...[fill in your favourite developing economy]. Americans are an extraordinarily impatient lot. Once they decide they are going to do something, it can be quite remarkable how fast it happens. A disporportionate number of new technologies and associated commercial enterprises will continue to be spawned in the USA, from its scientists, engineers and entrepreneurs. And maybe, just maybe, while other nations are pissing away money building up their military to protect their African and Latin American interests, perhaps the USA will be able to redirect more of its funds to something productive, as it weans itself off the reasons [such as an overdependence on imported oil] that have caused it to maintain such a large military force for so long.
raja, we dont need or want wage equalization. read some re ricardo and comparative advantage
http://en.wikipedia.org/wiki/David_Ricardo#Competitive_Advantage
we do need some globally desirable products or services other than financial services. the answer will likely be tech or biotech. and of course food.
raja, we dont need or want wage equalization. read some re ricardo and comparative advantage
http://en.wikipedia.org/wiki/David_Ricardo#Competitive_Advantage
we do need some globally desirable products or services other than financial services. the answer will likely be tech or biotech. and of course food.
To reinforce the point, a little story. When I was in the Gulf a few weeks ago I spent some time with a Canadian friend that runs the MENA [Middle East and North Africa] operations for a fast growing California headquartered technology company.
This company has not only developed a performance breakthrough technology in their niche, but more importantly has a creative and compelling value proposition for clients...one that saves their clients money and continues to allow them to extract value out of their existing investments in a competitor's product. His company is hiring, not only internationally, but also in the USA.
This is the type of enterprise [and it'll take thousands and thousands more just like it] that is going to be an important part [but certainly not the only part] of rebuilding the American economy.
To the degree that Washington persists in its efforts to maintain the lifestyles of Ken Lewis and Vikram Pandit, the decline will be greater and the recovery a more painful process than necessary. But it's still going to happen.
Sorry, but I don't agree with you, and you appear not to understand why. You'll be waiting a long time for equalization of wages.
And you better hope it never occurs, for if it does it means this Administration has decided to take "the easy way out", down a path of protectionism and nationalisation. This is the path that Great Britian took in the middle of the last century after it's previously unassailable economic position had been under relentless attack from the USA for decades. And I will admit this is a real risk given the proclivities of this Administration [so far].
But I remain very optimistic that the USA won't repeat that mistake. That we will see a rebuilding of the economy on a new model, and it will happen long before average US worker productivity [and wages] fall to the same level as Mexico, or Ukraine, or...[fill in your favourite developing economy]. Americans are an extraordinarily impatient lot. Once they decide they are going to do something, it can be quite remarkable how fast it happens. A disporportionate number of new technologies and associated commercial enterprises will continue to be spawned in the USA, from its scientists, engineers and entrepreneurs. And maybe, just maybe, while other nations are pissing away money building up their military to protect their African and Latin American interests, perhaps the USA will be able to redirect more of its funds to something productive, as it weans itself off the reasons [such as an overdependence on imported oil] that have caused it to maintain such a large military force for so long.
I'm not suggesting that wage equalization is a good or desirable solution.
All I'm saying is that manufacturing has moved to other parts of the world because it's cheaper to produce stuff there . . . and the main reason for that is that wages are lower.
In a global economy, for manufacturing to return to the US, manufacturing costs have to be lower or equal to manufacturing costs in the rest of the world . . . or else why would corporations choose to manufacture in the US?
To me this seems logical and clear, and I can't say it more simply or explain it any better.
If you still don't see it that way, take one more shot at telling me why, if you want to, then let's just agree to disagree.
raja, we dont need or want wage equalization. read some re ricardo and comparative advantage
http://en.wikipedia.org/wiki/David_Ricardo#Competitive_Advantage
we do need some globally desirable products or services other than financial services. the answer will likely be tech or biotech. and of course food.
I agree that if we were to come up with products that can't be produced elsewhere, that would justify higher wages because other countries couldn't compete. And we certainly have a high capacity for food production. But would there be enough of those products to recover a manufacturing base compared to our past? I don't know the answer, but my pessimistic side says No.
I hope I'm wrong, because it would mean America's standard of living would go down considerably . . . as it already is.
vanvaley1
04-07-09, 02:35 PM
I'm not suggesting that wage equalization is a good or desirable solution.
All I'm saying is that manufacturing has moved to other parts of the world because it's cheaper to produce stuff there . . . and the main reason for that is that wages are lower.
In a global economy, for manufacturing to return to the US, manufacturing costs have to be lower or equal to manufacturing costs in the rest of the world . . . or else why would corporations choose to manufacture in the US?
To me this seems logical and clear, and I can't say it more simply or explain it any better.
If you still don't see it that way, take one more shot at telling me why, if you want to, then let's just agree to disagree.
I'm guessing that Raja is more right than wrong. But...borrowing from the slang of my generation, "Fat Chance." At least not in my generation. America was weaned on a protectionist mercantile system with cheap labor and we're now being consumed by one. When the nation was in trouble that's the policy it followed. Do it again. Unless...ya think we're not in trouble, we have nearly a whole continent and people to exploit, and tons of folks who are rapidly headed in the opposite direction of the poverty that many of our ancestors experienced.
The world had better come to some 'fair' or 'decent' or 'smart' accommodation bout these cycles of protectionism, 'free trade', inequitable wealth distribution, etc. sooner or later. As for the venerated dead economist and some living-dead economist, let em rest in peace. This slavish adherence to 'the doctrine' is self-destructive...and/or insane. We'd better find something that works...or else...we're condemned to follow the same pattern over again with different folks on the stage...or worse.
What accommodation? Not in my paygrade. But it better have something to do with health, housing, living wages, environmental protection, education, food, and some other things or we're just gonna follow our ancestor's proclivities and destroy a bunch of crap...maybe ourselves included. Does anybody here see any serious effort of the nations moving in that direction?
I'm not suggesting that wage equalization is a good or desirable solution.
All I'm saying is that manufacturing has moved to other parts of the world because it's cheaper to produce stuff there . . . and the main reason for that is that wages are lower.
In a global economy, for manufacturing to return to the US, manufacturing costs have to be lower or equal to manufacturing costs in the rest of the world . . . or else why would corporations choose to manufacture in the US?
To me this seems logical and clear, and I can't say it more simply or explain it any better.
If you still don't see it that way, take one more shot at telling me why, if you want to, then let's just agree to disagree.
Labour costs and manufacturing costs are not the same thing. And not every unit of labour is the same as every other unit of labour around the world. That's a simple as I can be also. So let's just agree to disagree... :)
Another point about wages: one of the largest factors that drive wages involves the amount of capital being used or controlled by each employee. The more productive capital a society has, the higher its wages. That's partly because higher amounts of capital mean that products can be produced more efficiently -- so one person can do the work of many if they have the right equipment and tools.
That's one reason why wages don't have to (and shouldn't) equalize between countries. If one country has ten times the capital investment of the other, their wages can be supported at ten times the level and still be globally competitive, all other things being equal -- which they aren't -- and that is the source of the problems....
Another point about wages: one of the largest factors that drive wages involves the amount of capital being used or controlled by each employee. The more productive capital a society has, the higher its wages. That's partly because higher amounts of capital mean that products can be produced more efficiently -- so one person can do the work of many if they have the right equipment and tools.
That's one reason why wages don't have to (and shouldn't) equalize between countries. If one country has ten times the capital investment of the other, their wages can be supported at ten times the level and still be globally competitive, all other things being equal -- which they aren't -- and that is the source of the problems....
The level of available productive capital, either high or low, results from many causes -- historical/political, such as Europe's self-depletion of capital as a result of waging wars; profitable manufacturing; available natural resources, etc. Where do you think the US is now regards available capital to enhance worker productivity?
Could you elaborate on the last point you made?
Where do you think the US is now regards available capital to enhance worker productivity?
Could you elaborate on the last point you made?
Here's my view about what happened with globalization and the de-industrialization of America over the last 20+ years:
1. Production costs rise in the US, as a result of increasing labor costs and increasing government regulation.
2. Industrial companies, more than many other businesses, require reliable long-term economic predictability. Heavy-handed government regulation made that increasingly difficult.
3. Artificially low interest rates in the US drove capital offshore, into places where it would receive a better return.
4. The sudden availability of large amounts of capital in some overseas economies, such as China, drove the industrialization of those economies.
5. As a result of modest industrialization, overseas labor became more productive. Production costs declined.
6. When faced with higher production costs, more regulation, excessive debt and less long-term predictability in the US, many companies were attracted by the decreasing production costs offshore, and made the decision to relocate production.
Reversing the trend requires understanding the cause. The issue won't be fixed by lower labor rates alone: there are a lot of other factors.
Where is the US now? Industrial companies are still buried in excessive debt. The idea of building a new factory in the US would be rejected by most large industrial companies, for the reasons described above. Capital is still flowing offshore. Even with lower wages, the US will continue to lose industrial capacity.
Here's my view about what happened with globalization and the de-industrialization of America over the last 20+ years:
1. Production costs rise in the US, as a result of increasing labor costs and increasing government regulation.
2. Industrial companies, more than many other businesses, require reliable long-term economic predictability. Heavy-handed government regulation made that increasingly difficult.
3. Artificially low interest rates in the US drove capital offshore, into places where it would receive a better return.
4. The sudden availability of large amounts of capital in some overseas economies, such as China, drove the industrialization of those economies.
5. As a result of modest industrialization, overseas labor became more productive. Production costs declined.
6. When faced with higher production costs, more regulation, excessive debt and less long-term predictability in the US, many companies were attracted by the decreasing production costs offshore, and made the decision to relocate production.
Reversing the trend requires understanding the cause. The issue won't be fixed by lower labor rates alone: there are a lot of other factors.
Where is the US now? Industrial companies are still buried in excessive debt. The idea of building a new factory in the US would be rejected by most large industrial companies, for the reasons described above. Capital is still flowing offshore. Even with lower wages, the US will continue to lose industrial capacity.
Point 1 is the result of inflation. When Nixon took America off the gold standard, unions fought and won wage increases for their workers.
Labour costs and manufacturing costs are not the same thing. And not every unit of labour is the same as every other unit of labour around the world. That's a simple as I can be also. So let's just agree to disagree... :)
Actually there is a simpler way to describe this...
30 years of FIRE economy has hollowed out large parts of the US [and UK] manufacturing base. The FIRE economy is now dying. Continuing to extrapolate its effects long into the future will be proved incorrect.
Once the rapid economic contraction finishes wiping out the last of the jobs of non-viable manufacturing enterprises like GM and Chrysler [and I think that final flush is well underway now, and government aid is not going to materially change the outcome], the multi-decade decline of manufacturing in the USA will be over. It may take a very long time to rebuild, but it ain't gonna keep getting worse. And wages on average in the USA will still be higher than China...:cool:
Here's my view about what happened with globalization and the de-industrialization of America over the last 20+ years:
1. Production costs rise in the US, as a result of increasing labor costs and increasing government regulation.
2. Industrial companies, more than many other businesses, require reliable long-term economic predictability. Heavy-handed government regulation made that increasingly difficult.
3. Artificially low interest rates in the US drove capital offshore, into places where it would receive a better return.
4. The sudden availability of large amounts of capital in some overseas economies, such as China, drove the industrialization of those economies.
5. As a result of modest industrialization, overseas labor became more productive. Production costs declined.
6. When faced with higher production costs, more regulation, excessive debt and less long-term predictability in the US, many companies were attracted by the decreasing production costs offshore, and made the decision to relocate production.
Reversing the trend requires understanding the cause. The issue won't be fixed by lower labor rates alone: there are a lot of other factors.
Where is the US now? Industrial companies are still buried in excessive debt. The idea of building a new factory in the US would be rejected by most large industrial companies, for the reasons described above. Capital is still flowing offshore. Even with lower wages, the US will continue to lose industrial capacity.
Thanks for explaining the various factors that have lead to the US's loss of industrial capacity.
Do you have any idea to what degree lower labor rates played a role, compared to the other factors? A ballpark percentage?
I'm trying to get some idea of how much poorer Americans will have to become now that the fantasy economy has popped . . . .
Thanks for explaining the various factors that have lead to the US's loss of industrial capacity.
Do you have any idea to what degree lower labor rates played a role, compared to the other factors? A ballpark percentage?
I'm trying to get some idea of how much poorer Americans will have to become now that the fantasy economy has popped . . . .
As GRG55 has said, it's not labor rate alone. A better number would be something like the ratio of productive capital to wages, with some mystery factor for regulation and other forms of government intervention. Relative competitiveness with another country would be the ratio of those ratios. With constant wages, as productive capital goes up in one country, they become more cost-competitive. Likewise, with constant capital investment, if their wages go up, they become less competitive.
The problem is that both wages and capital are in constant flux. I suppose in a very broad (and therefore not very useful) sense, one could guess that capital equipment per employee might have declined by 50% over the last two decades, with wages staying flat. So either wages need to come down by an equivalent amount, or capital investment needs to double, or capital investment in competing companies needs to come down by 50%, or their wages need to double. BTW, I'm using "wages" in the broad sense, which includes benefits, legal and administrative costs, regulatory compliance, etc -- all of the costs of doing business.
BTW, this ties back in the cause of the Great Depression. Artificially low interest rates in the US caused capital to flow to the UK and elsewhere overseas, and with it, American industrial wealth.
How do you reverse it in a country that is already up to their ears in debt? Debt deflation. Deleveraging. Unemployment. Restructuring. Dollar devaluation. Etc, etc.
ThePythonicCow
04-08-09, 02:35 AM
As GRG55 has said, it's not labor rate alone. A better number would be something like the ratio of productive capital to wages, with some mystery factor for regulation and other forms of government intervention.
Allow me to elaborate on this, to the point of actually disagreeing rather substantially.
That mystery factor might be the high order bit these days ... and not just government intervention, but also Bankster intervention.
For the last several centuries, and especially in the last few decades, human civilization has been able to increase its average standard of living, thanks to enormous advances in science, technology and whatnot. As might be expected, this does not always result in a "fair and balanced" distribution of increased wealth. Some people get vastly more wealth for the same or less work, while some are oppressed by ingenious new forms of enslavement (see another quite recent iTulip thread on Dubai.)
Most of my middle class American neighbors live vastly wealthier lives than most anyone lived a century ago, for (hard to compare) similar labor. Americans are consuming more than they produce. Many Chinese workers have recently become much more productive, for a quite more modest improvement in living standard. They now produce more than they consume.
We have ethics of personal and economic conduct in the healthier long standing cultures and markets, some dating back millenia. But such a code is quite lacking in the global economy. Such a code of conduct will take generations to develop and instill into the teaching of our young and into the constitutions of our institutions. The world of high finance and global economics is far too recent to have such a well developed code. The world economy is and will remain for sometime deeply corrupt, especially in the centers of power and wealth.
The presumption you make that there is some "regression to the mean" for labor rates, based on productivity and related factors, is simply not applicable to the world economy at this time.
The story of how global human civilization learned to act justly and constitute just institutions will take several chapters in its history book that are yet to be written.
Until then, the study of economics will often be as much a tool of the confusion and corruption as it will provide the insight needed for a proper ethics in a world economy.
dcarrigg
04-19-09, 08:53 PM
I agree that if we were to come up with products that can't be produced elsewhere, that would justify higher wages because other countries couldn't compete.
This is a good point. How long do you think it is that we can come up with products that can't be produced elsewhere?
As information dissemination (http://en.wikipedia.org/wiki/Information_asymmetry) continues to accelerate through enhanced computer software (http://sourceforge.net/softwaremap/) and hardware, and laws continue generally to fail at preventing this (http://www.icc-ccs.org/index.php?option=com_fabrik&view=visualization&controller=visualization.googlemap&Itemid=236), I do not think that there is much a foreign entrepreneur/government could not figure out how to do on their own.
Value then grows from accessibility to capital and will to execute. Anyone with internet access and a reasonable education (ability to process available information) can now be Samuel Slater (http://en.wikipedia.org/wiki/Samuel_Slater).
vBulletin® v3.7.0, Copyright ©2000-2009, Jelsoft Enterprises Ltd.