USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

[Sapiens]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

People tend to forget why they do things, the U.S. used to allow the best and brightest into their schools to gain "brains" as those students tended to stay put in the U.S., that is no longer true.

From time to time I like to recall the little story at the beginning of this sermon when I see someone doing something that does not make sense:

http://www.crossties.org/sermons/indiv/sermon19.pdf

[touchring]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

The chinese have been around for a LONG time. They don't think in terms of 4 year political cycles. That is their big advantage. Their disadvantage has always been that you don't get much out of the box or creative thinking(innovation) in a totolitarian country, They could COPY anything you made but they lacked the creativity for product development. that too is changing.

The Chinese society from the time of antiquity was based on capitalism and commerce. With capitalism there will be inventions. Stuff like matches, steel, drilling for natural gas, gunpowder, rockets, paper, countless others were Chinese inventions.

In fact, the bank note is a Chinese invention around 600AD, 1000 years before the bank of Sweden issued Europe's first bank notes in 1660.

http://en.wikipedia.org/wiki/Banknote

Along with bank notes, the Chinese invented modern banking. Everything we know of today, loans, issuing of paper money, money exchange, long-distance remittance, the Chinese were doing it in 1000 years ago, without computers.

http://en.wikipedia.org/wiki/History...nking_in_China

As for communism, it's a European invention, China had never been a socialist society before communism 60 years ago.

[*T*]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

I think it matters what level of education we're talking about. At the graduate level, attracting tuition is not the issue. In a good program, a science or engineering graduate student has a free ride, and even gets paid a small stipend to live off of. The funding angle is about talent and grants. The money comes from grants; to win grants, you need to produce results; to produce results, you need the best talent working for you. The bottom line is that America doesn't produce enough domestic technical talent to staff either its high tech industry or its academic labs. We seek out foreign graduate students because we have to, even though they cost more to support.

Have you ever watched the cartoon Futurama? This negotiation between Professor Wernstrom and Mayor Poopenmeyer is funny because it's true:

POOPENMEYER: Dr. Wernstrom, can you save my city?
WERNSTROM: Of course. But it'll cost you. First I'll need tenure.
POOPENMEYER: Done.
WERNSTROM: And a big research grant.
POOPENMEYER: You got it.
WERNSTROM: Also, access to a lab and five graduate students, at least three of them Chinese.

For my part, I'm pretty sure that our shortage of domestic science and engineering talent is cultural. It's more about our values than the resources we bring to bear on education.

I think it's both. In the UK at least, research council grad student funding is usually restricted to home (EU) students. Foreign students often have to bring their own funding via a bursary from industry or their govt.

Further, I would add that security clearance is a problem. In my field, I have a colleague (a professor at a top US university) who is applying for US citizenship because "it's hard to get funding otherwise" since in the US the funding in Eng is often defence related.

The UK produces lots of good engineering graduates, so it's not about talent or interest (at least here). However they are not able to find engineering jobs so they go (went) into finance, accounting, management consultancy etc -- where the pay and the prestige is. Despite many of them wanting to be engineers as kids. I could name a dozen of them right now.

[jiimbergin]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

People tend to forget why they do things, the U.S. used to allow the best and brightest into their schools to gain "brains" as those students tended to stay put in the U.S., that is no longer true.

From time to time I like to recall the little story at the beginning of this sermon when I see someone doing something that does not make sense:

http://www.crossties.org/sermons/indiv/sermon19.pdf

Thanks for the link. I enjoyed the sermon. It certainly shows both the positives and negatives of traditionalism.

jim

[goadam1]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

The chinese have been around for a LONG time. They don't think in terms of 4 year political cycles. That is their big advantage. Their disadvantage has always been that you don't get much out of the box or creative thinking(innovation) in a totolitarian country, They could COPY anything you made but they lacked the creativity for product development. that too is changing.

They are sneaky but make good food (but what animal is it?).

Saying they "lack" creativity is different than saying the Chinese system discourages individual creativity.

[goadam1]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

worse than that! they come here. we make them into the best engineers in the world. they fall in love with the usa... their college town, whatever... and want to stay, to start the next great high tech company. do we let them? no! we make them go home.

nuts!!!

If you want to fix nearly every economic ail America is in right now, allow a proper wave of immigration. Hell, give incentive to allow the best and the brightest to come. It would be better than the FIRE economy policy of looking the other way on illegal (cheap) labor.

[goadam1]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

right about what? the dollar crashing last year? no.

about it crashing in the future? i doubt it.

this makes more sense to me... they support the dollar as needed with short term debt while diversifying out of dollars... use long term debt as collateral... set up currency swaps... etc...

what's the motto here... 'a process not an event'.

chart from part ii...



the dollar's been 'crashing' since 1971.

the pound sterling didn't 'crash' and lose reserve status overnight, either. process took decades, too...

The question is, should a British citizen with some savings, diversified out of holding denominated in pounds or would it not have mattered that much?

[WildspitzE]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

I’ve brought charts to show you to make my points.

Interesting graph. I own part of a company that has invented and is producing a disruptive technology that will revolutionize electrical transformers. Guess where it's going? The highest bid, and fairest strategic partnership offering came from?

Again, our interest is only in purchasing as many short term Treasury bonds as necessary to maintain the purchasing power of our current dollar holdings and to manage our exchange rate as we see fit. We will use our long duration US securities holdings as collateral to buy assets such as oil and metals in Latin America, Africa, Australia, and Canada that we need here in China, to improve the living standards of our people.

One of my other projects validates this initiative (it does not validate the source of the USD, but that isn't the hard part IMO). I cannot say much as it's in very early implementation phase, but it bypasses the US and bridges Latam energy with China's (among other investors) LT view.

[goadam1]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

It seems to me that in the last dozen years, it doesn't matter if you invest in a productive economy. The nature of inflation is all the money chases returns. A productive economy is just as likely, if not more, to suffer from a market distortion as extra good returns create a positive feedback loop of smart investors. And then pop!

[metalman]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

The question is, should a British citizen with some savings, diversified out of holding denominated in pounds or would it not have mattered that much?

$5 1941 to $2.50 in 1971... 50% in 30 yrs = dollar 110 in 2001 to 55 in 2031. itulip sees 79 to 60 in 5yrs.

my take... either way, slow or fast depreciation... you do not want a big exposure to a currency of a country that has another country trapped in that currency.

another the 'poom' scenario...

China’s Syndrome: The “dollar trap” in historical perspective

Olivier Accominotti 23 April 2009

China’s “dollar trap” has many analysts worried about its future resolution. This column discusses a similar situation in the 1920s when France held more than half the world’s foreign reserves. France’s “sterling trap” ended disastrously. Sterling suffered a major currency crisis, French authorities lost a lot of money, and subsequent policy reactions deepened the Great Depression.

China’s huge volume of dollar reserves is now at the centre of serious concerns about the future of the US currency. The origin of this situation dates back to the early 2000s, after the East Asian and Russian crises. At that time, accumulating foreign reserves was considered benign policy. Developing and emerging countries were encouraged in this way in order to insure against sudden reversals of capital inflows. China was pegging its currency against the dollar and, due to the US trade deficits, started acquiring US assets.

Ten years on, the People’s Bank of China (PBOC) has an extraordinary stock of dollars, and one pressing question: “What to do out of them?” Increasing political tensions have given rise to fears that it might get rid of this huge bulk of securities and precipitate a dollar crash. In August 2007, a Chinese official indeed reminded that Beijing was in a position to provoke a “mass depreciation” of the dollar if it decided to do so. Recent suggestion by Zhou Xiaochuan that China’s central bank might shift from the dollar has put the issue on newspapers’ headlines once again.

But bold statements are one thing, and actual policy another. Up to now, China’s authorities have shown few signs of attempting to weaken the dollar. The reason for this seems straightforward. After all, China is the world’s largest dollar investor, and no one else would have less interest in seeing the value of the US currency plummet. The PBOC might be the promptest to support the dollar, not least because it would suffer a huge capital loss in the event of a dollar depreciation. In a recent New York Times column, Paul Krugman argues that China has “driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.”

This situation might appear unprecedented. But in truth, all this is not brand-new.

French foreign reserves policy during the Great Depression

Economic history offers one striking example of a country being trapped by the huge volume of its foreign reserves. This country was France, the period was the early 1930s, and the currency at stake the pound sterling. The episode ended up dramatically. Sterling suffered a major currency crisis, French authorities lost a lot of money, and their subsequent policy largely contributed to the Great Depression.

The origin of the problem lay in the government’s decision of 1926 to peg the franc to the sterling and dollar, two years before re-establishing the gold standard. Since the trade balance was in surplus and capital was flowing into the country, this goal was achieved through public purchases of foreign exchange. The Bank of France therefore accumulated a bulging portfolio of foreign holdings. At the end of the 1920s, the country held more than half of the world’s volume of foreign reserves.

French policy over subsequent years has been heavily criticized for being destabilizing. British contemporaries, like Paul Einzig, accused France of using its reserves in order to weaken the pound before the sterling crisis of September 1931. Others have noted that French conversions of foreign assets into gold after 1931, by imposing constraints on their money supplies, put intense deflationary pressures on other countries on the gold standard.

France’s Sterling Trap in 1931

Why did France engage in a policy that had such dramatic consequences? In a recent work, I explore the motivations behind the French reserves policy of this period. Spending time in the archives, I was able first to reconstitute the evolution of the reserves currency composition, and second, to identify the reasons invoked for the allocation decisions. Last, I have combined this information with market indicators of the perceived risk of reserves currencies.

France’s problems were similar to those of China today. The Bank of France was a private institution and its primary objective was to avoid capital losses. Its reserves were allocated between sterling and dollar. From 1929 to 1931, there were fears that the pound might be devalued and the Bank started shifting to the dollar (figures 1 and 2).

Figure 1. Bank of France’s Sterling Reserve (in millions of pounds sterling), 1928-1936


Figure 2. Bank of France’s Dollar Reserve (in millions of US dollars), 1928-1936

Source: Bank of France’s archives.

However, in implementing this policy, the Bank was also constrained by its position as a large player on the exchange market. So, as sterling’s weakness worsened at the end of 1930, the Bank was in a trap: it could not continue selling pounds without precipitating a sterling collapse and a huge exchange loss for itself. The only workable option left was to support the pound. French policy therefore suddenly turned cooperative. The Bank halted the sterling liquidations, and even intervened on the market in order to support the British currency.

When the pound eventually collapsed, the Bank of France was put into a state of technical bankruptcy. It was only able to survive thanks to a state’s rescue, obtained under tough conditions. Moreover, there were now rising fears over the dollar. The will to avoid further losses therefore led authorities to convert all their dollar assets into gold (figure 2), a policy that heavily contributed to the global monetary contraction of the 1930s.

Lessons for today?

What are the lessons for today? China’s objective function today certainly differs from those of France in the interwar years. But French experiences in the early 1930s are a reminder that when there is growing risk on reserves currencies, foreign reserves can be both a source of instability for the international monetary system, and a burden for large holders.

References

Accominotti, O., 2008, “The Sterling Trap: Foreign Reserves Management at the Bank of France, 1928-1936”, forthcoming European Review of Economic History.
Einzig, P., 1932, Behind the scenes of international finance, London: Macmillan.
Krugman, P., “China’s Dollar Trap”, New York Times, 2 April 2009
“China threatens nuclear option-of-dollar-sales”, Daily Telegraph, 10 August 2007

This article may be reproduced with appropriate attribution. See Copyright (below).

[metalman]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

Interesting graph. I own part of a company that has invented and is producing a disruptive technology that will revolutionize electrical transformers. Guess where it's going? The highest bid, and fairest strategic partnership offering came from?

i count $90B in equipment and steel imports, $55B in toys and crap for walmart, yet american's think 'china' they think 'toys and crap'. when i was a kid in the usa in the 1970s we made the same mistake re japan... 'japan' = cheap plastic toys... never saw the auto competition coming. back then we had an excuse... no internet, no data. here's the data from wto in black and white. what's the explanation for the misunderstanding today?

One of my other projects validates this initiative (it does not validate the source of the USD, but that isn't the hard part IMO). I cannot say much as it's in very early implementation phase, but it bypasses the US and bridges Latam energy with China's (among other investors) LT view.

they'll cut the dollar out one trade partner at a time... drip... drip... drip. some day we'll wake up and china dominates in medical equipment, telecoms, computers, you name it, and the dollar is #4 world currency.

[WildspitzE]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

i count $90B in equipment and steel imports, $55B in toys and crap for walmart, yet american's think 'china' they think 'toys and crap'. when i was a kid in the usa in the 1970s we made the same mistake re japan... 'japan' = cheap plastic toys... never saw the auto competition coming. back then we had an excuse... no internet, no data. here's the data from wto in black and white. what's the explanation for the misunderstanding today?

Hubris, a country full of people reading their own press-releases.

Forgot to mention, the human capital transfer that EJ talks about, is the motivation for the strategic partnerships.

they'll cut the dollar out one trade partner at a time... drip... drip... drip. some day we'll wake up and china dominates in medical equipment, telecoms, computers, you name it, and the dollar is #4 world currency.

This is the first one in my pipeline, and it's relatively significant in it's goals, but it's only the beginning IMO.

[metalman]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

Hubris, a country full of people reading their own press-releases.

Forgot to mention, the human capital transfer that EJ talks about, is the motivation for the strategic partnerships.



This is the first one in my pipeline, and it's relatively significant in it's goals, but it's only the beginning IMO.

dollar dies with a whimper not a bang.

[Munger]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

I think it matters what level of education we're talking about. At the graduate level, attracting tuition is not the issue. In a good program, a science or engineering graduate student has a free ride, and even gets paid a small stipend to live off of. The funding angle is about talent and grants. The money comes from grants; to win grants, you need to produce results; to produce results, you need the best talent working for you. The bottom line is that America doesn't produce enough domestic technical talent to staff either its high tech industry or its academic labs. We seek out foreign graduate students because we have to, even though they cost more to support.

Have you ever watched the cartoon Futurama? This negotiation between Professor Wernstrom and Mayor Poopenmeyer is funny because it's true:

POOPENMEYER: Dr. Wernstrom, can you save my city?
WERNSTROM: Of course. But it'll cost you. First I'll need tenure.
POOPENMEYER: Done.
WERNSTROM: And a big research grant.
POOPENMEYER: You got it.
WERNSTROM: Also, access to a lab and five graduate students, at least three of them Chinese.

For my part, I'm pretty sure that our shortage of domestic science and engineering talent is cultural. It's more about our values than the resources we bring to bear on education.

Professor Katz is more than half crazy, but also completely brilliant. He had this to say on the topic:

Don't Become a Scientist!


Are you thinking of becoming a scientist? Do you want to uncover the mysteries of nature, perform experiments or carry out calculations to learn how the world works? Forget it!

Science is fun and exciting. The thrill of discovery is unique. If you are smart, ambitious and hard working you should major in science as an undergraduate. But that is as far as you should take it. After graduation, you will have to deal with the real world. That means that you should not even consider going to graduate school in science. Do something else instead: medical school, law school, computers or engineering, or something else which appeals to you.

Why am I (a tenured professor of physics) trying to discourage you from following a career path which was successful for me? Because times have changed (I received my Ph.D. in 1973, and tenure in 1976). American science no longer offers a reasonable career path. If you go to graduate school in science it is in the expectation of spending your working life doing scientific research, using your ingenuity and curiosity to solve important and interesting problems. You will almost certainly be disappointed, probably when it is too late to choose another career.

American universities train roughly twice as many Ph.D.s as there are jobs for them. When something, or someone, is a glut on the market, the price drops. In the case of Ph.D. scientists, the reduction in price takes the form of many years spent in ``holding pattern'' postdoctoral jobs. Permanent jobs don't pay much less than they used to, but instead of obtaining a real job two years after the Ph.D. (as was typical 25 years ago) most young scientists spend five, ten, or more years as postdocs. They have no prospect of permanent employment and often must obtain a new postdoctoral position and move every two years. For many more details consult the Young Scientists' Network or read the account in the May, 2001 issue of the Washington Monthly.

As examples, consider two of the leading candidates for a recent Assistant Professorship in my department. One was 37, ten years out of graduate school (he didn't get the job). The leading candidate, whom everyone thinks is brilliant, was 35, seven years out of graduate school. Only then was he offered his first permanent job (that's not tenure, just the possibility of it six years later, and a step off the treadmill of looking for a new job every two years). The latest example is a 39 year old candidate for another Assistant Professorship; he has published 35 papers. In contrast, a doctor typically enters private practice at 29, a lawyer at 25 and makes partner at 31, and a computer scientist with a Ph.D. has a very good job at 27 (computer science and engineering are the few fields in which industrial demand makes it sensible to get a Ph.D.). Anyone with the intelligence, ambition and willingness to work hard to succeed in science can also succeed in any of these other professions.

Typical postdoctoral salaries begin at $27,000 annually in the biological sciences and about $35,000 in the physical sciences (graduate student stipends are less than half these figures). Can you support a family on that income? It suffices for a young couple in a small apartment, though I know of one physicist whose wife left him because she was tired of repeatedly moving with little prospect of settling down. When you are in your thirties you will need more: a house in a good school district and all the other necessities of ordinary middle class life. Science is a profession, not a religious vocation, and does not justify an oath of poverty or celibacy.

Of course, you don't go into science to get rich. So you choose not to go to medical or law school, even though a doctor or lawyer typically earns two to three times as much as a scientist (one lucky enough to have a good senior-level job). I made that choice too. I became a scientist in order to have the freedom to work on problems which interest me. But you probably won't get that freedom. As a postdoc you will work on someone else's ideas, and may be treated as a technician rather than as an independent collaborator. Eventually, you will probably be squeezed out of science entirely. You can get a fine job as a computer programmer, but why not do this at 22, rather than putting up with a decade of misery in the scientific job market first? The longer you spend in science the harder you will find it to leave, and the less attractive you will be to prospective employers in other fields.

Perhaps you are so talented that you can beat the postdoc trap; some university (there are hardly any industrial jobs in the physical sciences) will be so impressed with you that you will be hired into a tenure track position two years out of graduate school. Maybe. But the general cheapening of scientific labor means that even the most talented stay on the postdoctoral treadmill for a very long time; consider the job candidates described above. And many who appear to be very talented, with grades and recommendations to match, later find that the competition of research is more difficult, or at least different, and that they must struggle with the rest.

Suppose you do eventually obtain a permanent job, perhaps a tenured professorship. The struggle for a job is now replaced by a struggle for grant support, and again there is a glut of scientists. Now you spend your time writing proposals rather than doing research. Worse, because your proposals are judged by your competitors you cannot follow your curiosity, but must spend your effort and talents on anticipating and deflecting criticism rather than on solving the important scientific problems. They're not the same thing: you cannot put your past successes in a proposal, because they are finished work, and your new ideas, however original and clever, are still unproven. It is proverbial that original ideas are the kiss of death for a proposal; because they have not yet been proved to work (after all, that is what you are proposing to do) they can be, and will be, rated poorly. Having achieved the promised land, you find that it is not what you wanted after all.

What can be done? The first thing for any young person (which means anyone who does not have a permanent job in science) to do is to pursue another career. This will spare you the misery of disappointed expectations. Young Americans have generally woken up to the bad prospects and absence of a reasonable middle class career path in science and are deserting it. If you haven't yet, then join them. Leave graduate school to people from India and China, for whom the prospects at home are even worse. I have known more people whose lives have been ruined by getting a Ph.D. in physics than by drugs.

If you are in a position of leadership in science then you should try to persuade the funding agencies to train fewer Ph.D.s. The glut of scientists is entirely the consequence of funding policies (almost all graduate education is paid for by federal grants). The funding agencies are bemoaning the scarcity of young people interested in science when they themselves caused this scarcity by destroying science as a career. They could reverse this situation by matching the number trained to the demand, but they refuse to do so, or even to discuss the problem seriously (for many years the NSF propagated a dishonest prediction of a coming shortage of scientists, and most funding agencies still act as if this were true). The result is that the best young people, who should go into science, sensibly refuse to do so, and the graduate schools are filled with weak American students and with foreigners lured by the American student visa.

Sad but true.
http://wuphys.wustl.edu/~katz/scientist.html

[jk]

Re: USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

Again, our interest is only in purchasing as many short term Treasury bonds as necessary to maintain the purchasing power of our current dollar holdings and to manage our exchange rate as we see fit.

i don't think the chinese will continue to have this option for very long. as chinese exports to the u.s. are constrained by the u.s. recession, and as the u.s. need to borrow grows for the same reason, the chinese flow of new dollar income will become simply inadequate to the task.