I typically think of four main factors that determine whether or not an economy can function efficiently as a single currency or economic zone. They primarily determine the level of adjustments costs and how these costs are to be shared, so that regions more able to bear the costs absorb a larger share of those costs:
- Labor mobility. If workers can move from one part of the economy to another with low frictional costs (which range from legal restrictions to transportation to language and other social barriers), this reduces the distortions caused by differing growth rates in different parts of the economy. Workers move easily from where they are less valuable to where they are more valuable, reducing downward pressure on wages in the weaker parts of the economy and increasing the value of labor overall.
- Capital mobility. The same is true if capital can move easily from one part of the economy to another. Declining prices and costs in the weaker parts of the economy should attract investment from the stronger parts.
- Fiscal policy. Mechanisms that allow an entity (usually the government) to transfer wealth from rapidly growing sectors to more slowly growing sectors – most obviously income taxes used to fund unemployment benefits – help reduce the disparity between sectors that are growing at very different speeds. This helps stabilize the economy overall.
- Monetary policy. The transmission of monetary policy should be consistent both in timing and effect so that interest rates reflect the needs of the different parts of the economy. This is always hard to do unless each economic entity imposes strict capital controls and has its own discrete monetary policy, and while capital controls are hard enough for a country to impose successfully, they are much harder to impose at a sub-country – e.g. provincial – level.
Although I think China is clearly much more integrated as an optimal currency zone than Europe is today, it is probably less integrated than the US (I will use the US and Europe as the two extreme cases between which China falls). China of course does not have the problems of multiple sovereignty and taxation that Europe does, but there are still important frictional costs among provinces and regions that exceed those among US states and regions and that may make an adjustment to slower growth bumpier than expected.
Labor mobility
One of the most obvious such frictions is in labor mobility. Even on paper China is far from being a single, unitary labor market. Some of the constraints on labor mobility are the typical constraints for any large country, for example the costs involved in moving from one place to another very different place – cultural differences, travel expenses, even language barriers – but in China there is an additional important legal constraint: the “hukou” system, or system of residential permits. The always-useful Wikipedia describes it like this:
A hukou is a record in the system of household registration required by law in the People’s Republic of China…A household registration record officially identifies a person as a resident of an area and includes identifying information such as name, parents, spouse, and date of birth.
This matters especially for China’s huge population of migrant workers. Technically in China a worker’s ability to work in any part of the country is constrained by the hukou system.
In 1958, the Chinese government officially promulgated the family register system to control the movement of people between urban and rural areas. Individuals were broadly categorised as a “rural” or “urban” worker. A worker seeking to move from the country to urban areas to take up non-agricultural work would have to apply through the relevant bureaucracies.
The number of workers allowed to make such moves was tightly controlled. Migrant workers would require six passes to work in provinces other than their own. People who worked outside their authorized domain or geographical area would not qualify for grain rations, employer-provided housing, or health care. There were controls over education, employment, marriage and so on.
The effect of the hukou system is to create a multi-tiered caste system for workers in which there are more desirable and less desirable hukous, usually based on differences in urbanization, growth and income:
Reformation of hukou has been controversial in the PRC. It is a system widely regarded as unfair by citizens of the PRC, but there is also fear that its liberalization would lead to massive movement of people into the cities, causing strain to city government services, damage to the rural economies, and increase in social unrest and crime. And yet, there has been recognition that hukou is an impediment to economic development. China’s accession to theWorld Trade Organization has forced it to allow reformation to hukou in order to liberate the movement of labor for the benefit of the economy.
…Chan and Buckingham’s (2008) article, “Is China Abolishing the Hukou System?” argues that previous reforms have not fundamentally changed the hukou system, but have only decentralized the powers of hukou to local governments. The present hukou system remains active and continues to contribute to China’s rural and urban disparity.
Most migrant workers in large cities are technically there illegally because they do not have the appropriate hukou. This means among other things that they have limited access to social services, including health care and schooling for their children. They also have limited legal standing in case of conflicts with their managers and bosses, including conflicts over late pay (in China wages for migrant workers are often paid months in arrears).
While most Chinese recognize that the hukou system is both unfair and detrimental overall to the economy, there is, not surprisingly, opposition to real reform, which would anyway be extremely disruptive without significant changes in the abilities of municipal governments to fund themselves. Eliminating the hukou altogether, for example, would require that workers who are currently non-hukou residents be treated the same way as hukou residents, so that logically city governments would have either to increase their revenues commensurately, or to reduce the services they currently provide to the latter. Almost certainly this would cause social service costs in cities with large migrant worker populations, including health and education, to surge, and so the largest and fastest growing cities strongly oppose real hukou reform.
Ordinary citizens with “upper caste” hukou also oppose significant reform. In China, as in most places, there is prejudice towards migrant workers, who are blamed for crime, low wages, dirty neighborhoods and drug usage. I would imagine that when overall economic growth slows and unemployment rises, tension and conflicts between those with “good” hukou and those without would only deteriorate. I would also assume that if unemployment were to rise, local government officials would naturally take steps to increase discrimination against outsiders.
As of now China effectively has a reasonably high level of labor mobility, especially because most migrant workers have moved from their villages to cities still within their own provinces, and so provincial leaders are responsible for them anyway. For this reason the default assumption among most analysts is that China has a reasonably high degree of labor mobility.
The interesting question however should be how the system would respond to conditions of much lower growth, higher unemployment, and potential labor tension. In my classes at Peking University I teach that government officials, especially regulators, should have the same pessimistic mind-set as bond investors. Instead of thinking about all the ways things can go right, they must think about what their constraints will be when things go wrong.
When we think about how labor mobility in China will affect a slowing economy, in other words, we should not assume that we will have the same level of labor mobility as we have had during the past several years. When there are plenty of jobs available and leaders of fast growing cities and provinces are eager to encourage immigration, the hukou system may work differently than when officials are worried about unemployment in their jurisdictions. We cannot say for certain, especially when the response of Beijing is uncertain, but it is certainly plausible that the hukou system will be used to reduce labor mobility if slowing GDP growth rates are associated with higher unemployment.
Money mobility
In China much if not most “fiscal” activity actually occurs through the banking system, with bank loans playing the role of fiscal expenditures and low or even negative deposit rates playing the role of fiscal revenues. Of course in a country whose financial system is dominated by banks, monetary policy is conducted largely through the banks. This means that capital mobility and the transmission of both fiscal and monetary policy is determined at least in part by the structure and mobility of the banking system.
China’s banking system is divided very broadly into national banks and local and provincial banks, with each side comprising roughly 50% of the total. In the aggregate, local banks, which include city banks and rural cooperatives, are generally believed to be much weaker than the national banks. Their relatively smaller branch networks force them to rely more heavily than their national rivals, with their large retail branch networks, on corporate deposits and purchased funds. In addition their assets are probably in far worse shape than the assets of the large banks, in large part because their lending policies are more likely to be subject to the needs of local officials.
I assume that one of the consequences of an economic slowdown in China will be a surge in potential insolvency among the smaller banks, a large part of which are probably already insolvent but kept liquid by confidence in the banking system. If (when) this happens, I suspect that the response of the financial authorities will be, rather than liquidate bad banks and pay depositors out of government revenues, to merge them into large banks. It would be politically risky to allow banks to default on depositors, and policymakers always prefer to bury expenses, hoping that over time they will resolve themselves.
Bailing out banks rather than closing them down can be economically justified under very specific conditions, formally identified long ago by Walter Bagehot, but the historical precedents suggest that protecting insolvent banks, as the US did in response to the S&L crisis of the 1980s, or Japan in the 1990s, nearly always ultimately raises costs significantly. Nonetheless in my opinion there is a very high probability that over the next ten years, rather than see the closing down of weaker banks, the Chinese financial landscape will evolve towards larger but operationally hobbled banks, much like the “zombie” banks that emerged in Japan in the 1990s.
Small banks tend to be very local in their operations, but I think in China even large national banks operate to an important extent on a provincial basis, with deposits collected in each province going largely to fund loans made within the province. What is more, governance within provincial branches, even those of the largest national banks, tend to be dominated by the needs of local government officials. This means that to some extent a national bank may be more aptly described as a group of provincial banks with headquarters (usually) in Beijing. As an aside, Anne Stevenson-Yang and Andrew Collier have both done very good work in trying to disentangle governance structures within the local banking systems.
Some of the financial reforms described in the Third Plenum are aimed precisely at modifying the ways in which local officials can influence the capital allocation process. Already there is a lot of concern among regulators about the risks associated with the ability of local officials to direct funding into favored projects, and as the economy slows, these risks will become much more obvious. We will see, of course, just how successful – and speedy – governance reform is likely to be in reducing the various kinds of frictional costs, but for now I think it is safe to assume that we cannot count on full, unfettered capital mobility within the banking system, and there is always the chance that unless Beijing forcefully intervenes, local responses to an economic slowdown will result in more, not less, localization of the banking function.
This also implies that the transmission of monetary and fiscal policy is not likely to be consistent across the country. To the extent that fiscal expenditures take place through the banking system, without transfers among provinces it may actually be more difficult for provinces experiencing economic problems to grow deposits fast enough to expand “fiscally”.
Will the costs of rebalancing be spread efficiently?
As growth slows within the Chinese economy overall, and as certain provinces and regions experience especially significant growth declines, I would guess that frictional costs and constraints on both labor and capital will remain, or even rise, and with them the transmission of monetary policy is likely to become more complex. Provinces that have relied heavily on government infrastructure spending – and the real estate boom that seems to accompany heavy government spending – may be especially affected, and these provinces are generally the poorer, Western provinces.
So what are the implications of frictions that constrain the adjustment process? If there were few relevant distortions or frictional costs within China, as China’s economy slowed, the rebalancing process would be difficult in any case, but at least there would be no tendency to distribute the costs of rebalancing unevenly, with heavier costs being assigned to regions less able to bear them. Because constraining labor mobility raises the costs for provinces with higher unemployment, and lowers it for provinces with lower unemployment, low frictional costs implies that labor mobility is not constrained. The same is true for capital mobility.
While the way costs are distributed among the provinces within China matters to individual provinces, of course, it might matter a lot less overall to China if losses for one province are matched with gains for another. To understand what might happen in China it might be helpful to think about the post-crisis experiences of the US and Europe, the two extreme cases of large currency zones in which frictional costs in the former are negligible and in the latter are highly constraining. Comparing how the US adjusted to the 2007-08 crisis with the way Europe did may shed insight on the process.
There are of course many costs within the US economy that keep labor and capital mobility from being frictionless (bus fare, if nothing else), but these are low enough to make the US very clearly an optimal currency zone, and so they spread the costs of the adjustment process more evenly in the US. This is not to say of course that the US adjusted quickly and painlessly from the crisis, but when we consider the other extreme, that of Europe, it is clear that the US adjustment could have been much more painful.
In Europe the adjustment following the crisis has been much more difficult, and this can be explained at least in part by the combination of high debt and high frictional costs (especially because of localized sovereignty) that protected stronger economies at the expense of weaker economies. These frictional costs made the adjustment easier for stronger economies, like Germany, but, I would argue, harder for Europe overall.
As peripheral Europe deleveraged, if Germany had taken steps to increase domestic demand, either German debt or European unemployment would have still risen (or some combination of the two), in the latter case with some, or even most, of the rise in unemployment occurring in Germany, but it would have risen by less than it actually did. Germany was able to take advantage of significant constraints in European labor mobility, along with Berlin’s near-total control of German fiscal policy and its disproportionate influence on European monetary policy, to transfer most of the adjustment costs to peripheral Europe, and this made Europe overall worse off.
The important point for China is not so much the genesis of the crisis but whether the higher adjustment costs for peripheral Europe were matched by equivalently lower adjustment costs for Germany, with European unemployment overall remaining unchanged. I would call this a “zero-sum” adjustment, in which what was worse for one side was equivalently better for another.
If Europe had undergone a zero-sum adjustment, it would be easy to argue (at least for German policymakers) that Europe’s adjustment might have been costly but it was well managed. I would argue, however, that this was not the case. A zero-sum adjustment could only have happened in principle if the rebalancing of internal European demand had occurred many years earlier, before debt levels became too high.
Early rebalancing was always unlikely of course. Like in China in 2007, when then-Premier Wen famously acknowledged China’s own unsustainable internal imbalances, or in the US in the years leading up to the 2007 crisis, when the collapse in the US savings rate had long been evident, European policymakers were unwilling to adopt costly adjustment policies until they were forced to do so, even though the delay sharply raised the cost of the adjustment.
Financial distress costs
It is important to understand the role of debt in forcing up the adjustment costs. High debt levels throughout Europe, even in Germany, made the rebalancing of internal European demand much more painful for Europe overall for at least two reasons.
- Leverage embeds pro-cyclicality into an economy – something that I have discussed many times before – so that the costs of a crisis increase as agents engage in self-reinforcing behavior in response to the crisis itself.
- Financial distress costs are non-linear, so that a transfer of costs is not symmetrical, with benefits for one equaling costs for the other.
To take the first reason, as the crisis forced peripheral Europe to deleverage, with no mitigating rise in German demand, the combination of high debt and significant downward pressure on prices and wages forced Europe into the highly pro-cyclical financial distress process, which I would argue resulted ultimately in much higher unemployment overall than would have otherwise been the case. The combination of debt and asset and wage deflation forced the country into a downward spiral of rising financial distress costs in which the debt burden worsened unemployment and unemployment worsened the debt burden.
There is nothing new about this. History makes it very clear that during periods of unbalanced growth and rising debt, the longer we postpone the adjustment the more expensive it becomes, and I would argue that it is precisely because high debt levels create a self-reinforcing process of financial distress (George Soros calls it “reflexivity”) that this must be true.
But this tells us nothing about how frictional costs and constraints within the Chinese economy might affect the cost of its adjustment. It is the second reason that matters more in the discussion of whether or not we can think of China as an optimal currency zone, and is why I would say that Europe represents the other extreme when we try to understand why a “more optimal” currency zone adjusts less painfully than a “less optimal” currency zone.
Except when debt levels are very low, or so high relative to debt capacity that the debt is practically worthless, the cost of a “unit” of deterioration is greater than the benefit of a “unit” of improvement, and depending on the amount of debt and the size of the unit, the difference between the two can be extremely high.* If distortions and frictional costs among different provinces are extremely high, as they were among different European countries, the cost of an overall rebalancing of the Chinese economy will be disproportionately borne by the weaker provinces.
Distributing costs
Apart from issues of fairness, this might matter less to Beijing if it simply meant a distribution of the costs from one part of the country to another. In that case China’s overall economic growth rate would still decline as part of the rebalancing process, but it would be a zero-sum decline, and the fact that the costs were borne unevenly within the country would not affect the overall economy. Anhui’s loss of one dollar – to make up an example in which Anhui suffers more than Zhejiang from the rebalancing process – would be Zhejiang’s gain of one dollar, and although political and social costs for China might change for the worse, overall economic costs for China would not rise.
But, as occurred in Europe, debt changes all of this, and this change is a consequence of the fact that financial distress costs are not linear. If the weaker parts of the Chinese economy are heavily indebted – which is likely to be the case for both the weak and strong provinces and regions – constraints in the way costs are distributed across the economy no longer result in a zero-sum game. Lowering Zhejiang’s cost at Anhui’s expense, in other words, would almost certainly reduce China’s overall wealth.
Financial distress costs do not change in a linear fashion mainly because changes in risk perception, once the market starts to worry about debt levels, causes agents to change their behavior in ways that automatically worsen the debt burden (for those who are interested I have discussed this in several earlier issues of my newsletter as well as in my book, The Volatility Machine). Unless Zhejiang’s debt burden was much worse than that of Anhui, in other words, transferring a dollar of the adjustment cost from Anhui to Zhejiang would reduce China’s overall economic growth if both provinces were heavily indebted. Anhui’s financial distress costs would rise by more than Zhejiang’s would decline.
This is not simply an academic matter. Most analysts were surprised by the severity of the European crisis relative to that of the US, even though in the aggregate Europe’s economy seemed to have entered into the crisis in better shape (some would say much better shape) than that of the US. It had less debt overall, for example, a tiny trade deficit, no subprime mortgages, and a healthier savings rate.
The reason Europe suffered more may largely be because of the frictional costs that made Europe much less optimally a single currency zone. High levels of debt created a kind of negative convexity that ensured that the overall impact of forcing weaker countries to bear a larger share of the costs of adjustment had necessarily to raise overall financial distress costs for Europe, even if weaker and stronger economies had suffered from equally heavy debt burdens, but it was made worse by the fact that the former tended to have more debt.
We need to bear this in mind as we see how China rebalances and how easily rebalancing costs are transmitted through the economy, especially as debt continues to grow while we wait for the adjustment to take place. Is China more like the US or more like Europe? I cannot really say, especially when the answer will depend in part on the timing and sequencing of the reforms Beijing implements.
The pace of both hukou reform and of governance reform in the financial sector will determine in part the answer to this question, just to state the most obvious ways in which the timing and sequencing of reform matters. If China is more like Europe – that is if there are significant frictional costs that make it hard to spread the costs of rebalancing evenly across the overall economy – it is a near certainty that debt will become a much bigger problem and financial distress costs for China’s economy overall will be higher.
Implications
There are unfortunately no easy ways to measure the extent and evolution of these kinds of frictional costs, but it is certainly worth keeping an eye on the way the costs of rebalancing are distributed nationally as growth continues to slow. I think there are three clear implications that investors and policymakers may want to consider:
- The distribution of growth in China during the period of rapid growth has been extremely uneven, even when Beijing was committed to rebalancing growth among the poorer and richer provinces and has committed substantial resources to doing so. This may reflect substantial frictions within the Chinese economy and real institutional differences that have resulted in hard-to-change disparities in what I have elsewhere called “social capital”. If that is the case, as the Chinese economy continues to slow, significant growth disparities between regions and provinces are likely to remain.
- To the extent that these growth disparities remain, the distribution of adjustments costs is not likely to be zero-sum. High debt levels will ensure that the cost of China’s adjustment will be higher than expected and that it will be higher as a function of frictional constraints. For this reason it is important to understand whether China, as an integrated currency zone, is closer to the US or to Europe in terms of the “smoothness” in the way costs are distributed. We need especially to watch how slowing growth affects labor mobility and capital mobility.
- Policymakers of course will determine policy based on political considerations, but from a purely economic standpoint reforms aimed at reducing debt and increasing capital and labor mobility should take precedence over other reforms. This analysis does however leave Beijing with a contradiction. We know that moral hazard has been an important reason for investment misallocation in China, and one important step in reducing moral hazard might be to eliminate Beijing’s explicit guarantee of provincial and municipal debt. This would force local governments to borrow only in ways that can be justified economically, or else lose access to funding.
But eliminating Beijing’s guarantee protects the credit of the central government at the expense of local government creditworthiness, and so threatens to make financial distress costs much worse. In that case we might consider that the greater the internal frictions, the more reluctant Beijing should be to withdraw its guarantee, at least until the rebalancing process has been complete and the debt burden resolved.
Convergence is linear, and unlikely
Whereas I argue that the growth disparities among Chinese provinces probably reflect frictional constraints and differences in social capital, and so are likely to have an adverse impact on China’s adjustment, I should point out that not everyone agrees. In fact some analysts argue that it is precisely because there are such great disparities within China that high growth rates are likely to be maintained for the foreseeable future, with at least one analyst arguing in 2013 that China’s growth rate would remain between 7-8% through nearly the end of the decade precisely because of provincial growth disparities.
I admit that I am bewildered by his logic, which seems implicitly to be based on a widely-held but historically suspect theory of economic convergence. It requires implicitly a model of development in which the development process is linear, so that development occurs automatically as knowledge and capital is transferred from richer entities to poorer ones.
My own development model, which owes a lot to economists like Albert Hirschman, assumes that rapid growth is by nature unbalanced and heavily constrained by domestic institutions, so that the development process is specific (i.e. not easily transferred), non-linear, bumpy, and subject to reversals – because rapid growth creates deep imbalances that must be reversed. I also believe that these reversals can be brutal enough to prevent long-term convergence, which is why unlike most economists I am more impressed by successful adjustments than I am by growth miracles. More importantly, I believe development is based less on the transfer of knowledge and capital than on the transformation of domestic institutions (legal, financial, political, etc.).
In fairness, I have to acknowledge that there is no consensus on the topic. There are economists who see things very differently from me who treat convergence as a fairly linear process that, once you have figured out how to do it, can be applied to any variety of economic entities. In that case the fact that some province are poorer than others guarantees that China will grow fairly automatically if for no other reason than that capital will be transferred from the richer to the poorer regions and convergence will do the rest.
If like me you do not believe that development occurs automatically as capital is added, then the idea that income levels of poor provinces will easily converge to the income levels associated with rich provinces becomes not just suspect but in fact almost backwards. Poorer provinces are poorer because their institutional characters make it harder for local businesses and households to exploit capital productively, and pouring money into poorer provinces will simply destroy \value more quickly than pouring it into richer provinces. Not only will it not result in faster growth overall, it will actually result in slower growth overall.
We will see what happens, but as China adjusts, I would expect that rather than converge, the income difference between the poorer and the richer provinces will persist and maybe even widen as financial distress costs for these poorer provinces rise faster than they will for the richer provinces. If local governments for provinces that are growing more quickly try to protect themselves by making it harder for migrant workers with the wrong hukou to immigrate, or by making it harder for capital to emigrate, China will slide away from a more optimal to a less optimal currency zone, and overall growth will slow.
One way that Beijing can lower the adjustment costs for China overall, in other words, is to reduce the power of local governments to intervene in labor or capital mobility. Another way is to use central government credibility to protect the creditworthiness of local government debt, even if this leads to moral hazard. China will almost certainly not force a rapid write-down of bad debt. This means that financial distress in China will persist, and over the long term, in exchange for less short-term disruption, the total cost of rebalancing the economy will be much higher
This is an abbreviated version of the newsletter that went out two months ago. Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me at [email protected], stating your affiliation, please. Investors who want to buy a subscription should write to me, also at that address.
* For those who think more easily in option terms, this becomes obvious by comparing debt with its optional equivalent, a short put on the “assets” of the borrower. Except when the delta of the option is close to zero (the borrower is so highly creditworthy that changes in the value of its asset have almost no impact on the value of debt), or when it is close to one (the value of assets is so low compared to the value of debt, that a change in the value of the assets is matched almost one-for-one with the change in the value of debt), an increase in creditworthiness has a smaller positive impact on the value of the debt than the negative impact of an equivalent reduction in creditworthiness.
^Michael Pettis WROTE: ” In that case the fact that some province are poorer than others guarantees that China will grow fairly automatically if for no other reason than that capital will be transferred from the richer to the poorer regions and convergence will do the rest.”
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There can be no GUARANTEES. Anybody who says development under certain conditions is GUARANTEED either works for Wall Street or the CIA (even if via “think tanks”).
For example, even after the historical completion of the travelling of the industrialization wave from the North-east to the South via the Mid-west, EVEN TODAY the North-east is richer than the Mid-west and the Mid-west is richer than the South. This is not only revealed in the US state-wise statistics, but is something that even a casual visitor to these regions will immediately notice.
http://en.wikipedia.org/wiki/List_of_U.S._states_by_income
In addition, the old custom of the regional pecking order still continues: The North-easterners make fun of the hicks in the Mid-west, even as the Mid-westerners laugh at the red-necks of the South. Even as ridicule flows from the North-east towards the South via the Mid-west, resentment, religious-bigotry and hatred flows in the other direction. Clearly, convergence has not happened in the US– somethings never change.
I think this is more racial than geographical. Yes, they are related, but the income differences among racial groups in the US is vast. Perhaps it might be more useful to compare Tibetan/Uyghur incomes to Han Chinese incomes, or strictly Han Chinese across provinces.
Prof Pettis’s convergence will probably occur as suggested among Han Chinese (meaning the Han in Xinjiang will eventually have incomes/quality of life comparable to Han in Shanghai). But the incomes of minorities in Xinjiang may not converge. You already see this vast separation today, and there’s no indication it’s improving.
No use believing racial, of course it is geographical and is further proved everywhere, globally. Rare is the case that an interior region, is as developed as an ocean bound, or near ocean, up river bound, location. This is geography, not social notions. Of course, then cities in the North are racially diverse, with all cities having a higher proportion of minorities. The mid-west is far more White, but has been traditionally far more agriculturally oriented, and the South has long-term relations to social and political policies and philosophies, that might be far less evolved in the North, and again, White, with cities more commonly minorities, although there are more rural minorities in the South, then one would find in the Mid-West or Northern States. Vinezi, is largely correct on this, and the US has no region, where these people are predominate, Uighurs, and etc, it is far more ethnically diverse, universally, across the States, but of course the rural Mid-West, and rural America, outside the South, is virtually a White demographic.
“For example, even after the historical completion of the travelling of the industrialization wave from the North-east to the South via the Mid-west, EVEN TODAY the North-east is richer than the Mid-west and the Mid-west is richer than the South. This is not only revealed in the US state-wise statistics, but is something that even a casual visitor to these regions will immediately notice.”
It depends on where you live. I live in a state that’s considered a part of the South, but the area I live in is one of the wealthiest in the country. You’ve also gotta take into account cost of living, which fluctuates wildly from state to state. For example, I’d rather make $35,000 in Texas rather than make $60,000 in New York as even $35,000 in Texas affords me a much higher standard of living. Where would I be able to save more money and accumulate wealth quicker? That would be in Texas, even though I’d be making >70% more in living in New York.
The US is a very complicated, diverse country. To people that are used to other parts of the world or are from a place like some European country, the US can be very difficult to understand.
Suvy WROTE: “You’ve also gotta take into account cost of living, which fluctuates wildly from state to state. For example, I’d rather make $35,000 in Texas rather than make $60,000 in New York as even $35,000 in Texas affords me a much higher standard of living. ”
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http://en.wikipedia.org/wiki/List_of_U.S._states_by_American_Human_Development_Index
I don’t know how these things are calculated and, quite frankly, I don’t care because I live here and I can find out the cost of living in very direct ways.
I’ll tell you first hand that if you live in New York (I used to live in New York state as a child), including state and federal taxes, half your income is gonna go to the government. In Texas, there is no state income tax AND energy is cheap as shit. Living as a single person in Texas making $30,000 means you can save a shit ton of money. In my state, I can live off <$15,000/year quite comfortably since I'm single and don't have a family. In Texas, those costs would drop quite a bit considering everything is cheaper there, including food, energy, and rent.
Suvy,
living on $15000 a year. Has got my attention. How do you do that?
Suvy,
you still did not answer how you manage to survive on 1500.
Gold has its up an downs with respect to dollar, but at least you know it will not go to anything close to zero.
Ever thought why England and the US are not in a hurry to return the gold reserves of other countries they are “safe keeping”? I am sure they are doing it because of their genuine concern for other countries well being, but I am a very naive person.
Suvy,
What most of the people in the West do not understand is that selling oil and gas to foreigners is not in strategic interests of Russia. That is however well understood in Russia even though not talked about publicly a lot. Cutting the West off right now is not a good economical option, but for Russia moving away from dependence on selling oil is in the works.
Your prediction of financial crisis in Russia short term is plausible, but for the next 30 years low oil prices is a blessing in disguise.
“Clearly, convergence has not happened in the US– somethings never change.”
Or maybe in some instances they do change.
http://www.aei.org/publication/chart-and-economic-fact-of-the-day-texas-has-added-one-million-jobs-since-2007-vs-only-24900-jobs-in-california/
^DAM WROTE: “Or maybe in some instances they do change.”
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Or maybe they don’t.
http://goo.gl/LuZ90W
http://goo.gl/SwbJiM
http://goo.gl/W984P9
http://goo.gl/7Op3Iu
http://goo.gl/o90pbk
When China’s investment growth rate goes to zero or turns negative (rebalancing), global oil & gas prices will go down. When petroleum prices collapse, Texas will go down with them.
In addition, even though the connection is not superficially obvious, US farmland prices will also collapse when global gas prices converge to US gas price levels.
http://goo.gl/WuBQLW
When farmland prices collapse, general real estate prices in the US will go down with them, as the property price-rise is essentially land speculation.
http://goo.gl/ERHAuo
When everyone is back ‘underwater’ once again, we will need more bailouts, larger fiscal deficits, even more QE.
Somethings never change.
In some instances convergences do happen. When politicians adopt smart policies and make full use of the advantages they have (of course politicians elsewhere adopting stupid policies aids such convergences).
http://www.aei.org/publication/chart-of-the-day-shale-oil-turned-one-of-americas-poorest-states-north-dakota-into-an-economic-miracle-state/
Your example is missing the whole point of Michael’s work. Michael is pointing out that these ‘miracles’ are a dime a dozen and yet very few of them have succeeded in maintaining the long-term growth needed for convergence.
So yes, North Dakota could have a good oil-gas-shale-fracking ‘miracle’ for a while, but then it will turn into a long bust. History tells us that these ‘one-trick ponies’ eventually return to their traditional status as laggards because they are unable to adjust to changing circumstances (falling oil prices in this case). Michael claims that convergence rarely happens in most cases because these periods of ‘miracle growth’ prove unsustainable in the long-term.
You could indeed point to Kuwait or Qatar as examples of convergence happening, but they are examples of lottery-winners and not the examples of a ‘career-path’ that most places need.
This depends on many more factors, and, of course you are right, but, in the US, and other advanced economies with vast rural spaces, I wouldn’t be so sure that technology isn’t altering the opportunity space. of course North Dakota would still be doing agriculture, raising livestock, dairy, and likely a slew of other mineral extraction, with perhaps a smattering of innovation around these spaces, and other normal industries.
While Michael points out that there is often a reversion, he also notes the importance of institutions. Where, as I have written otherwise, that, while, “institutional weakness” is a phrase used to suggest corruption and graft, weak institutions, surely aid in reversion.
“This depends on many more factors, and, of course you are right, but, in the US, and other advanced economies with vast rural spaces, I wouldn’t be so sure that technology isn’t altering the opportunity space. of course North Dakota would still be doing agriculture, raising livestock, dairy, and likely a slew of other mineral extraction, with perhaps a smattering of innovation around these spaces, and other normal industries.”
Only the areas with cities have an opportunity to be developed. Places without large population centers cannot be developed because there’s no sustainable way for the economies to have the ability to substitute inputs. Relying on external demand to pay for inputs is not sustainable. That’s why the rural parts of the US have much lower living standards than the urban areas (excluding the hood).
^DAM references SHALE ‘miracles’ in Texas & North Dakota.
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Excellent timing. From the Telegraph 2 hours ago:
https://uk.finance.yahoo.com/news/oil-price-slump-trigger-us-153833535.html
Poorer provinces in china are poorer because of geography, all the poorer provinces are far in land, making it difficult for them to participate in the international trading system. Which is why Chinese government is building the new silk road project, moving trading over land by rail may benefit these inland provinces.
Surely geography is important, but it cannot be destiny. Otherwise the small, landlocked, mountainous country of Switzerland with hardly any natural resources would not be the most functional economy in Europe, with full unemployment and incomes twice that of the EU.
First, geography and history have played a huge role in the prosperity of Switzerland. For instance, the Geneva private banking industry is directly born out of the French Revolution and the ensuing capital flight. Later, by positioning itself as a neutral country at the heart of Europe, Switzerland has not only avoided the wealth shocks of WWI and WWII but has benefited from its position as a neutral financial, economic and diplomatic center. The best way to achieve positive compounding over time is to never experience negative compounding (Warren Buffet says there are two rules in finance: #1 never lose money ; #2 never forget rule #1). The absence of war destruction alone is enough to explain why Switzerland has higher wealth levels than its neighbors, some of which experienced a near complete wealth reset 70 years ago.
Second, notwithstanding the first comment, it is indeed remarkable that Switzerland has quasi full employment (even more so when considering that this is achieved with ~ 20% of domestic jobs being held by foreign “borders workers” from France, Italy, Austria, Germany) and has so many (for such a small country) global blue chip companies in the food, chemical, pharma, banking, insurance / reinsurance, watch, luxury, cement etc. industries. Clearly, Switzerland is doing something right in terms of social capital and institutions. The contrast with the Eurozone – at the heart of which Switzerland is geographically located – could not be more striking. It is also comforting to see that it is a real democracy. Even so, the Swiss economic development model is, by definition, not globally replicable since it is based on maintaining current account surplus of 10% of GDP (despite a consistently appreciating currency). Something a small country like Switzerland can do but that no large country could do without destabilizing the rest of the world.
My comment is gonna be a bit off-topic, but did anyone notice the results of the US midterm elections yesterday. It was a thumping by the Republicans as the Republican party will have 54/100 senators. The Republicans gained ground in the House as well. This may seem like, to most people not familiar with the American political system, the Republicans will get everything they want. However, political parties are much more decentralized in the American system than they are in the European system.
There’s a real split in the Republican party and the biggest threat to the establishment Republicans doesn’t come from the Democrats, but from within their own party. The split within the Republican party is bigger now than it was two years ago–particularly after this election. Really, this entire idea about “bipartisanship” and “working across the aisle” is really just bullshit. The mainline of both parties is really the same bankrupt ideology. We’re in the process of seeing that ideology getting thrown out.
it’s a normal movement in the electorate, underpinning a longer term satisfaction. the more interesting story is how successful Republicans, used traditional Democrat positions to get elected. In the 1990’s Clinton moved the Democratic party to the right, with signing of Nafta, WTo, Welfare Reform, even signing Graham-Leach-Blilely (repeal of Glass Steagal). Republicans tried to blame Clinton for the financial crisis, but Graham Leach and Bliley are all Republicans, Clinton signed it in a Lame Duck era of his Presidency (which Obama enters now). What is more interesting is that the Republicans that got elected moved in direction of traditional Democratic positions. A new center is forming. A new region in which the parties can compete with ideologies. While Republicans gave into carving out territories around special interests (Traditional-Conservative values, Christian-Right, Pro-Business, etc), this era which grew from Reagan is likely ending. It is clear that the populist policies of the Tea Party, which include horrendous economic stances, is coalesced, and has, coalesced Republicans around important long-term Democratic positions.
Regardless of dissension within the party, it is likely that the ground is being lain for important alterations in the landscape. It might be that new understanding of global dynamics and evolution’s in economic thought are finally filtering into the pandering interest bases that have made the Republican party to reliant upon the techniques of marketing and propagandizing, and divided to have something meaningful to say. In 2000 I thought Obama would win, this time around I suspect Jeb Bush, although moderately dependent upon how successful Republican contestants and Democratic opponents are in linking to Bush legacy (it cannot be forgotten that Senior was a far different man than Junior). I think the Democrats will make a mistake to push Hillary (especially as how she seems to have grave misunderstanding of global economics, supporting Chinese treasury purchases as Biden told the Chinese to keep their money, such a mis-focus on important policy, might be why she left so soon.)
But back to economics, more specifically, there is little this session of Congress will be able to do, Republicans and Democrats know that, what got the Republicans elected were traditional Democrat issue concerns, this might portend that some other movements might be in the offing, and perhaps, we can hope, cooperation rather than dissension leading the way. This might push up the inequality and infrastructure dialogues that will predominate the 2016 election. It should be highlighted, that Shareholder value Friedman, was he who supported Helicopter money.
The “infrastructure” dialogue is complete BS. Almost all of the infrastructure is done by state and local governments with the federal government only playing a role in transportation. If you wanna fix the infrastructure problem, you need to repair the balance sheets of the private sector, state, and local governments.
http://fivethirtyeight.com/features/why-we-still-cant-afford-to-fix-americas-broken-infrastructure/
The real reason these statists (ex. modern progressives, who push progress without pushing civilization) push for such bullshit is because it allows them to have more centralized control and pushes our society closer to blowing up. These people want to fix a debt problem by increasing the debt of the public sector. You don’t fix a debt problem by adding more debt. You must cancel the debt. You need massive debt writedowns, not more centralized control put in the hands of people with no skin in the game.
I’m pretty sure Rand Paul is gonna win. He’s the only one talking about the real issues. Do you really think some guy like Bush is gonna win when he’s talking to the public about police brutality or his pro-war stances? Do you even live in the US or understand the problems of a typical American? Do you know how sick the American populace is of war, more war, and even more war? Paul can campaign on war alone and he’ll end up winning in a landslide.
Take another issue like the drug war. It’s been an abject failure. You’re putting college kids in jail for nickel and diming bud while the DEA is bed with all of the largest drug dealers. This is a complete joke.
By the way, there’s just as much propagandizing in the Democratic party as there is in the Republican. What the hell do you think this Ukraine thing is about? Why the hell does the US have any role in Ukraine? Keep in mind that most of the bullshit that’s being thrown around about the US role in Ukraine is coming from the Democrats. Have you ever seen MSNBC? What about issues like affirmative action or keeping around a crony welfare state that works by suppressing the upward mobility of minorities? What do you think that is?
What about the disaster called Obamacare? It makes no sense for a country as diverse and large as the US to have one health care policy (not to mention the way it distorts incentives for illegal immigrants while screwing over health care for everyone else). Texas has a completely different social structure than California and New York. So why does it make sense for Texas to have the same health care system?
These guys that run the Democratic party wanna make us more like Europe. They want us to believe in bullshit ideas like equality and “power to the people”. What kinda retard actually believes in equality or “power to the people” or “democracy”? Democracy and equality are such bullshit ideas. The only role of democracy should be to prevent rulers from oppressing people. Every other idea that are held up as virtues of democracy like “power to the people” or “equality” are vices, not virtues.
The reality is that there’s as much propagandizing in the Republican party as there is in the Democratic party. If you really wanna fix the problems we have today, there are 4 things you need to do:
1. Fix the monetary system
2. End corporate welfare
3. Reduce the national debt/decentralize power
4. End the war machine
It’s obvious that the Democrats don’t wanna do any of this. They’re the ones that’re now promoting the war machine, they want to increase the national debt to “invest” in infrastructure when anyone who has a half decent understanding of the American system knows that the falling spending on infrastructure is coming from underwater private sector/state and local government balance sheets.
What the Democrats really wanna do is to help their base and court the votes of those who have been promised entitlements at the expense of the young. There’s a reason why youth turnout was so low in 2014: it’s because we don’t trust the Democrats.
*We don’t trust the Democrats OR the Republicans.
We need a new set of ideas to run the country. Not the typical progressive bullshit that advocates socialist policies. Why the hell would we wanna be more like Europe? So we can all experience a default on our debt and socialize everything in the name of equality. Fuck Europe. They’re idiots.
Suvy,
technically USA is in default as it went off gold standard in 1933.
Yes, I know, a lot of people do not see it this way and will argue like Mr. Pettis already did, that it is not in a technical default, but it also means that with US being fiat currency, the country can NEVER default. It always has a chance to find a way to issue as much US dollars as it thinks is needed. In the contrast, individual countries in Europe can not issue their own currency so there is a possibility of default for some countries.
Also, you do not seem to understand the processes in Europe if you think that “everything” here is socialized.
As far as calling other people idiots, please take a look in the mirror first.
Jon, sovereign currency issuers can default (you’ll see Japan default in the next decade). The US has yet to default on its national debt, which plays a huge role in the credit markets. Actually, Prof. Pettis talks about the importance of countries not defaulting on their national debt in his book The Volatility Machine. When they do, major problems ensue.
Suvy, your assay of the problems is clairvoyant, but you won’t get solutions politically in time, at least not on the national scope. Instead we will crash and burn first. Another much more severe global contagion will ensue in 2016.
The near-term future of the youth is the internet and an internet monetary system controlled by no one. But Bitcoin has failed to be that unit. After 2032, you will see political solutions but your youthful demographic will get glossy-eyed and hand the power to globalized monetary fiat in return for idealistic slogans of “end war” which we will be very tired of by then because we will see a massive upswing of war from now until 2024 at least. For example, China and Japan are ramping up to fight in order to redirect public angst away from the failed national monetary policies.
In short, the death of the nation-states and the rise of a global community. There will be a split between the first-class Knowledge workers who will go for individual sovereignty with an improved decentalized internet monetary unit and the rest who will side with a socialistic (political) fiat global reset.
@Suvy:
As well, the USA never canceled the dollar, yet Europe has routinely canceled their currencies (which is distinct from defaulting on the sovereign debt).
http://armstrongeconomics.com/2014/01/02/europes-practice-of-cancelling-currency-the-dirty-little-secret-everyone-overlooks/
http://armstrongeconomics.com/2014/06/04/european-tradition-of-cancelling-the-currency/
Why would Japan or USA default if they issues they own currency?
What prevents them from printing as much as they owe to pay the current debt payments? This is what fiat currency is all about, the government can create it from the thin air and use it as it see fit.
Please explain it to me where I am wrong. I did not read The Volatility Machine.
“What prevents them from printing as much as they owe to pay the current debt payments?”
Real shifts in the currency, politics, and a whole host of other things. Even from where we are today, the US government can sustain much higher debt/NGDP levels–the only problem are other risks. The deficit is also falling while the country’s production levels are still well below what they should be. Any sort of increase in the demand for American goods (ex. protectionism) would send production levels higher.
Hyperinflation almost always happens from a collapse in production. Barring that, it’s virtually impossible for hyperinflation to take place.
Suvy,
“This is what happened in many countries before they entered WWI because other countries left the gold standard, so gold demand plunged.” Do you want to clarify that?
When the entire world is under a gold standard and a few countries leave, the demand for gold drops. Note that on a gold standard, the currency is pegged to gold. A drop in the worldwide demand for gold leads to a drop in the value of the currency and places inflationary pressure. This is why, at the beginning of World War I, many countries that didn’t immediately jump into the war started to experience inflationary pressure.
It surprises me when libertarians hail the gold standard without realizing that it’s the most centralized monetary system in the world. You’re setting the total amount of reserves in the international banking system equal to the total amount of gold. It’d be a horrible idea to do that today.
Suvy,
“When the entire world is under a gold standard and a few countries leave, the demand for gold drops. ”
Is it what happen in the US in 1970s?
Do not forget to add healthcare reform to the list of 4 fixes.
Jon
Absolute Noise, Gold Standard in 1933, you must be kidding!
Every currency is Fiat, and when there were metals used, these were debased as well, ….
Irish folk songs that reference Tin (for silver) because they were debased, your Goldbug noise is absolute non-sense, better suited for twittering RT. Please try to follow what is actually being said here, we have had the Goldbugs come and go for years here.
Csteven,
no, “not every currency is fiat”. I do not understand what “fiat” even means.
It differs from commodity money, which is based on a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange.
http://en.wikipedia.org/wiki/Fiat_money
Of course, you live in your own world, so definitions do not matter much to you.
So go back listening to Irish songs, i am sure you can find a great deal of wisdom there.
So, Jon, let us say the following Currencies:
Commodity or Fiat
Euro,
RMB
Brazilean Real
South Korean Won
South African Rand
Australian Dollar, Canadian, NZ, Singapore
Etc…
Read a little further down into the Wikipedia article…plus, even when there were coinage, based on precious metal, these were melted down and debased… in fact this is where the word, debased, comes from, get to de – base = {to move away from} – {the concentrations of the metal} base.
Get it. So, all money in use today is fiat, and all previous coinage was debased, repetitively throughout history, then, you realize that if 95% of all countries currencies, today, if not higher, are weaker against the USD, today, than 25 years ago, then they have debased even more than the USD. So, if such is true, which it is, how can you even discuss debasement, …..because you do not know what you are talking about, a matter toward ignorance, less mere creation of own facts. Basic thought and concept processing skills.
Jon,
A gold standard (or a commodity standard) doesn’t mean that the commodity is money, per se. In reality, money is still gonna be bank deposits. What a commodity backed currency means is that bank deposits is convertible at 1:1 par for some commodity. There’s a HUGE difference between the two. Money is still created the same way in a fiat system as it is in a commodity backed currency (loans create deposits). Csteven’s point is that governments simply reduce the backing ratio, which is 100% accurate.
Where I disagree with Csteven is on the benefits of a commodity backed currency. The advantage of such a system is that if you start to enter a debt deflation, the system adjusts by simply reflating the price level. You don’t have to rely on some bureaucrat sitting in an office to think about what short term interest rates are gonna be.
The problem with a commodity backed currency is that if everyone wants more of the commodity (say gold) all at once, the adjustment mechanism I stated above no longer works. Or the opposite can happen: as demand for the commodity drops, the currency plunges and can cause major inflationary pressure. This is what happened in many countries before they entered WWI because other countries left the gold standard, so gold demand plunged.
What do I think is the best solution? Get the government out of banking. I support free banking.
Bravo!!
Honestly I found this site by accident one day when I was preoccupied thinking about countries intervening in the currency market. (I can’t resist mocking the idea of intervening in order to try to fix rates, i.e, when a country with interest rates of double digits and no rGDP tries to hold to the USD – good luck with that!!! I am sure it will work out well… ). I read a few things and made a few silly comments to needle people a bit, but I have to say, what you just wrote was the best thing I have read so far.
Csteven,
my point is only that there is a difference between fiat and currency based money.
With debasement you as a consumer or investor know exactly how much is debased.
Do you have any idea with fiat money? No, you can only guess.
It is OK Csteven boy, keep dreaming about US being in better shape than the others. Until about 2020 it might look this way. After that, big sudden crash when your US dollar can mostly be used as a wall paper and no pension money left.
Do not tell me in 2020 I did not warn you. Would not want you to lose all your money just like you did your 200K, sitting all depressed and listening to your favorite Irish songs.
“After that, big sudden crash when your US dollar can mostly be used as a wall paper”
Actually it would take $9 to cover 1sq ft of wall with US$1 bills. A nice high end wall paper will easily cost you about $7 a sq ft, today. I estimate, using my A.I. model, written by my dog, that it will be cheaper to wallpaper your walls with dollars, than wallpaper by around 2022.
Also, please be careful with references to betting dollars vs. donuts. That will now be changed to betting donuts to dollars.
My dogs model says aluminium prices will fall, so your tin hat expense should not be an issue.
Jon:
Fiat Money story, Banksters Fraudsters and Amerika are so 2003.
No need to dream. I live it, and have been to very many other places, and lived there.
I didn’t lose 200K because of a financial investment, an actually project that the stupidity of another caused to fail, in mid-stream, because of child minded carelessness and greed of another, with every milestone, completed, but for the final, long story. Cash, not investments up and down, etc…
As to warnings, Dot.Com, housing by 2004, 2008 downturn, october 2008 Ford (1600 % in one year). House paid for, no bills, so…
The USD can still be used in the US, and the state, nature and potential of production is changing, along with the spirit of the times and worldviews of people. Even those who had supported another perspective, with vacant properties at REIT’s, unstable gains at Pensions, unsure local, state and national tax revenue streams, will start singing like a barbershop quartet, along with labor, a very different tune. The last 35 years ends, broke on the back of over-use of a development model.
China may have 20 years of clothing inventory, but I have 20 years of everything that I actually do, or can use when it wears out.
Csteven,
OK, so you do not like the messenger, but what about the message itself?
You think 80 trillion debt is a wrong “projection”, then what is the “right” one?
China does not have pension promises and 401K plans paper “savings” the way US does. I am not even sure professor Pettis understand the significance of these pormises when he talks about China debt comparing it to the US.
Makes China banking current problems pale in comparison.
Is it “systemic” enough for you, Csteven boy?
^^Suvy: “There’s a real split in the Republican party and the biggest threat to the establishment Republicans doesn’t come from the Democrats, but from within their own party….”
————————
Republicans swear by the supply-side approach as a solution to all problems. The Democrats insist that the demand-side approach is what is needed, regardless of the problem at hand. The beauty of democracy is that the people get to choose via elections and hence alternate between these two approaches until they find the right one. So which approach might be the right one TODAY?
A) The supply-side approach can be useful in inflationary economies, especially those that are savings-constrained with high-consumption and low-savings, such as those we see in Latin America, Sub-saharan Africa, India, Indonesia and so on today. The supply-side approach may have been correct as a temporary response to the inflationary-stagnation seen in the West during 1970s, but it is quite useless as a strategy to address the deflationary-stagnation problems the West faces today. Cutting taxes, shrinking government, privatizing infrastructure and so on is pointless as a solution to the current problem of having travelled down the road of unsustainably-rising debt-loads over the last generation. So the Republican approach will not work.
B) The demand-side approach can be useful in deflationary economies, especially those that are consumption-constrained with low consumption & high-savings, such as those we see in China, Malaysia, Taiwan, Korea, Singapore and so on today. The demand-side approach may have been correct as a response to the Great Depression that seen in the West during the 1930s, but it is quite useless as a strategy to address the high-consumption deflationary problems that the West confronts today. Raising taxes or increasing government borrowing, expanding government consumption, raising wages, building infrastructure and so on is pointless as a solution to the current problem of having travelled down the road of unsustainably-rising debt-loads over the last generation. So the Democratic approach will not work.
What the West has today is a strange mix of (A) & (B). The West has a high consumption, low-saving, current account deficit economy like the economies of Latin America, Sub-saharan Africa, India, Indonesia in (A), AND YET it is DEFLATIONARY in nature like the current account surplus economies of China, Malaysia, Taiwan, Korea, Singapore in (B). The only explanation for this strange mix is excessive and unsustainable levels of DEBT in the West.
Therefore, the conventional duality of Republican approach v/s Democratic approach will not work anymore.
One familiar thing that can pull the West out of the debt-trap in which it has become caught is RELIGION. A return of Christianity, which frowns on debt, would help restrain the tendency to generate growth via unsustainable increases in the debt-load and purge the excesses from the Western economy. Yes, this would result in slow-growth for a generation, but at least the unsustainable path of using increases in debt-load to temporarily generate fast-growth would finally be abandoned if religion were to return to the West. However, given that the West is far too clever, too intelligent, too advanced, too educated and too sophisticated for religion to make a come-back, this is not an option.
Therefore, the West is now at a dead-end. It cannot go forward on the same path that it has been travelling for the last generation. It could stay at that dead-end and stagnate there forever. Alternately, it could make a U-turn and go-back by reducing debt-loads via brutal state intervention (far right or far left) instead of traditional religion, but that would necessarily imply a leap into Statism and a conceptual shift away from the supposedly “free” nature of the West.
I could be wrong. Just some preliminary thoughts. Alternate views from other blog-participants might well be more accurate.
Post-Script Note: The ‘West’ here refers to primarily the Anglo-Saxon economies, but could also include other developed countries on a case by case basis.
You don’t need a return to a state sponsored religion. All you need is a change in the monetary system. An elimination of the Federal Reserve would solve the problem.
For the record, let me explain to you the difference between the American system and the European system. The political parties don’t represent ideologies, so talking about Republican economics doesn’t make any sense. A Northern Republican would be well to the left of a Southern Democrat. People here do not vote for parties; they vote for specific people. The parties are decentralized and there’s a huge split in the Republican Party.
I’ve personally spoken to Republican Congressmen (in the libertarian wing) who really do understand the issues you just spoke about. They do not sponsor the kinds of economic policies you’re talking about. American political parties are decentralized! The American political system is fundamentally different than the European ones as political parties are much weaker. A large part of your comment simply makes no sense.
Suvy WROTE: ” You don’t need a return to a state sponsored religion. All you need is a change in the monetary system. An elimination of the Federal Reserve would solve the problem ….. xx….. A large part of your comment simply makes no sense…..
…..Fuck Europe. They’re idiots.”
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The West is far too clever, too intelligent, too advanced, too educated and too sophisticated for something as backward as religion.
You don’t need religion–all you need is freedom. Freedom is antifragile. The problem with the “West” as you put it, is that the rulers are actively trying to limit freedom. That will end up being their downfall.
Keep in mind that a country like the US is far more religious than a country like China. Actually, the US is very religious.
^^Suvy WROTE: “Keep in mind that a country like the US is far more religious than a country like China.”
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The Communists in China are far too clever, too intelligent, too advanced, too educated and too sophisticated for something as backward as religion.
~~~~~~~~~~~~~~~~~
^^Suvy WROTE: “You don’t need religion–all you need is freedom”
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Man was born free, like all the other animals in the wild. Man then gave up some of his freedom and subordinated himself to the collective (family, clan, tribe, nation, empire, civilization, state) in order to raise his individual chance of survival (i.e. increase his ‘safety’). Man then had to invent mass-religion as a compensatory mechanism to kill the pain of his loss of individual freedom (i.e. ‘the opiate of the masses’) and also to reinforce his membership of the safety-enhancing collective via behavior modification (i.e. ‘religious brainwashing’).
As man progressed further into the super-smart, super-clever, super-intelligent, super-advanced, super-educated and super-sophisticated ‘modern man’ of the West, he saw through the lies of medieval, backward superstitions and rejected mass-religion completely. In order to kill the pain of his loss of religion (‘withdrawal’), man had to invent secular-socialism as the new opiate of the masses. To reinforce his membership of the welfare-maximizing socialist state via behavior modification, man had to re-orient the old ‘religious brainwashing’ and convert it into the new ‘socialist brainwashing’. The caring gods of old were overthrown and replaced by the new caring State.
For example, when worried about the future the economy, people in the US no longer dampen their fears by saying, “in god we trust”; instead they now dampen their fears by saying “the government won’t let that happen”. This is the New Religion. Here is freedom: If the economy begins to collapse into a downward spiral due negative self-reinforcement, then it should be allowed to collapse. Even if it results in people losing all their life-savings with 50% unemployment and riots, the economy should be allowed to go its natural way– that is freedom. But once the State intervenes to stop that collapse, then freedom is lost. We cannot have a situation in which there is worship of freedom on the upside and reliance on the State on the downside. We cannot have disbelief during the boom and belief during the bust. It is one or the other.
In fact, when we look closely, we see that religion and socialism are both dampening mechanisms that absorb and slowly dissipate (definition of a ‘damper’ in engineering) the natural fluctuations in energy (freedom) that cause volatility. It is because natural freedom causes volatility that man invented religion/socialism as dampening mechanisms to compensate. If we reject religion, then we must have socialism; if we reject socialism, then we must have religion. If we try get rid of both religion and socialism, then we will be left only with the undamped volatility of freedom. And if that happens, man will return to his original condition as all other wild animals– absolutely free, yes, but with 80% infant-mortality, average life-expectancy of 15-years, and a 90% chance of a violent end.
“we see that religion and socialism are both dampening mechanisms that absorb and slowly dissipate (definition of a ‘damper’ in engineering) the natural fluctuations in energy (freedom) that cause volatility.”
This is incorrect. Religion didn’t come into place to dampen volatility. It came into place to prevent the society from blowing up by placing heuristically based decision making. Don’t confuse a lack of volatility for stability; it’s a major mistake. In most cases, religion adds some volatility that makes the system more stable.
My point is this: why do you assume that religion cannot go hand in hand with a free society? Freedom actually causes people to become more religious, not less. People are much more likely to be religious when there isn’t some bureaucrat holding a gun to your head telling you to how to behave.
I’m NOT arguing against religion. I’m arguing against a state-sponsored religion. I can’t argue against religion as that would make me a flaming hypocrite.
“Even if it results in people losing all their life-savings with 50% unemployment and riots, the economy should be allowed to go its natural way– that is freedom.”
Vinezi, these kinds of situations are caused by massive centralization, not by a free society. They’re caused because you’ve got some bureaucrat with no skin in the game making decisions about things they don’t understand and then the country gets locked into certain policies and you get a massive feedback loop where a boom develops for around 30-40 years when everything blows apart to smithereens (ex. China today).
Freedom/radial decentralization limits the scope of these problems by simply keeping the costs localized. Unfortunately, we actively have the world’s top bureaucrats/politicians stealing the freedom from their populace.
Freedom is incredibly robust because the costs of a free society are localized. The problem is large-scale centralization, which goes against the virtues of a free society.
^^Suvy WROTE: “…..These kinds of situations are caused by massive centralization, not by a free society. They’re caused because you’ve got some bureaucrat with no skin in the game making decisions about things they don’t understand and then the country gets locked into certain policies……….”
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QUOTE: “The Fed doesn’t have to contract its balance sheet and if the Fed does need to tighten, the Fed can raise the RR or increase IOR. There’s no reason the balance sheet will ever have to be contracted to its previous level and doing so would be retarded. As for contracting the balance sheet, that’s no difficulty either: you just do a reverse repo, which the Fed is doing……..”
SOURCE: http://goo.gl/TFKzJn
Greenspan and Bernanke were bureaucrats who ‘had no skin in the game’. They ‘made decisions about things they did not understand’. The US is now ‘locked into certain policies’.
The conclusion is therefore inescapable: The US has painted itself into a corner; it is now caught in a trap from which it cannot escape. A lost generation has now become inevitable.
The inferences are very interesting:
(1) Dumb, backward and rudimentary institutions with few moving parts are what are keeping Third World countries in poverty. Their institutions should become smarter, more sophisticated and more complex with lots of moving parts for them to come out of poverty.
(2) However, there is limit to this ‘institutional genius’. If institutions become too smart, over-sophisticated and unnecessarily complex with too many moving parts, then they start becoming a problem once again.
(3) As a parallel: Lower IQ is better than retardation and higher IQ is better than lower IQ, but only up to a point. Beyond that point, increasing IQ just completes the circle and increases the occupancy rates of mental institutions once again. As Shakespeare put it, “tis is no mean happiness, therefore, to be seated in the mean”.
(4) Similarly, when the thought-processes of individuals become too knowledgeable, too sophisticated, too certain and overly-complex, they complete the full-circle and return to where they once began in ignorance, backwardness, confusion and rudimentary over-simplicity.
^^SUVY WROTE: “You don’t need religion–all you need is freedom.”
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To say that society does not need religion, because all it needs is freedom in order to develop fast is like saying that cars do not need shock-absorbers, because all they need is a powerful engine to travel fast.
Revolutionary slogans like “live free or die” or “those who given up freedom for security deserve neither and get neither” SOUND very good in an emotional sort of way, but they are not very logical. We need to be more specific:
A) Those who give up 100% of freedom for 100% security, will get neither because they will wind up as oppressed slaves.
B) Those who give up 100% of security for 100% freedom, will also get neither because they will be wiped-out before sundown.
A) When 100% of the economy is in the hands of the state, we wind up like Mao’s China or Stalin’s Russia.
B) When 100% of the economy is beyond the hands of the state, we wind up like Afghanistan or Somalia.
The Buddhist concept of moderation in “Middle path” seems appropriate here.
http://en.wikipedia.org/wiki/Middle_way
“To say that society does not need religion, because all it needs is freedom in order to develop fast is like saying that cars do not need shock-absorbers, because all they need is a powerful engine to travel fast.”
In a free society, people will develop/find the religions that work best for them. In my case, I’m Hindu (and a relatively strict one). For example, I do fast and I also don’t eat beef or pork (not eating pork is a Muslim tradition, but considering half of my hometown is Muslim, I’ve adopted the tradition).
As I’ve said, what I’m against is a particular person holding a gun to someone’s head telling them how to practice their religions. That’s exactly how very robust traditions can get lost and the convexity provided by religion gets turned into concavity.
I also don’t know why you assume I’m against government involvement in an economy. I’m against CENTRALIZED government involvement, including central banking. What you said about Bernanke and Greenspan is EXACTLY WHY the Fed must go!!! There’s no point in trying to prevent the crisis as crises must occur. Things don’t shift until you hit a crisis. That’s what’ll happen here in the US and it’ll be an opportunity to really fix some things. I’ve been very consistent about this on this blog. You can go through and read my previous comments or my blog (I’m gonna have a blog post on religion at some point).
I’m not against individual American states taking up individual policies to force up wages or force up demand or redistribute income/wealth (on the contrary, I think such policies are extremely beneficial). I’m against the federal government doing so. The purpose of centralized government is for war. Once we recognize this, we can truly fix the problems we have.
Vinezi, here are some blog posts I’ve done that concern governmental control over different facets of an economy. You may wanna check these out so you can gauge my stance on these issues.
In this one, I advocate individual states raising the minimum wage independently of the federal government.
http://suvysthoughts.blogspot.com/2014/07/impacts-of-minimum-wage-policies.html
In this post, I talk about why capitalism works. It’s a very important post that I think you’ll find very entertaining, whether you agree or disagree with the topic at hand.
http://suvysthoughts.blogspot.com/2014/08/why-does-capitalism-work.html
This is a post I’ve done on redesigning the American financial system and redesigning incentive structures for corporate executives. I can design a system that’s one page long that’s better than the thousands of pages of BS they passed in the Dodd-Frank bill which doesn’t fix a damn thing.
http://suvysthoughts.blogspot.com/2014/08/guidelines-for-building-better.html
Vinezi, I actually have a new post up on the topic of freedom and a free society. I’d like to get your take on it.
http://suvysthoughts.blogspot.com/2014/11/democracy-equality-freedom-and.html
^^Suvy WROTE: “I actually have a new post up on the topic of freedom and a free society. I’d like to get your take on it.”
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It’s all good.
I think your are making a mistake on deflationary and inflationaries economies. Because you mix situations. In China inflation has been pretty hight because of government spending and a fake currency. If you look at goverment spending they clearly try to fight low groth with spending which bring inflation up. And so you have a country facing important deflationary pressure on commodities real estate who have high inflation(wage, real estate). I agree on what you said on supply side vs demand side. But see China is really leaving in a inflation world recently i’ve seen a job offer arround 2500 USD a month in Shanghai. When i was ther i think foreign english teacher use to get 1300 USD. So if you raise demand in the wrong way (raising wage again) China just collapse. To me they should allow chineese people to buy more foreign goods with less taxes. And probably commercial balance of China should reduce.
So to me their is normal inflation economies, when governemnt policy lag behind activity, deflationaries economies when countries are facing crisis and a third category fake inflation because governemnt battle against deflation(China ).
^Cedric WROTE: “I think your are making a mistake on deflationary and inflationaries economies. Because you mix situations. ”
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COMPARE Inflation to see that US is grouping along with Korea, Singapore, Malaysia & China:
http://goo.gl/ZSFpLM
COMPARE Trade Balance to see that US is grouping along with Indonesia, India, SSA:
http://goo.gl/fVjJk5
You mix the situation with China. US to me is more complicated than categories i or you gave, like you were saying. China really has a lot of inflations even if they try to cover it…. They have now a demand problem and a supply problem. If you look at earnings of chinenese and you assume it came from either wage or dividend. If Xi force money to go to one to the other, it won’t help that much. SOE dividen are very low so they need to raise them in their way to be more market friendly. This reform is a SUPPLY side reform and prof already said China need it. If you raise wage globaly, private companies who most likely follow the law and have less bargain power with their employees will probably face a bigger problem than SOE and it’s not a good thing. This is a DEMAND side reform. Prof said that in a past entry that you can raise wage, raise your currency or stop financial repression. Only the last is good for private sector and workers.
The situation is like that because China has not a market base wage distribution. And more globaly wealth distribution is linked to debt imbalances. When debt shifted to SOE to real estate they also needed more people to take a loan.
The situation in China look like Japanese situation in 1991 after the real estate crach. I think if we don’t see the crash it’s because Japan have first an overcapacity boom then a real estate boom one after a onther. But China real estate boom started in 2000 with WTO agreement and so a supply boom.
If China did not pass some debt to household, raising wages could be better, because it won’t be important feed back loop with real estate(SOE) but with chinese private sector. Even Viet Nam growth rely on a real estate boom.
In the japanese situation I don’t see what rising wage could bring. Japan’s brands are weaker now than ever they can’t afford that. Japanese already have higher wage than in most OECD countries. Higer wage means higher productivity. Higher productivity means deflationary pressures. Bankrupcy is what Japan need. They will be forced to reduced wages because wage are paid with debt at some point.
Actually, a state religion is banned under US law in the First Amendment to the Bill of Rights. Let’s keep it that way. If you don’t separate religion and state, the state will use religion as a tool to oppress the populace and wipe out those of other religions given time. Arguing for a state-sponsored religion is dangerous. For the record, the US is the most religious developed country and the number of people who are religious is increasing relative to those that aren’t. You’d eventually see religious minorities persecuted.
Here’s the quote:
“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof”
*You’d eventually see religious minorities persecuted IF there was a state religion established. You don’t need a state sponsored religion for a society to be religious. I’d actually argue that a society will, in the long run, be more religious, if the state doesn’t sponsor a religion (ex. the US vs Western Europe in the past few centuries).
Actually, one of the arguments Keynes had against communism is that it was like a religion (I agree with him here).
Suvy WROTE: “…..Fuck Europe. They’re idiots……”
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VIEW 1: A touch of religion might bring sufficient humility to prevent the formation excessively strong opinions.
VIEW 2: The formation of excessively strong opinions indicates a sense of intellectual certainty that can ONLY be the result of religion, regardless of whether such a religion is a traditional & simplistic one, such as Christianity, or a new & complex one, such as secular-rational non-linear heuristically-endogenous dialectical materialistic-determinism.
Vinezi, I’m well aware of the advantages of a religion (I am religious), but there’s a right way and a wrong way to have a religious society. The wrong way is to have some bureaucrat hold a gun to someone’s head and say if you don’t do as I think is appropriate, you’re a goner.
A free society has a higher proportion of the population that’s religious than a society with a state-sponsored religion.
^^Suvy WROTE: “Actually, a state religion is banned under US law in the First Amendment to the Bill of Rights.”
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How did you arrive at the concept of state-sponsored or ‘official’ religion in this discussion? Can you point us to the specific lines in the original comment that made you think that it was state-sponsorship of religion that was being discussed?
I may have made an incorrect assumption, read something incorrectly, or may have been confused by something you’ve said.
I’d like to add that the US is, by far, the most religious developed country. I don’t see why you’re saying that a free society is incompatible with religion though. Actually, most of the libertarians I speak with in my area seem to understand the need for religion in a society quite well. They’d agree with us on debt 100%. How do I know? I interact with these people quite regularly and I am one of them.
Check this out.
http://econjwatch.org/articles/religion-heuristics-and-intergenerational-risk-management
Vinezi:
Interesting as always, at least, you are, like Michael, generally saying something new, which is require and refreshing, as it does seem this way has been walked to the end of the path.
I am not sure that something as extreme as you desire is required, or that something can not be achieved in a new synthesis. Nor am I sure that debt loads are so high in the US as to require, perhaps alterations to ways taxes are generated, as the ground upon how revenues are generated will alter with near to medium term technological advances that will not, at a grassroots be dissimilar, to the state and nature, of what has occurred at a higher level of capital output, the shale revolution. Essentially, as things are moving the producer-consumer is not too far in the future, as are evolutions in battery tech, local generation of power, and so many other things. So necessarily, how revenues are generated, and how taxes need be generated, will alter. But of course, much of the Supply Side, has run its course, leading to inequality, and many Democratic positions are zealously idealistic. So, it might be, as I believe a new center is forming around which these debates can be discussed. And we can monetize, the role of the US, in the structure of the global economy, needs similar support by others, similarly and structurally, but minds remain to narrow or obtuse to understand this necessary function. I see reversion to stronger partnerships between nations, and higher growth. There is room for growth. Further, there is room for greater production domestically, and there is not the realization of the global middle class, and elites siphon like there is no tomorrow. It seems that everyone globally is more interested in their children have several hundred million dollar yachts that can cruise the Med, rather than advancing the status of their peoples and nations. Inevitably, more can be done domestically.
Csteven
you are entitled to your opinion, but to your facts. Obviously you have no understanding of fiat currency is. So start with the dictionary and use the definitions properly. You can use your favorite Wikipedia:” Fiat money is currency which derives its value from government regulation or law. It differs from commodity money, which is based on a good, often a precious metal such as gold or silver”
Obviously there is a difference between debasing your currency and flat out using your currency strictly as accounting unit, which is what the government do today. Instead of calling people names, you should first make sure you know what you are talking about. By the way, I am not advocating going to gold standard, am just trying to make a point that with fiat currency the governments always can find a way to prevent default, if they are so determined. With commodity based currency it is not so easy.
No, this is pure Goldbug, libertarian non-sense. I have no ideology, just a great interest in development, and a fairly deep study of all business environments (past into future, with an interest in Philosophy).
On this and other blogs, years ago, this discussion was had.
Essentially, as Rogoff and Reinhart noted, the world’s history is replete with crisis, and paper, fiat, or currency, which had been debased as often as paper, literally, melted, and with cheaper metals added.
This is moot, because neither can, nor will the world ever return to a metal backed currency. Your perspective that the USD is debased is ridiculous, in relation to other currencies, of which 95% are worth less in USD terms than they were 20 years ago, so…
For some reason, the Godlbugs have it in their head that a metal, or commodity backed asset will somehow be more stable. If they do this, and all of a sudden everyone and their brother is building submarines that can go to the bottom of the Marianna’s trench, and elsewhere, and quadruple Gold production overnight, would that be problematic in the Goldbug scenario? Would that be more stable? If the US were to deploy its advanced submarine technology to do it, would it be better? Would milk be cheaper? Shoes made in Vietnam, in the US? Is that better or worse? Nothing, just inane references to USD, USD, USD, over and over and over, nothing but some arbitrary references to stability, etc…
Hi, prof and everyone! Now that we know you sip champagne with hight rollers billionnaires in Beijing all day, I feel like my life is so lame! But some good things happened to me. I used to spend times with mathematician kingpins when I was younger and even one from your university. They taught me things very important for your subject. There are multiple ways to study a flow. Most of then try to make thing simple without taking account of every atoms. One ways is with energy, an other is with entropy.
The first rely on stability. The fact that if you sell for ten somebody buy for ten. Your using this kind of idea when you talk about zero sum game, or accounting identities.
The second is a bit more complicated. If you take a gaz it says that if you have three parts with differents speed, if you wait long enought the speed of the parts should converge. It’s what you are talking about when you wonder if parts of china should actually converge or not.
Energy is very strong concept very difficult to break and in physics it has actually almost no contradiction with facts we know. Entropy is a purely statistical theory so you can easly use it. It do have some issues with many facts but it’s at the heart of thermodynamics which is strong theory. Entropy is also used in informations theory and work very well.
One exemple of using these concept could be this,
energy tells you that in perfect world(equilibrium) wealth creation always become transfet to less rich part in way that they instantly become equals. Anythings that push away from equilibrium should be seen as a problem. There is no convergence because they were no divergence at the start.
Entropy tells you that, things should converge like in my gaz exemple. And if not, there wil be a backtrack “force” to put things in place. You can see globalisation as an exemple.
You might be used to work with enegetical-like concept because of the fact that equilibrium theory is equal to have a energitcal theory of economics. Entropical-like concepts are less popular. We know that it doesn’t really fit to physics because theorical assumptions made are not connected with facts. But like the equilibrium theory the most interresting things are probably to study why and when it doesn’t work.
Adopting the EU approach to migration “would require that workers who are currently non-hukou residents be treated the same way as hukou residents, so that logically city governments would have either to increase their revenues commensurately, or to reduce the services they currently provide to the latter.”
Sounds like the UK.
Watt WROTE: “Sounds like the UK.”
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Can you see that European Welfare Cow over there with the large udders? I suggest you go and milk it. If you don’t, someone else will, and you will get stuck with the bill for the fodder.
http://goo.gl/byK1I4
http://goo.gl/8q5JdY
http://goo.gl/FkEKhJ
Remember that Capitalism is not based on morality or social responsibility. Capitalism is based on the assumption that every individual WILL act in her/his best interest AND that such behavior turns out (“invisible hand” of Adam Smith) to be in the best interest of ALL (society, country, world et cetera).
Are the people who are milking the Welfare Cow acting their OWN best interest? Yes, clearly they are. What they are doing is just human nature; If the State is handing out wealth, why would anyone refuse to take it?
As you can imagine, the fault here is not with the moochers (whether domestic or foreign), the fault here lies in the very concept of these handouts that have been GUARANTEED by the European Welfare States.
http://goo.gl/w3o6L8
http://goo.gl/UnNVK4
http://goo.gl/74jLq1
The invisible hand is a notion that bridged the gap between the modern age and the axial age which was mentioned a few times by Smith, largely because it was mentioned far more by other writers of his day, and widely read authors of near previous generations, at the time. The invisible hand is more than merely the action of the actors, but might be implicate God actions, or one might say the largely unknown actions, of truly complex systems. Further, the notion economy, is derived from Greek and essentially involves the management of one’s private affairs, again a notion of the enlightenment, as Feudalism was beginning to be undermined, where the power of Kings was rising, with cities and Guilds, and trade, which gathered treasure for sovereigns, generated by a more sovereign Man (crafts, Guilds, Trade, etc).
So, the provenance of the Invisible Hand, has far more importance, and meaning, then merely Self-Interest.
It brought forth, the unknown and mystery of the Axial age (the rise globally of great spiritual leaders and religious traditions, into the present. Perhaps, this is something, that can be addressed, in your notion of religion and debt.
Vinezi Karim,
I have rad the links you refer to. There is one factor in Europe which politicians are very much aware, but do not want to acknowledge publicly: local population is dying out. It is the emigrants who supply the young and capable to work. So the view is, weather you like it or not, that if they give birth and raise kids, the government will pay to assist them.
^^Jon WROTE: ” So the view is, weather you like it or not, that if they give birth and raise kids, the government will pay to assist them.”
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Yes, I heard something along those lines. I suppose “endangered minority communities” in any society are like “endangered species” in the wild and need help increasing their numbers.
http://goo.gl/Le0c0M
Good to see that Europe is still the vanguard of the revolution in all these sophisticated social experiments.
You are missing the point here. It is a government policy, which is not based on “protecting minorities”. Do you think local lords in GB care about that? That would be funny.
What the countries need are the young people, and since the locals are not providing those with their 1.6 average children, you must rely on emigrants or face demographic crisis like Japan and soon China will.
We will revisit this subject when both you and me are retired only to find out there is no one left to pay into our social security, assuming the fund is still around and not bankrupt.
Jon,
Populations have to come down at some point. You can’t have exploding populations forever. These countries need to find ways to deal with their aging population.
Resource scarcity is complete bull. We are moving into a higher tech knowledge based economy where resources are not the scarce asset. This changes everything in macroeconomics because knowledge can’t be financed, so capital can’t be aggregated.
Populations do come down when wealth increases, pandemics, and war, but they come back up again when those abate.
So you think raising children qualifies the parents as moochers?
I always find it interesting how the locals Europeans or Americans who have one kid or no kids at all themselves think it is not worth their tax money to support others who have many kids.
So who do you think is going to pay taxes when you and me are old? Or do you want the situation be like it is in Japan now , where is proportion of young people is so small?
^^Jon WROTE: “So you think raising children qualifies the parents as moochers? …..xx…… …..xx…… So who do you think is going to pay taxes when you and me are old?”
——————————
Not everybody is a NET tax-payer just because they are of working-age. The people at the bottom are NET tax-drains even when they are of working-age, and will just become even larger tax-drains when they retire.
So if government subsidies encourage more children in families at the bottom and if those children then turn out to be NET tax-DRAINS when they turn of working-age, then the inter-generational transfer problem you mention could get WORSE instead of getting better.
In other words, it is not simply quantity that counts, quality is also an issue. It is not just a matter of how many children are born, but also a matter of what their future NET tax-paying capacity is likely to be.
Are the large number of children born into families from “struggling minority groups” going to be NET tax-PAYERS or NET tax-DRAINS when they grow up to be of working age?
http://goo.gl/Mu9BTc
http://goo.gl/xBcwYl
http://goo.gl/a41hMD
The answer is not so clear. Please let me know your thoughts on this more nuanced view.
I am not sure that the old orthodoxy is necessarily even true.
What is upon us is amazing in its impact and potential.
I had a typewriter as a kid, and loved books, now I have more digital books, than physical ones.
Went out, had to have plans, now meet at a moment.
Wanted to buy something, went to a store, now know most competitive prices, alternatives and subsitutes I never imagined, and new offerings about to hit the market.
Had to use a card catalog, now more information at my fingertips than all libraries in the world (public).
Hell, I just bought a used steam cleaner for my carpets, barely used 9 USD, used to cost more just for an estimate (coffee and cookies, or beer, whatever).
Then, Big Data, Intelligent Devices, Micro-factories, localization, Craft everything, Battery Tech, end of squeezing the margins era, etc….etc…etc…
They even want to fly me beer when I am ice-fishing by uav.
3D printing, scanning, mass-customization, its all on doorstep, now.
So, not sure old orthodoxy as to age matters as it once did.
Question is global development, will China’s RMB swaps, while likely limiting rises in USD surplus, do more than limit others development trajectory, do more than create a mercantilist suzereignty, of China, on peer and lessor developed developers.
20 years of clothing inventory, stockpiles of commodities, shoes, electronics, etc….etc….etc….who is going to take them, how?
And we worry of dynamics in an age of material science advances and greater utilization of data, only beginning. It seems that the whole environment is actually changing, but we have a greater need to catch up our thinking with it.
Can’t wait for battery, will be game changing.
Of course with such over-capacity globally, prices for wares will continue to be challenged and we focus on demography. This is for those whose politics have been far too influenced by the notion since the 1980’s. And often incorrectly vis a vis global challenges, where I think population itself is far more a problem, rather than who is having children.
When you have a pool of young people capable of working, you can adjust government policies that would FORCE them to work, weather they like it or not.
On the other hand, if you have only a bunch of old geezers on social security left around, what you are going to to then?
The links you are referring to imply to me that the likelihood of emigrant children working is higher than them sitting on welfare.
By the way, “unemployed” does not mean “not willing to work”.
“More importantly, I believe development is based less on the transfer of knowledge and capital than on the transformation of domestic institutions (legal, financial, political, etc.).”
Wouldnt it then be more prudent to call for structural reforms in Southern Europe, just what german governments is doing, instead of asking for more german spending?
I think you are calling for the periphery to become more “German”. The problem there is that if the EZ as a whole runs a relatively benign external position, the imbalance would need to be solved within the zone and Germany would have to become less “German” which I think they would reject. The alternative is for the EZ run a large surplus as a whole. Say this is equivalent to the German current account of 7% then the rest of the world would need to run the corresponding deficit, simply shifting the imbalance to the RoW.
So two questions:
1. Who would be willing to sacrifice the €1 trillion plus of demand?
2. Why should the RoW have to adjust and lose the necessary employment just so that Europe doesn’t have to deal with it’s own employment problem?
No, Im calling for structural reforms within Southern Europe, less red tape, more transparent spending, more flexible labour force, simplier tax code etc, there´s nothing “german” in this. Should this happen, your two questions become meaningless.
Ok, what effect on intra-EZ trade and capital do you see these reforms in Southern Europe having then? If the Germany economy does not consume it’s total output it must export the difference. If the EZ as a whole runs a balanced external position then the non-German sector of the EZ must run trade deficits, which recent history has shown to be unsustainable. Are you saying that reforms in the South would eliminate this constraint?
^JamesPF WROTE: “Ok, what effect on intra-EZ trade and capital do you see these reforms in Southern Europe having then? If the Germany economy does not consume it’s total output it must export the difference. If the EZ as a whole runs a balanced external position then the non-German sector of the EZ must run trade deficits, which recent history has shown to be unsustainable. Are you saying that reforms in the South would eliminate this constraint?”
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Which constraint? If the South stops borrowing from the North or the North stops lending to the South, then the North-South trade Surplus-Deficit will automatically vanish.
This does not mean that the surplus of the North must necessarily vanish, because there is no constraint that says that the EZ as a whole must be balanced. The North could just redirect its lending (and hence its surplus) towards Latin America (just like the petro lending of the 1970s) and towards Sub-Saharan Africa (just like the colonial lending of the 1960s).
http://goo.gl/mrCulY
James PF wrote: ” 1. Who would be willing to sacrifice the €1 trillion plus of demand?
2. Why should the RoW have to adjust and lose the necessary employment just so that Europe doesn’t have to deal with it’s own employment problem?”
——————————————-
Both questions would be valid if RoW means the United States.
But if RoW means Latin America and sub-Saharan Africa, then it is not clear that any ‘sacrifice of demand’ would have to be made or that any loss of employment would necessarily occur.
Vinezi,
What makes Latin America and SS Africa special that they would not lose demand by running current account deficits?
^^JamesPF Wrote: “What makes Latin America and SS Africa special that they would not lose demand by running current account deficits?”
———————————————-
Because they have supply-constrained (or savings-constrained) inflationary economies, the problems of which are best understood via the lens of Classical Economics (or supply-side, right-tilted economics of the Republican Party/US or Conservative Party/UK).
US, Europe, Japan, on the other hand, have demand-constrained (or investment-constrained) deflationary economies, the problems of which are best understood via the lens of Keynesian Economics (or demand-side, left-titled economics of the Democratic Party/US or the Labor Party/UK).
http://goo.gl/c8WCuN
The former are too poor with the tendency to generate insufficient savings, whilst the latter are too rich with the tendency to generate excess savings. The former are natural capital importers, whilst the latter are natural capital exporters.
Michael, I just saw your predictions from 2011 (and then revisited in 2013), in which you were quite optimistic about the US and its ability to recover from the 2008 crisis very quickly:
http://blog.mpettis.com/2013/09/revisiting-my-2011-predictions/
Perhaps as an alternative view, we are seeing a lot of articles these days questioning the sustainability of the US recovery. This one, from last-week’s Washington Post, is typical:
http://goo.gl/dJIS9s
Do agree with this Washington Post article? Or do you find it excessively alarmist or pessimistic? Or do you think it is just plain wrong because it is barking up the wrong tree?
What are your CURRENT views on this topic of the US recovery and its sustainability? Have your views remained the same since you made your original predictions in 2011? Or did they change by the time you re-visited your 2011 predictions in 2013? If so, have they changed still further from then to the present?
Now that 6 years have passed after the crisis, does the US recovery look healthy and sustainable to you today? If so, when do you think the Federal Reserve will START REVERSING the QE process? Do you think it might happen in the next 1-2 years? Will this process be a very slow one or can it be done quickly? How long do you think it would take the Federal Reserve to COMPLETE the REVERSAL of QE and purge the 3 Trillion$ expansion from its balance sheet? Do you think this can be done in a few years if we get a strong and sustainable recovery with fast growth and low unemployment? Or do you think that the institutions in the US have been so badly damaged that it will take a generation for things to go back to normal in the US?
PS: These questions are not exclusively for Michael. Regular blog participants who may have some insight into these matters could also try to analyze the situation and give us a synopsis of their findings.
The Fed will NOT start reversing the QE until the asset deflation cycle ends. That will definitely take many years to play out.
Jon WROTE: “The Fed will NOT start reversing the QE until the asset deflation cycle ends. That will definitely take many years to play out.”
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But the asset-deflation cycle HAS ended in the US. ZIRP & QE have ALREADY reflated assets such that stock & house prices are back to 2006 levels or HIGHER. The bubble is BACK in America!
http://goo.gl/lx7pNk
http://goo.gl/ERHAuo
QUESTIONS: Let us say that ZIRP & QE create another boom, just like the ones we saw between 1997-2000 & 2003-2007. What happens if this boom is followed by another bust, just like the ones we saw in 2001 & 2008? Will nominal interest rates then go negative? Will ZIRP become NIRP? Will there be QE4, QE5, QE6? Will Government debt go up to 150% of GDP? If that does not seem possible or sustainable, will the bust then become unstoppable? Will the traditional strategy of applying Keynesian Estoppels fail? Will the economy go into free-fall and simply collapse?
This is precisely what was meant by (quote) “it is clear that these frequent and large Keynesian Estoppels have ‘drained the batteries’ of the system. Unless it is recharged by completing the second part of the Keynesian prescription, it is possible that the Estoppel might fail during the next bust and send the economy into irreversible decline.” SOURCE:
http://mindinstruments.blogspot.com/2014/10/america-estopped.html
There is a difference between asset deflation and dollar deflation.
What you are talking about is dollar deflation stopped. Asset deflation continues.
^^Jon WROTE: “What you are talking about is dollar deflation stopped. Asset deflation continues….”
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This article (Nov 10, 2014) explains this issue in language that is simple and easy to understand….
http://www.businessinsider.com/central-banks-are-at-war-with-deflation-2014-11
When one views assets in the US, which ones are inflated, of course equities will not take years to correct, the will cycle down and up, if talking about housing, i can scarce imagine a place on the globe, with few counter examples (NY, Boston, San Francisco, etc), where houses are more in tune with incomes than the US. So, which assets will correct?
If anything, the US, unlike too many places in the developing world (E. Europe, SEA, NEA, South Asia, Central Asia, everywhere from my own eyes), and then places like Canada, Australia, UK, and continental Europe, let alone Japan, Korea and Taiwan, seem to have house prices that far exceed reality, this is nothing to speak of fast growing developing Asia, or other fast growing places, which have real estate valuations that just do not make sense in relation to domestic realities.
Look at this chart, house price need to correct all the way down to year 2000 level.
http://www.acting-man.com/blog/media/2014/01/CS-home-price-chart.png
^^Ultron WROTE: “Look at this chart, house price need to correct all the way down to year 2000 level.”
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Yes, if the ‘free-market’ were truly free then house prices would already have corrected to that historical trend value by now.
But you see, the whole idea behind creative, innovative & sophisticated policies like TARP, ZIRP, QE, NIRP, SLURP, BURP et cetera is to RE-INFLATE house prices such that they climb back to the peak seen in 2006. They want to do this so that the mortgages at the margin move ‘above water’, while the mortgages further away from the margin re-build sufficient equity to re-start the “a man’s home is his ATM” consumption cycle.
Once home and stock prices have all been forced back into the stratosphere, then they expect that the bells of freedom will once again start ringing from sea to shining sea. The traditional battle-cry of the republic will then echo throughout the land of the free and the home of the brave: “Honey, let’s go shopping!”.
While going shopping is admittedly difficult, it is a sacrifice that must be made in order to ensure that the light of freedom triumphs over darkness of slavery all across the world. In fact, this is the Highest Calling of the Chosen People if they are to fulfill their Manifest Destiny.
Japan’s housing bubble was a very rare instance of a bubble that took longer to deflate than to inflate, and it took 20 years for japan’s housing bubble to deflate.
What does that Chart actually Say, a composite of what, S&P and Housing Price Indice for what. this is taken out of context, shows absolutely nothing.
When looking at housing the issue is median income versus average house cost.
A commercial real estate property is worth 8 years of rents.
A house should be no more than 4 years of salary, better 3, a smart man, with a happy wife, or a smart woman with a happy husband, materialistically for, quality of life otherwise, would be better at 3 and below.
I attended private high school (public for commonwealth), and our teachers were decent, but lessor paid, had a business teacher, history teacher, who would buy a house, and fix it while he lived in it, then buy another, and so forth. He had one child, she went to private school for free. When she went to university, he began to teach at university, and she went free. He also had a plane. So,….
Your chart says absolutely nothing. With that said, with wage stagnation, and price increases, there has been some stress on the ratio’s that obtain, but these are marginal stresses, for the rational family, and are nothing like what I have seen with my own eyes, having lived and traveled to more than 20 countries. So, again, easy to say, think and believe, but I can actually compare, rather than practice the post-modernist predilection to equalize, or worse, to see a forest, when not a tree stands in the matter..
Vinezi
Why would the FED have to reverse?
Why couldn’t it keep the assets on the books, and divest, as it wishes over a very long time?
It seems to me they have a very powerful, new, monetary tool in their pocket?
I would look for actual monetization, before I worry of FED divestment.
I predicted in 2008 that the US would be in recovery in 2014. But, who new that Europe would be on the verge of committing suicide and that China would blow up assets for as long, while worsening the structure of their growth and GDP, accumulating debt, and similar. Thus, the US, has problems, only insofar as the rest of the world. Where other regions face graver difficulties, this might actually force a consensus for action on the political parties, so I do not worry. Asset values, equities, will decline. Both the US and Germany, are roughly equal as to wealth to income ratio’s, unlike a few Anglo countries, many continental European ones, and of course many in the developing world are in the stratosphere, so…seems to me to be room.
^Csteven WROTE: “I predicted in 2008 that the US would be in recovery in 2014. But, who new that Europe would be on the verge of committing suicide and that China would blow up assets for as long, while worsening the structure of their growth and GDP, accumulating debt, and similar.”
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Who knew that Europe was heading for trouble and that China was heading for a slowdown? Michael did. In fact, this is PRECISELY what he predicted in 2008, 2011 and then revisited in 2013:
http://blog.mpettis.com/2013/09/revisiting-my-2011-predictions/
So the only question mark on Michael’s predictions is on his ‘optimism’ about the US recovery. He was optimistic that the US would recover well from the crisis. So is he still optimistic? Or has he changed his mind? Does he still believe that, unlike in Europe & China, a strong and sustainable recovery is just around the corner in the US? Or does he now find his views slowly starting to shift towards the consensus of those economists who have been talking of a ‘secular stagnation’ or a semi-permanent slowdown in the US?
Given that Michael’s predictions (or forecasts) has been proven so accurate for China and Europe, I think it would be very important to hear his views on the US. Wouldn’t you agree?
Been following Michael since before 2008, don’t remember the Europe prediction.
^CSteven WROTE: “Been following Michael since before 2008, don’t remember the Europe prediction.”
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Not all communication is through words. Body language is often said to be 50% of human communication. So Michael may not have said anything in explicit words, but his body-language spoke volumes about the problems about to hit Europe. Don’t you remember how his left eyebrow twitched when the topic of Europe was raised at the 2007 CFA conference?
Vinezi, some believe body language to be a far greater percentage of communication than 50%, those who study Culture, for example, and while I can not say that I have seen the twitch, or the remember the video, I mysef, thought in 2008, that Europe had far more issues than was recognized, but had no idea, that everyone would go in the opposite directions to that which was required. Especially as to how European pundits were want to describe the policy responses of Europe during this period, as inspired by evil Washington Consensus types, and the US response as careless, yet, another, as undetermined, but increasingly seen by critics as Japaneseque.
So, one provisio, for those out there, who might want read people, be very careful to practice a long process of winnowing your (value-ethics-moral-ideological) assumptions, before trodding such a path, or you very well might just find your self, and (rather than) the other, when reviewing the other, where you, yourself, expected, and such is a rather boing cycle.
“Vinezi, some believe body language to be a far greater percentage of communication than 50%”
I think body language is way more than 50% of communication. There’s only a limited amount we can actually express in words, but we can express much more in all of the other things we do (tone, variations in tone, movements, body language, what we wear, etc). What we say is much less important than how we say it.
As for the Europeans taking the “evil” American path, the Europeans are idiots. They have no new ideas and the ideology that runs those countries is more bankrupt than the ideas that exist in the US. The simplest example is that these people believe in democracy as virtuous in a positive sense. They actually believe in equality and “power to the people”!
Why don’t we list some specifics instead of speaking in generalities. Here are some of the key problems facing the various countries of the world:
1) Excessive debt-load accumulated over the last 30 years. (In general, the West).
Inter-related CAUSES: Rising inequality, globalization, East-Asian/Germanic surplus models
2) Insufficient demand generated by over-investment. (In general, East Asia)
Inter-related CAUSES: Japanese model, semi-command economy in China, rising inequality,
3) Excessive reliance on the high-price bubble in commodities. (MENA, SSA, LA, Australia, CIS)
Inter-related CAUSES: Chinese investment binge of (2), Western debt-binge of (1).
~~~
A) The Chinese investment-binge must end at some point. When that happens Korea, Taiwan & Japan, for example, will see reduction in their surpluses, because they were supplying equipment to support that investment binge. This will lead to a major slowdown in East-Asia.
B) The Western debt-binge of the last 30 years also must end at some point. When that happens, the export-dependent growth model economies (East Asia, ASEAN) will see a reduction in their surpluses, because they were supplying goods to match the rise in Western debt-load. Therefore, the West & Eastern Asia will slow down in a closely inter-related (or coupled) fashion.
C) When (A) & (B) happen, the commodity boom will end and the countries that rely on high commodity prices to drive growth will see a general slow down.
So the pain of slowing growth will be GLOBAL. However, the countries that will feel the least pain in a relative sense (i.e. the “cleanest of the dirty shirts”) will have the following characteristics:
A) They will have low debt-load (i.e. low debt/GDP ratio) with a traditional equity-tax-wages (business, government, household) growth model instead of the new debt-debt-debt (business, government, household) growth model that the West has used over the last 30 years.
B) They will be driven by healthy internal consumption (sustained by wages & taxes and not by rising debt-load) and proportional investment (sustained by taxes & equity and not by rising debt-load), without having excessively dependency on exports as a growth-driver.
C) They will be major commodity net-importers (best case) or minor commodity net-exporters (worst case).
Can someone draw up a list of countries that fit this description? That would make an interesting line of discussion.
Csteven WROTE: ” Thus, the US, has problems, only insofar as the rest of the world. Where other regions face graver difficulties …..xx….. unlike a few Anglo countries, many continental European ones, and of course many in the developing world are in the stratosphere…..”
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Really? How did you arrive at this conclusion that the debt-loads of European countries were in the stratosphere compared to the US?
Here are the data from various sources for composite debt for all END-USERS (household, business, government) for 2008, 2009, 2011, 2012:
http://goo.gl/Fps0v3
http://goo.gl/0baUuV
http://goo.gl/HR4VmD
http://goo.gl/xhirFg
I am not seeing any spectacular evidence of lower debt-load in the US compared to European countries. Are you?
Csteven’s comments on this topic are accurate. I did some work on the size of a country’s banking system relative to its GDP. The European banking system as a whole is around 300-400% of Europe’s GDP. The German and French banks are around 250% and 350% of the country’s GDP, respectively.
The American debt load is much less (particularly considering that much of the debt is just securitized, so when one loan gets paid off, the others do too).
^^Suvy WROTE: “The European banking system as a whole is around 300-400% of Europe’s GDP. The German and French banks are around 250% and 350% of the country’s GDP, respectively.”
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Let us try to maintain some standards.
(1) If “German and French banks are around 250% and 350% of the country’s GDP, respectively”, then you should be able to provide a link to the data than show this to be fact.
(2) If you want to argue that the US is different from France & Germany in (1), then you should be able to provide a link to the data that SHOW that the data for the US are different.
Once you have done that, we can then take a closer look at the comparative sizes of the Shadow Banking system in the US versus France/Germany.
I’ve linked to the data in my original post.
http://www.ecb.europa.eu/pub/pdf/other/bankingstructuresreport201311en.pdf
Excuse me Suvy, that would be accurate on all topics, each and every I discuss, thank you (for seeing the light)
But You should love this one, that follows from Adair Turner
https://www.project-syndicate.org/commentary/german-slowdown-global-leverage-by-adair-turner-2014-11
“But the whole world cannot devalue against other planets. If all countries except the US devalue, the US economy will face the deflationary impact of their attempted deleveraging.
We need to stimulate growth and increase inflation without generating higher private or public leverage. The only way to do that is to run increased fiscal deficits, permanently financed by central-bank money. Otherwise, the world will either become mired in deflation and slow growth, or will need to accept further increases in leverage – thereby simply postponing the problem and making it still more intractable. The end of Germany’s credit-fueled expansion has now made that choice clear.”
I’ve read that post by Turner and it made me furious such nonsense; it’d be funny if it weren’t so damn dangerous. Only suckers think you fix a debt problem by adding more debt (or transferring it to a sector where the downsides are higher).
These guys compare everyone (like the US) to Japan even though Japan has a very economic structure than the US. This is the kind of stuff that happens when you let people with no skin in the game make decisions about things no one understands. The world needs massive debt writedowns. The reason worldwide demand is so low is because debt levels are so high. So the solution is to add more debt? That doesn’t quite add up.
People like Adair Turner are dangerous. Shit like this is why I hate Project-Syndicate.
^Csteven QUOTING Lord Adair Turner WROTE: “The only way to do that is to run increased fiscal deficits, permanently financed by central-bank money. ”
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Yes, this is precisely what was done some time back in Germany:
http://goo.gl/x3MJIW
http://goo.gl/jjOrAb
Similar things have happened in America as well:
http://goo.gl/0ZT8af
Usually people respond to such trends like this:
http://goo.gl/ilWpht
^^Suvy WROTE: “I’ve linked to the data in my original post.”
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Did you also link to this? What are the comparative ratios between the US & Europe for the proliferation of the following:
http://goo.gl/uMHLYI
Did you also link to this? What are the comparative ratios between the US & Europe for the extent of the following:
http://goo.gl/J760J6
Perhaps stratosphere is two strong a word, Europe is larger than EU, and only core Eu is shown, but your charts tends to support my perspective minus word stratosphere.
Suvy and Venezi: Potty-mouthed expletives and exclamation marks do not a coherent argument make. Nor do links to cartoons. Here is a link to Lawrence Summers and De long who make a similar argument; perhaps you can explain why precisely why they are incorrect. http://www.pathtofullemployment.org/wp-content/uploads/2014/04/delong_summers_ball.pdf
1) TYPE 1 Deficit Spending (QE)
The Government borrows 500 billion$ from the marketplace by issuing bonds and then spends it to “increase demand”. At the same time, the Central Bank ‘prints’ 500 billion$ and buys 500 billion$ worth of Government bonds from the marketplace, thereby keeping total Government bonds outstanding in the marketplace (‘held by the public’) unchanged.
2) TYPE 2 Deficit Spending (Lord Adair is recommending this)
The Central Bank ‘prints’ 500 billion$ and buys bonds DIRECTLY from the Government by bypassing the marketplace and thus keeping total bonds outstanding in the marketplace (‘held by the public’) unchanged. In other words, the Government bypasses the marketplace by borrowing 500 billion$ of ‘freshly-printed’ money DIRECTLY to the Central Bank and then spends it to “increase demand”.
What is the difference between (1) & (2)?
QUOTE from Summers & Delong: “For reasons laid out in Summers, we believe that the safe real interest rate necessary for full employment has declined considerably in the United States, raising concerns about secular stagnation — the idea that the financial conditions necessary for adequate growth and production near potential output are likely unsustainable, and that sustainable finance is likely to go along with unsatisfactory growth and production well below potential output. Under such circumstances it is likely (1) that the zero lower bound on interest rates will be reached more frequently in the future than in the past, (2) that fiscal expansion will reduce the need for extraordinary monetary policies that potentially create instability, and (3) that debt burdens are less problematic because of lower interest rates.”
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What is the PURPOSE of these Keynesian “fiscal expansion” deficits? The purpose is to borrow the excess of savings over investment and then convert it into aggregate demand via government spending in order to keep the economic output (and hence employment) at its maximum potential.
But does the US have an excess of savings over investment in the first place? Does the US have insufficient aggregate demand in the first place? When a country runs a current account deficit, it implies that it has INSUFFICIENT savings to meet its own investment demand. In other words, such a country has EXCESS aggregate demand and the CAD is merely a way of exporting that excess demand.
Therefore, prescribing Keynesian “fiscal expansion” for a country that is running a current account deficit makes no sense whatsoever. Keynesian spending to prop up aggregate demand in order to keep unemployment down is something that is appropriate for countries that run current account SURPLUSES (and hence, by definition, have insufficient aggregate demand and need to import it)
http://goo.gl/7SwA7U
Given that the US already has excess demand, why should the US government go deeper into debt to solve the demand-insufficiency problems of other countries that run trade surpluses?
What Summers & Delong are prescribing would have been appropriate during the 1930s, because the US was running large trade SURPLUSES during the 1920s and had built-up excess capacity (i.e. it had insufficient aggregate demand at home). The situation today is completely different, where the US has been running large trade DEFICITS for the last generation and has now has excess aggregate demand at home.
If the US indulges in Keynesian deficit spending while it still runs a trade deficit, the spending will mainly increase the trade deficit and thereby provide a boost to employment in the trade surplus countries. Therefore, the US government would be going deeper and deeper into debt only to resolve the unemployment problems of other countries. Is this what the taxpaying-voters in the US want?
Let me know your views.
Yea, so let’s listen to the guys who got us here so they can get us out.
That’s smart. Anyone else have better ideas?
Dan Berg,
You do not fix problems by letting the guys that got us here tell us the way out. Guys like DeLong and Summers are the problem. They were making these forecasts and have been preaching this BS economic theory over the past 30 years. They’re a part of the problem.
^^CSteven WROTE: “Why would the FED have to reverse? Why couldn’t it keep the assets on the books, and divest, as it wishes over a very long time?”
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Good question. I don’t know for sure, but here is what I tentatively think…..
It all depends on the quality of US institutions and how well they successfully they handle the adjustment that the US needs to make. I believe that Michael will be explaining this point in more detail in his next book:
http://goo.gl/N2UpAq
(a) If the US had backward, rigid, slow-moving, simple and rudimentary institutions with few moving parts– such as found in Africa, Asia, Russia, Latin America and so on– then the QE would NECESSARILY have to be reversed before any real sustainable recovery could begin. This reversal would be needed in order to convince businesses that things have returned to normal such that they can start investing again. You can imagine how reluctant businesses would be to invest when the fear of a possible recession caused by any future reversal of QE is hanging over their heads.
(b) But since the US has advanced, flexible, dynamic, complex and highly-sophisticated institutions with many moving parts, it may be possible for the Federal Reserve to keep the additional 3 Trillion$ of panic-printed money on its books for an extended period of time. This superiority of US institutions might convince businesses that they can physically-invest without either (i) the fear of a recession that might be caused in the future by the Federal Reserve reducing liquidity by reversing QE, or (ii) the fear of unpredictable & destabilizing inflation that might be caused in the future if the QE money moved out into general circulation.
There does appear to be a small caveat w.r.t. (b):
(1) Assume that the US regains fast growth, low unemployment, soaring stock markets, rising house prices, rising farmland prices and low inflation (i.e. a ‘Goldilocks economy’) under ZIRP and with the 3 Trillion$ of the panic-printed money still sitting on the balance sheet of the Federal Reserve.
(2) What if this new cycle of fast-growth ends in another bust with another financial crisis? Will the Federal Reserve now create even more panic-printed money via QE4, QE5, QE6? Will its balance sheet expand by another 5-6 Trillion?
(3) What would be the interest-rate response to any such crisis? Would the Federal Reserve move to Negative Interest Rate Policy (NIRP) to outdo its old Zero Interest Rate Policy (ZIRP)?
(4) What would be the fiscal response to any such crisis? Would US federal government increase its debt from 100% today to 150% to deal with any such crisis? Would it run fiscal deficits of 20% of GDP to outdo the 10% of GDP that it ran in response to the previous crisis?
(5) If the Negative Interest Rate Policy (NIRP) and QE-n have little effect, would the Federal Reserve then have to move to an even more creative & innovative Hyper Inflationary Recovery Policy (HIRP)?
(6) If HIRP were to become a reality, would American mothers find it cheaper to feed 100$ bills to their children than to buy bread? What would be the nutritional value of such 100$ bills? Is it possible that creative innovations may increase the nutritional content of these bills by adding vitamins to the printing ink, while lacing the paper with protein supplements and fusing essential minerals into the metallic thread? Could the watermark itself be made of sugar, thereby making such 100$ bills more appealing to children who might be picky-eaters?
As we can see, the questions are many, but the answers few. Something to reflect upon and discuss. All inputs or views would be helpful and welcome.
“it may be possible for the Federal Reserve to keep the additional 3 Trillion$ of panic-printed money on its books for an extended period of time. ”
Vinezi, this makes no sense. The Fed doesn’t have to contract its balance sheet and if the Fed does need to tighten, the Fed can raise the RR or increase IOR. There’s no reason the balance sheet will ever have to be contracted to its previous level and doing so would be retarded. As for contracting the balance sheet, that’s no difficulty either: you just do a reverse repo, which the Fed is doing to some extent with European banks as we speak.
You need to remember that when the Fed “prints money”, it’s just issuing liabilities to buy asset (regular banks issue liabilities to fund loans). It wasn’t “panic-stricken” by any means and it’s the same way the Fed shifts the short term interest rate. In 2008, all the Fed did is went from targeting the money market rate of interest to targeting the monetary base.
Also, why are you saying QE has little effect? QE has a HUGE effect, but the standard mechanism through which people think QE works (lowering longer term rates) makes no sense–it’s just some theoretical justification by people who have no understanding of monetary economics (this includes Paul Krugman and Joseph Stiglitz as they both think in terms of IS/LM, which sucks). I think you may need some help with monetary economics. You may wanna take a look at these posts I’ve done:
1. Money and Banking Basics
http://suvysthoughts.blogspot.com/2014/07/money-and-banking-basics.html
2. Monetary Policy Basis and QE
http://suvysthoughts.blogspot.com/2014/07/monetary-policy-basics-and-qe.html
3. Impact of QE
http://suvysthoughts.blogspot.com/2014/08/impact-of-qe.html
4. Why IS/LM Sucks?
http://suvysthoughts.blogspot.com/2014/08/why-islm-sucks.html
I’d like to add a thought on IS/LM and the idea of IS/LM being called “Keynesian”. Keynes explicitly rejects IS/LM in one of his papers. IS/LM was a model developed by Hicks. Anyone that claims that IS/LM was a model that Keynes used or suggested it be used is a fraud/liar/pundit who doesn’t know what they’re talking about (*cough* Krugman *cough*).
Move from 100% debt to 150%, what is the Federal governments net debt position, subtracting out money it owes utself, which can act as another tool, buying new treasuries with interest, or paying the treasury interest, that reduces the budget deficit.
Remember, Japan has 250 or 260% debt, but net out government holdings, and it is 70%, of course with interest rates very low of the long-term liquidity process.
With NIRP you assume the staying of ZIRP (with QE%, 6, etc), if I agree that short to medium, if longer, term interest rates will be lower.
Then the changing state of production, BAyers work funded through the EU, lower capital outlays, modular, increased energy, resource and similar production, closer to users, and able to be moved on trucks. So things are afoot that will alter all these landscapes.
No one is saying that the government can run out of money. The argument against higher levels of government debt has more to do with all of the other risks.
Holding Japan as a standard with regards to public debt seems stupid to me. Japan has MAJOR issues and the Yen is on the verge of collapse (it’s already fallen 40% over the past two years and it’s a one-way bet IMO). One of the problems with government debt is that high levels of government debt force the central bank to suppress volatility in the interest rate market (ex. Japan right now). This causes the volatility to show up in the rate of exchange (ex. Japan right now).
Just because the government can’t run out of money doesn’t mean that more government debt is the solution to a debt problem. That’s just a sucker’s bet.
I agree with you. There’s no need for the Fed to exit. They’ll probably just hold the securities until they mature.
Why would the Fed ever need to exit or reverse QE? They could just hold the bonds until maturity. That’s what I think is likely.
The US recovery is slowly gathering pace. Have a look at the website Calculated Risk for the favourable future outlook for the US from a commentator who is most often correct in his views.
China has toyed with the German austerity idea and it has nearly blown up its own economy, It is now retreating from that path, as the Chinese are nothing if not realists. You will see the Chinese govt increasing the stimulus by increments as they try (and finally succeed) in returning their economy to a growth path that makes the problems outlined by Michael Petits manageable.
The Chinese know that the US is getting stronger, that Europe is getting weaker and they they have a limited amount of time left in the easier growth mode that their own demographic profile gives them until 2015-2017. My thinking is that they will leave the Europeans to their stupidity for the time being and try to catch a share of the American led world growth while it’s still going.
The Europeans are missing a fundamental reality – it is easier to make structural change that increases the actual productivity of a nation when there is the will and the finance to invest in that change and the capital improvements required to bring about that change. The willingness and the finance flows in the good times for changes to the broader economy and for the uptake of the technology by the majority of the population.
The vanguard of technological change, – small tech companies and govt support for those companies may take place in recessionary times but the capital required for implementation can only come from earnings retention and reinvestment by large companies or govt finance, and these things most often available when times are good, finance is fluid and animal spirits are high.
David NZ WROTE: “The US recovery is slowly gathering pace……”
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A) The question is NOT “can the US get a strong recovery with fast growth, low unemployment and low inflation”?
If that were the question, then the answer would clearly be an unequivocal ‘YES’.
B) The question is this: “Can the US get a strong recovery with fast growth, low unemployment and low inflation, WITHOUT a further increase in the debt-load (i.e. without a further increase in the debt/GDP ratio)”
The answer to this question is not clear.
Given that debt has been rising faster than GDP for a generation (i.e. debt-driven growth), it is not immediately obvious that the US is now even capable of growing with unsustainable increases in debt.
http://goo.gl/WUYpbo
Do you disagree? Do you still see a SUSTAINABLE (i.e. without further increase in debt/GDP ratio) recovery around the corner? Please let me know your views on the issue.
I agree with you on the reliance of debt based growth in the US, but everywhere else in the world is much worse with regards to debt based growth (except maybe India, which has other issues).
In places like China and Europe, debt levels are way higher than they are in the US. In the US, much of the debt has been securitized, which could actually end up being a good thing. In China and Europe, the debts have been embedded in the banking systems with the size of the banking systems dwarfing the economic size of the countries. In China, the total assets of the banking system are, I think, somewhere in between 400-500% of Chinese GDP. A 10% shift in the assets of the banking system would mean a corresponding increase of 40-50% in the government debt of the country and that’s not even including all of the cyclical effects that would deteriorate the government budget situation from a recession/depression. The European banking system has assets of 300-400% of GDP with capital ratios of <5% while Germany and a few other countries haven't even borne the brunt of the damage yet.
The US has a way out, although it would mean rejecting the socialist model of increase welfare spending, increased war spending, and socializing everything in the hope that some bureaucrat will do the "right thing" because of some naive idea of democracy. Basically, I'm saying that if the US takes the European solution, we'll end up like Europe.
^David NZ WROTE: “China has toyed with the German austerity idea and….”
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Here are some graphs that show the trend-lines (with higher-order effects captured) of the GDP growth rates of the developed countries.
1) United States
http://goo.gl/gE7EY4
1) European Union
http://goo.gl/48aLZ6
2) United Kingdom
http://goo.gl/u9GJ0i
3) Japan
http://goo.gl/12lj49
4) France
http://goo.gl/BiaAhu
5) Italy
http://goo.gl/05k2Rh
6) Spain
http://goo.gl/QK4eQE
7) Germany (world bank data available from 1971 only)
http://goo.gl/tdTHOy
8) Canada
http://goo.gl/KdVxED
9) Australia
http://goo.gl/HiiI7e
10) Korea
http://goo.gl/UWAzM5
QUESTION for all blog-participants: What is causing this CLEAR pattern of a LONG-TERM slowdown in the developed countries? Is it due to the deterioration of demographic-profile (baby-boomers etc.)? Or is it being caused by the slowdown in population growth? Or is it due to a slowdown in productivity growth? Or is it a combination of all three? Are there other demand-side factors such as insufficient demand, excess investment, excess debt, unsustainable models and so on at work here as well? All views and insights would be helpful.
Structural supports along Picketty, where everything has been about supply side and squeezing margins, as more and more demand is being satisfied abroad, for the domestic markets in developed countries which undermines structural dynamics to make ita shorter term process than it could have been if all wasn’t done in such a short period of time, a few decades. Then there might be some of the other issues you mention. As to some developed countries, I think more have to move into positions as the US, and few are prepared to see that as necessary, to promote a more broad based global prosperity, especially as many developing world countries due all they can to advantage over the peer industrializers, with eyes set on more advanced countries markets, companies and industries, not realizing how necessary the health of each is, to the other. In many way, a grave immaturity obtains to many of these discussions, from my global development perspective.
“The Europeans are missing a fundamental reality – it is easier to make structural change….in the good times ….”
Is it? How many structural reform did US, being in good times supposedly, compared to Europe? It makes more sense economically, but It is impossible politically. Why would you change anything when times are good? Any politicians doing painful reforms in good times is commiting political suicide. No chance for re-election. They only time for structural reforms is crisis, when everyone sees that theres something wrong and will thus accept the necessary change. This is the fundamental reality.
Exactly! The only times you adjust are during crises; so it’s better for localized crises to occur frequently and often rather than postponing adjustments.
Look at Ford, not only did they not government support in 2008, their CEO said he intended to keep every penny of his multimillion dollar salary, so we do not need your help, these other companies do, and we support that because we use the same suppliers, so help them, but we are fine. Why they started making reforms in the early to mid 2000’s.
Share price went from 1.10 to 16.00, in less than one year. I remember watching the Senate Finance Committee meeting, and going oh boy, Ford is going to explode.
Of course, the general tenor of the people impact the potential opportunity horizon, but I think that people are becoming more savvy and that those who spread disinformation are generally at a loss.
Even the Goldbugs, I think, come on, that was so Ron Paul, young Republican 2003, or a fair distance before with crackpots and Lyndon Larouche, it is strange how seemingly far apart some are, while using the same themes, actually a bit hilarious, but this stuff wanes, any trying to beat that horse are confused.
i would say that the internet has allowed a soapbox, but that these types have run up against a wall, that the reviewing public gets far more sophisticated, where dystopian fantasies are being exposed, and that a fair bit of this leaves. Look how China Daily changed its tune, what a bunch of hogwash. Really how detrimental all that was, people are talking about empty cities and such now, but well before 2004, many new that empty buildings were being built everywhere, all one needs to do is look at the buildings, to see if lights are on.
Because that’s the norm, right? Why not use the taxpayer to provide cheap capital to large enterprises while small businesses keep having a more difficult time. The point isn’t whether or not the bailout “works”. The problem is you’re subsidizing large enterprises that’re inherently fragile over small enterprises that have much more upside. Over any extended period of time, such a strategy is bankrupt.
Suvy:
Global Pension funds, your bank, etc…..just funded Audi to build another billion dollar plant in China, not dissimilar to Saudi tactics re oil recently, to maintain market share, where Audi has been doing well, in an environment that doesn’t bode well for Chinese auto sales, and th only thing you can do, is yet again, not see, that there is more dysfunction at play, pretending that not funding these companies would have been fine, destroying all those companies, the suppliers of Ford (the very same who supply Gm and Chryser, etc), and that this would have been beneficial because of small businesses.
What of all the employees of those companies who ea at local restaurants, shop in local supermarkets, get their kids tutored by local companies, go to local arcades, get local small businesses to prepare their taxes, cut their lawns, fix their heaters, change their oil, sell them their prescriptions, vitamins and greeting cards, make cakes for their kids birthdays, provide a venue to build robots or pant ceramics, a place to watch the Sunday game, or pick up a pizza, or any of these who provide the initial capital, or the garage to the local kids who are building energy efficient smart devices in their spare time, or making a 6 cent test for Leukimia, or, and etc….
Bring it all together, and stop beating the same ideological Trojan horse.
“Global Pension funds, your bank, etc…..just funded Audi to build another billion dollar plant in China, not dissimilar to Saudi tactics re oil recently, to maintain market share, where Audi has been doing well, in an environment that doesn’t bode well for Chinese auto sales, and th only thing you can do, is yet again, not see, that there is more dysfunction at play, pretending that not funding these companies would have been fine, destroying all those companies, the suppliers of Ford (the very same who supply Gm and Chryser, etc), and that this would have been beneficial because of small businesses.”
We have to understand that economies are not man-made systems. They’re closer to the human body than they are to a car or a washing machine. If you don’t allow a system to break, at least partially, it won’t grow.
If you wanna build strength in your body, you have to destroy your muscle fibers (literally). Why would you destroy your muscle fibers? Because if you provide your body enough nutrients and rest, they’ll grow back. In other words, your body is (up to a point) long volatility. Economic systems are very similar.
If we take another example, all religions have fasting, but fasting is actually beneficial (up to a point). If you look at the latest medical research, fasting actually helps destroy cancer cells by forcing your body to destroy its cells, so the weakest cells are the first to go. When you refeed your body and provide it the nutrition to regenerate cells, it becomes stronger than it was before.
When you keep allowing bailout after bailout in the hopes of avoiding breaking the suppliers, the economy is getting weaker because you’re preventing the fragile from breaking. Any natural system works that way.
What I’m saying isn’t ideological nonsense; it’s common sense once you realize what an economy actually is. It’s not like a car or a machine. It’s much more like the human body. You can’t prevent weak parts of it from breaking because it’s gonna be painful in the long run. This is equivalent of someone sitting on the couch all day because it’s inconvenient to get up and move.
So, for the abstract relation of a thing to a thing, for all the utility of a metaphor, a device for understanding, we assume truth, from, of, the necessary, simplicity, from, of, the sense-making, and framing tools we have chosen to use, and from this simplicity we get a simple linear projection of what is the case. This is then compounded by the process of assuming that what we use in the comparison, for simplicity, and generally, is taken at a one for one basis. Neither are all human bodies the same, nor economies, although the one, or the other, have very many similarities; but when linked, it only becomes useful for explaining another simple thing, not something as complex as the systemic relations, and impacts, of what I have rather simply addressed. Your notion that they are fragile because they are exposed to other forces within society, under very different assumptions, and for very different purposes than mere economics is a bit (word) (word not given because several would fit, and none, due to limitations of this medium, are useful, for extending the discussion in the spirit in which I respond, nor toward my interest in keeping a useful dialogue).
The ease at which you assume truth is limiting your further study.
It is not answers that matter, but questions.
The Indians, Hindu’s I believe, have a word, called satsang, which is to be in the company of truth, to be around it, or near it, but not on it. If one accepts that complex systems exists, then an important property of them is that they contain “emergent properties” which change and alter due to forces in the system, inter-relations and impacts, between and of elements, whose attributes alter, with new elements developing, and a continuous moving flow.
So,….while I am, or at least could have been, if I hadn’t sublimated my emotions from contemplation of Spinozan, and his notions on the relation between thought and emotion, and the habituation of (emoto-mento) belief-thoughts, could have, am as angry as you about all that is happening, but, am likely different in what I suspect the culprits to be (perhaps, more likely the necessary responses).
“The Indians, Hindu’s I believe, have a word, called satsang, which is to be in the company of truth, to be around it, or near it, but not on it.”
I am Hindu; you’re preaching to the choir. I’m aware of what it means.
In the case of fragility, I define it very simply (and I use the most common definition): short volatility, disorder, randomness, etc.. I would like you to find me a non-man-made system that isn’t self-regenerating. EVERYTHING in nature is self-regenerating. Why is it the case? Because complex systems have a hierarchy.
Complex systems to have many parts that interact with one another and I’m not discounting that fact. Did you read the comment where I spoke about power-law distributions and effects of scaling? That’s how the probability distributions of complex systems look. Why do they look like that? It’s all of the interactions that you’re talking about that create that kind of behavior.
The only real assumption I’m making is that we know absolutely nothing and have no ability to predict the future. Due to the nature of fat-tailed distributions, there is no point in trying to play the probabilities because it’s very difficult to know what the probabilities are. Instead, you must focus on the odds! The payoff, if you will.
You said:
“Your notion that they are fragile because they are exposed to other forces within society, under very different assumptions, and for very different purposes than mere economics is a bit”
This is not what I’m saying at all. We’re not fragile because we’re exposed to other forces in society. We’re fragile because of our response to the exposure of other forces in society. There’s a subtle, but very important difference.
I can’t emphasize the nature of fat-tailed distributions (which come from complex systems and are effectively fractals) enough because that’s how virtually everything in the natural world works. Why does it work that way? It works that way because of the complexity and the interactions between each of the different parts. Small shocks can cause large, violent shifts. Nonlinear responses occur everywhere, which means you get tipping point effects (ex. nothing noticeable happens in response to an increase in dose for a long time, and then, all of a sudden, you get a massive shift).
Let me make the assumptions I’m making very, very clear:
1. We don’t understand the world around us
2. We cannot predict what will happen
3. Nonlinear dose-response curves are the norm
This is why I’m saying that the only way to be able to sustainably survive in this kind of a world is to create a system that gain gain from this kind of environment. You don’t achieve such a system via bailouts, in any industry.
One of the things that makes large complex systems so robust (and antifragile) is because they’re layered–there’s a hierarchy. What do I mean by that? Your body is antifragile because it’s made up of lots of tiny little cells. Your body also has the ability to regenerate itself. What that means is that the death of cells in bad shape combined with proper nutrition/rest/etc. allows the good cells to multiply after the bad cells die off. Similarly, our society is made up of individuals. The fact that each individual is fragile makes the society as a whole, on a higher level of the hierarchy, much more robust.
An economy isn’t much different. How is an economy not a whole lot different from that? An economy is layered as well. If we take a city, it’s filled with all sorts of different businesses, companies, firms, and all that other good stuff. What makes a city robust/antifragile is that a business can fail, but it provides everyone else in the city with information about what not to do.
In a typical city, how many restaurants are there? How many restaurants do you see go out of business over, say, 10 years? You’d see more than you’d ever think of, but does the entire restaurant business go bust? No because each failure provides the rest of the industry information about what NOT to do.
In the same sense, a national economy is similar. If you have lots of small enterprises that’re fragile, it makes the entire system as a whole robust/antifragile. Antifragility at the systemic level REQUIRES fragility at the local level. If you deprive the local level of fragility, you end up artificially suppressing volatility which causes the system to appear more stable while hidden risks build under the surface. What ends up happening is that the system becomes much more unstable.
This brings me to my next point: what are the individual units in a nation that allow the nation to sustainably accumulate wealth? It’s the cities, states, localities, and provinces of a country. It’s the same layering effect I was talking about. You need individual cities and states to be fragile for the nation to be robust/antifragile.
In complex systems, volatility is information. The fractal nature of the system means that everything which happens organically provides information to every other part of the system. Do you notice how many layers that this entire economy has and how complex it is? A country like the US is built of 50 different states. Each state has its own set of cities. Each city has different layers to that and it goes on. That’s what makes up a fractal. Each time you zoom in on it, you see a similar pattern (this effect is called self-similarity).
Why did I spend such a long time rambling about this? It’s because you don’t create a robust/antifragile country by centering things around Washington and by trying to keep large corporations alive via bailouts. These corporations MUST break. If you don’t let them break now, they’ll simply break later and the cost will be higher. If everything becomes dependent on DC and something goes wrong in DC, everything gets wiped out. Keep in mind the kind of incentives that many corporate executives, politicians, and bureaucrats have too. The job of a politician is to get reelected and the job of a bureaucrat, for all effective purposes, is to cover his own ass. So when you have large bureaucracies and large corporations while decision makers keep the upside and transfer the downside to the rest of the public, that’s a major problem. You’re feeding these groups in DC while other parts of the country are seeing people, resources, capital, and all sorts of stuff fly out of there. Then, everything becomes dependent on the center of the country for jobs. The debt becomes socialized while all of this is going on. The individual units (cities and states) that do end up surviving become dependent on DC for their survival. The normal volatility of some cities and states strengthening while other cities and states weaken goes away. Everything becomes designed through the center.
Since you’re the kinda guy that likes artsy stuff, literature, poetry, and all the other good stuff, I’ll end this post with a reference to a famous quote from a famous poem:
Things fall apart when the center cannot hold.
At that point, mere anarchy is loosed upon the world.
How do we get around that problem? Don’t build/design the system around the center because if it falls, you’re finished. Instead, the system needs to come from the bottom-up with as little reliance on the center as possible.
Note: I’m simplifying a lot in my examples. Obviously, there’s a lot more going on, but the reason I was simplifying is so that you can understand the concepts. It seems to me that you’re having difficult understanding all of these concepts and you don’t really understand what I’m trying to get across.
Suvy:
Great Stuff (stuff = a word that a tenured Harvard philosopher professor will be using today to the angst of Statisticians and Mathematicians). But really quite good, however, remember, that likening anything to another thing is a very risky endeavor itself. It is a framing device, a tool for sense-making. It is a tool, for understanding, for theorizing, and theorizing, even a theory, is a very different animal than truth.
Corporations must break
Well, your argument for decentralization is interesting. You mention many areas are
Everything Dependent on DC
Actually, I believe few things are DEPENDENT upon DC. That DC has a lot that many would like it to do,to have done, or do instead,… but dependent is a rather strong word. There might be firefighters who are arsonists, but typically one wouldn’t want to assume the occurrence, evolution and trajectory of a fire as merely dependent upon the actions of the firefighter, much less its occurrence (especially when we sit and merely criticize from our comfy chairs, even when we can see so clearly, and linearly, I might add)
Politician Re-elected
It has been shown that there is a higher prevalence of mental pathologies (socio), among corporate leaders, politicians, sports figures, movie stars,(even doctors), etc….those who are out in the limelight, “leaders”, more generally.
Agree, agree, agree, keep upside and transfer downside, i would say this, as someone who has experienced it, is an outgrowth, of the philosophies that have dominated, and diluted real discussion over the last 30 years. Of course, this will not last, and our lives are but a spark before the match ignites.
seeing people, resources, capital, and all sorts of stuff fly out of there
I slow down here. I wonder if you are about to use the same darwinian non-sense that justifies the actions of those whose activities you oppose. Then, it might be possible in some far future, with others in the world evolved of a similar consciousness and set of possibilities, that we can, are even able, to move (possible and plausible), to a system of purely open, regional economies (Hudson valley, etc…). However now such isn’t the case. And States, Locals have gotten far more efficient and less dependent on the center over the last 30 years, actually. The whole small government thing, happened, at the State and Local. This might be a point of those whose perspectives you enjoy, not being honest as to this, such has really occur, and I can list how.
Normal Volatility Weakening Strengthening
This is a curious perspective that has gained some ground in rationalizing natural rises and falls, and actually, I think you would often find this wielded by those who like to transfer downside costs, funnily enough. While there are ghost towns, I would hesitate to see Detroit, which I am quite sure that you do under such a light, there are very many more reasons, the least not political, and philosophical.
Artsy Stuff…uhmmmmmm
Actually, i tend to think that people take artistic positions in these matters is part of the problem. Before the web, I had never seen such a load of non-sense being blasted upon people, that got me looking into the underlying thought, philosophies and perspectives of others thoughts (often blind assumptions). Then, I have had a longer term meditation on Spinozan, the master Rational Logistican, where thought can be likened to habit, similar with notions of the ethical, or better, (and converses). Try not to sound too Tea Party here.
Difficulty Understanding
Not really Suvy, Merely that I think you are hyperventilating, and far to fond of a clear destination from your assumption of truth. Other than that, our perspectives are very much similar. But the Libertarian strain, of angst, and protest, doesn’t lend to a more practical RealEconomik, based upon plausibility, rather than self-chosen desireability. For writing an academic paper, useful, a piece of prose perhaps, for a protest manifesto, OK, for understanding where things will go, are, and have been, not useful. But, I enjoy the perspective, truly. Frankly, am often confused why you think our perspectives are very different, and then, the Tea Time keeps popping up (which I am sure you will disagree with, but, were I to run sentiment analysis on your writing, it would spit such out) .
Michael Pettis WROTE about China in the article entitled ‘Revisiting my 2011 predictions’ as follows:
QUOTE BEGIN >>> “Chinese debt levels will continue to rise quickly over the rest of this year and next.
I don’t think I need to say too much about this prediction – no one doubts anymore that debt is growing much too quickly. Over the past three days the Financial Times has published a series of very interesting if alarming articles about debt in China and it is hard to pick up a business periodical nowadays that doesn’t discuss the topic.
But there really should never have been any surprise about China’s unsustainable debt path. I argued that given the systematic tendency to investment allocation that has driven growth for the past several years, an unsustainable increase in credit is a necessary condition for GDP growth levels much above 3-4%, not an accident caused by spates of irresponsible lending, and whether or not you agree with me I think it would be hard to disagree that credit growth has been astonishing.
For my model to be right, either GDP growth must slow significantly in the next year or two, or if it doesn’t, credit will continue to surge dangerously and perhaps reach debt capacity constraints within two or three years. The consensus seems to be that growth won’t slow. On Monday, for example, Credit Suisse, sort of in the middle of the pack, wrote in their research note that “We call for growth to stabilize, without much upside momentum. We revise up our forecasts for 2013 GDP growth to 7.6% from 7.4% and 2014 to 7.7% from 7.6%.” It is only if the growth forecasts by analysts like those at Credit Suisse are right, and, instead of surging, credit growth slows substantially, that this aspect of my interpretation of China’s growth model will have been proven wrong.” <<< END QUOTE.
————————–
What you wrote about China is 100% true, Michael, and I, for one, am convinced that your predictions will turn out to be VERY accurate.
But what about the rise in the debt/GDP ratio in the US over the past 30 years? Do you think that "debt has been growing too quickly" (i.e. much faster than GDP) in the US also? Hasn't the Financial Times been publishing alarming articles on this topic as well?
Do you think that the US has been on an "unsustainable debt path" along with China? Or is the US a unique exception to the general theory of unsustainable debt paths? Would you say that rise in debt-load (i.e. rising debt/GDP ratio) was a "necessary condition" for the fast average-growth level of 3% that we have seen over the last 30 years? What do you think the average growth rate in the US would have been over the last generation if debt-load had remained approximately a constant (i.e. debt would have grown at the same pace as GDP)? Do feel that the rise in the debt-load over the last 30 years in the US, allowing for the fact that it is a mature economy, has been just as "astonishing" as the rise in debt-loads in China ?
Comparing your model for China to your model for the US, would you also say that "either GDP growth must slow significantly" for an extended period in the US, "or if it doesn't, debt will continue to surge dangerously and perhaps reach debt capacity constraints" very soon?
What are the estimates predicted by your model for the US economy over the next 5 years? Do you see:
(a) Debt-load rising (i.e. further increases in debt/GDP ratio) and a return to the fast-growth of the last 30 years?
(b) Debt-load remaining constant and much slower growth than seen over the last 30 years?
(c) Debt-load falling (i.e. reversal and decline in debt/GDP ratio) and complete stagnation or a long recession?
(d) Debt-load remaining constant or slight falling, and a return to the fast-growth of the last 30 years?
(e) Debt-load rising, and yet accompanied by slower-growth or stagnation (i.e. similar to Japan)?
PS: Although seemingly addressed to Michael since this is his blog, these questions are completely general. Any of the regular blog-participants who might have some insight into these issues could take a shot at addressing some of these questions.
The US could attach more of its own demand.
If the rest of the world, doesn’t quickly can momentum in coming to a very much more clear understanding of the structural functions that exist in the system as it is (not the one we hypothesize that it should be), then they will rather quickly reversal of dynamics that have assisted growth. More fundamentally, more need to move into a position that is more similarly structurally. All of the free-trade discussion, has been on the discussion of enabling a global middle class, this is necessary, of course, if more countries do not do more to ensure that there are greater drivers of growth globally, on the back of rising wages, where most discussions is needed to be among industrializing peers in this matter, then quickly it will be seen that the dinner table is not large enough for all those who would like to sup at once. Of course, this is the glaring reality that is facing any who view the system, rather than supposed preferred policy responses (taxes, regulations, open capital markets, etc….etc….etc….)
So, if the US will suffer, it is of the declining prospects held more widely and globally:
declining emerging markets, japan, China, EU, etc….
This should serve as a wake-up call to marginal, parochial ideological thinkers in the American poity, and among policymakers.
Professor Pettis,
Very enlightening article as always. I agree with you point that bad cultural capital and human capital are responsible for the differences in economic performance world over. The same as within country. One point I would like to make is that, in the case of Europe, and to a much less extend in the case of China, while it is true that in a contraction, burden of the contraction are born mostly by the weaker areas, in a way, this is the only way to prod them to change their ways. For example, I am told that for the Greeks, a very large part of the “economy” was the government. In good economic times, this might not be sustainable, but could go on for a while, but in bad economic straits, it forces the government to cut down, which might be economically bad for the Greeks and Europe, but it is the only politically feasible way to correct the balance.
Don’t forget a common language.
People want a common unit-of-exchange so they don’t incur exchange rate timing risk. The drive to a globalized monetary unit is being driven by greater P2P and B2B trade, due to for example greater mobility (e.g. filipino OFW remittances) and the internet.
I believe the internet monetary unit will outpace the regional currency unions, yet the latter are starting from larger basis of inter-trade.
I meant cross-border trade (the internet being an enabler) and labor migration (virtually or physically).
So what that US never canceled the dollar?
One can argue in Europe they never confiscated gold. Which one is more socialistic, canceling your currency or confiscating your assets?
@Jon
People don’t widely hold your currency if you routinely cancel it, thus it doesn’t become a reserve currency.
What about if you routinely debase you currency and denominate trillions of debt in it while you know all along there is no way to pay majority of it back? Ever. How long will it stay trusted?
As far as gold bias, you are right, I have one. That is why I am trying to be careful and very conservative with my estimates of what the true worth of gold is. $55000 is way on the low side. Just did not want to have people and Csteven and Suvy all excited, but it is about time for them to wake up and smell the roses.
Jon
Maybe you didn’t realize but your notions are non-sense and to those as you, I have always said, create a movement, encourage whichever country you are a citizen of to jettison the dollar, buy gold. It is absolutely ridiculous, but i have no “fear” of it happening or not happening.
It is just, well, poor thinking, and Michael has given many of the supports as to why. As to notions of a dollar decreasing in value, or being debased, well such is ridiculous, or debt, when one does a comparison to others, it is not nearly as you describe, nor different, if even lessor than the trajectory of many, many others. i have always said that if the US benefits while being in the reserve position, it will do so more afterward.
It is strange, i had worked my way through the Gold non-sense a long time ago, even read on the GCC Gold Dinari, which wasn’t really picked up by Gold Bugs until after the GCC had rejected it. It is often like all these people never read the matter, they hear something, immediately file it in their sense-making frames, and move on, while the notion had already been dispelled. 55,000 you believe that. Why not 5K or 550 k. Just ridiculous. Why even use a dollar figure, why not ruble, rmb, rupiah, rupee, rand or koruna.
Shelby,
Armstrong seems to think that DOW will go much higher.
“Everything is correlating so far on time. We have the metals crashing shaking the tree to get rid of all the perpetual bulls. They just have to be devastated before you can move in the opposite direction. This is just how markets move. The stock market advance has been with historic lows in retail participation. This sets the stage for the skeptics to rush back and buy the highs. The average person buys or sells based only when they see confirmation. This is what leads to buying highs and selling lows. The rally will come when the fresh crowd all start to buy once again. That becomes the question as to how high is high. It is starting look like the 43000 number more so than just the 26000 level. We need more price action to confirm that outcome.”
http://armstrongeconomics.com/2014/11/09/dow-confusion/
@Jon
Armstrong has been saying since 2012 at least (when I first read him on that) the DJIA would go higher possibly to double or triple. The only question in his mind now is whether the peak will be before 2015.75 or will the DJIA invert w.r.t. to his ECM model and then continue to rise with all private assets after 2015.75. The key is to understand the ECM is currently in a 51.6 year Private wave (which ends 2032 and then a Public wave will begin). So the downturn in the ECM on 2015.75 will be negative for Public assets, i.e. sovereign bonds.
Shelby,
For current 51.6 year Private wave, sovereign debts all over the world are doing pretty good. I am not sure I understand what he means then. Or should we wait until after 2015.75 to see the sovereign bonds going down? According to his ECM model it should happen sooner.
@Jon
The Private wave is a shift away from government. We can see governments being overthrown, riots, sovereign debt collapses already. Each downturn in the ECM (1981.35, 1989.95, 1998.55, 2007.15, 2015.75, 2024.35, 2032.95) will see greater contagion and the core economies will eventually be taken down. Each upturn (1985.65, 1994.25, 2002.85, 2011.45, 2019.05, 2027.95) will see a temporary deadcat bounce for government. After 2032 we get a waterfall capitulation so that we hit rock bottom and can begin a move back towards Public assets and trusting government—government will be much smaller percent of GDP by then. The early seeds of the failure of government began as early as the beginning of the sovereign bond bubble with peaking interest rates in 1981 (inflation due to baby boomers entering the work force), Japan’s peaking in 1989, the institution of hedonics in 1994 in the USA to obscure the level of CPI inflation, Long Term Capital Management fiasco that almost set off a global contagion in 1998, etc.. all were right on time as expected by the global ECM model. He also has country specific models which have different phases.
Thank you to Michael Pettis for another intriguing article.
To follow-up on some slightly off-topic comments and questions on what’s the Fed to do now depending on the strength and sustainably of the US economic recovery and the strengths of financial asset values, may i indulge in some week-end fiction?
BACK TO THE FUTURE: IS THE US NOW IN LATE 1928?
In the late 1920’s, after the Fed engaged in QE in 1924 and 1927 (monetizing bankers acceptance notes at the time in absence of Federal debt) to encourage gold to leave the US and return to Europe to help Great-Britain go back to the Gold standard in 1925 and also to consolidate the monetary stabilization achieved by Schacht in Germany end 1923 after the hyperinflation, the Fed went even further and cut interest rates in July 1927 despite a “roaring” economy ad stock market. This was mainly to help G-B which was struggling under deflation and high real interest rates after going back to gold pre-war parity in 1925 (and thus being uncompetitive after massive war-time inflation) and also to consolidate the monetary stabilization achieved by Poincaré in France end 1926. In any case, capital did come back to Europe around the mid-1920’s as shortage there could have meant attractive returns.
But, by cutting interest rates and doing some QE in 1927, the Fed triggered massive speculation in the US stock market. This was partly on leverage (brokers loans exploded). By August 1928, despite the Fed tightening again between February and July 1928 because the market was getting “frothy”, capital started to flee Europe again to flow back into the US, attracted by the apparently fantastic gains to be made in the US stock market and scared by reparation tensions rising betwwen France and Germany during preparations of the Young Conference which convened in February 1929. This tipped Europe into recession and greatly exacerbated the stock market bubble in the US. The value of total capital in the US exploded relative to the value of production from 4.2x end 1926 to over 6x end 1929 (Total Capital = Total Non-Financial and Financial Debt + Equity Market Capitalization + Residential Real Estate Net Worth).
The situation today is strikingly similar: QE fueled the S&P500 for the past years but has now ended. Still, global capital is rushing back to the US, fleeing Japan and Europe, both struggling under deflation and both trying to debase their currency. Europe is close to recession again. The tensions over who should pay for the costs of Eurozone adjustments – Germany or the weaker countries including now France? – are rising. Capital is also fleeing Middle-East, Eastern Europe and Latin America. The US stock market is the receptacle for all this floating capital looking for a home as the bond market provides negative real return, commodities are crashing and there is little real economy investment opportunities because final demand is lacklustre and capacity often already in excess. This is fueling another leg up in the S&P500, similar to the post Fed-tightening ramp up from Q3 1928. Like brokers loans in the late 1920’s, margin debt is currently skyrocketing as speculation in long-dated risk assets is more and more funded by on-demand borrowed funds. The value of total capital in the US is now over 5.5x the value of production, the level of December 1928, though the compostion is different (more debt, less stock market equity, comparable home equity).
The Fed has trapped itself in an inextricable (if totally predictable) corner:
– Either it tightens by raising interest rates, in which case it will further enhance the attraction of the $ and hence attract even more foreign capital at the same time as it will harm the economy by eroding the spending power of its most leveraged parts. If the momentum of the equity bubble is very strong, short term rates at say 2% might not even stop it (the dividend yield of the S&P500 is 1.9%), you might need short term rates at 3.5% to 4% to refrain speculation now that the bubble psychology has firmly taken over, but that would be too painful for the economy.
– Or, it remains in status quo, no more easing but no tightening either. In that case, as BoJ ad ECB weaken their currencies, as Middle-East doesn’t export so much petro-$ any more given declining oil price, the US finds itself sucking up all floating global capital which is inflating – on top of all the Fed liquidity injections of recent years – another epic asset bubble.
QE1 was justified by the necessity to backstop credit markets in late 2008-early 2009. But, pursuing QE all the way to October 2014 was a huge mistake from which there is no obvious way now to avoid having to pay the costs.
If this is the correct historical analogue to judge the current situation (and of course, that’s the big “if”, mainly a thought experiment exercise based on certain similarities between 2014 and 1928), the implications could be the following:
– The S&P500 will go up another ~+35% in the next 9-12 months. That would make the S&P500 at ~2740 by late 2015, which is 2 standard deviations above its long term trend since 1871 (see Robert Shiller online data).
– Then we’ll have a major financial crash as equity are grossly overvalued compared to the sea of debt underneath it and the correction degenerates due to leverage unwinding. It will spill over into an economic recession / depression in 2016-2017.
– By Q3 2018, the S&P500 will be at 265, which is 2 standard deviations below its long term trend, as many companies part of the index won’t survive.
– A new bull market will start in 2028 and the S&P500 will have recovered its current value (2031) by 2037.
– Between 2018 and 2028, who knows what can happen…
As an aside, we note that some of Shelby predictions and this “back to the future” week-end fiction are not too far off.
@DvD
Armstrong has pointed out that historically the Fed will tighten because they mistake the macroeconomic deadcat bounce—caused by the influx of international capital flows—as a real economic upturn. Historically the stock market doesn’t decline when interest rates rise. As interest rates rise, more capital flows into the dollar because the rest of the world is short the dollar due to the carry trade in dollars from the QE1 – 3 (world has accrued massive dollar loans because QE drove dollar investors abroad to seek yield). Meaning the rest of world will accelerate its implosion, thus more capital will flee. It is inescapable spiral and the real interest rate return on equities is not the driving factor.
1929 was the beginning a Public wave; whereas, 2007 or 2015 are both in the middle of a Private wave. Also we have a confluence of the upswing in the 25.6 year war cycle in 2014, the peak of 224 year political cycle in the USA in 2013 (see Public wave link for chart), the pandemic cycle peaking in 2019 (see Public wave link), and the peak of the 309.6 year civilization wave in 2032 (note it is not a public wave but a civilization change wave).
So not only is the USA not entering a Public confidence in 2007 or 2015, rather the confidence in the Public bonds is collapsing every where (even Germany will be insolvent). The movement is towards Private assets every where and there will be no safe haven sovereign nation. This is why all the cycles are flashing red alert in unison.
The governments will hunt down the wealth with a globalized police state (and squander it of course in collapsing spiral of failure and pestilence). This is extremely dangerous. Asia will rise as the next financial center, but after the chaos and not until 2032.
World War 2 was a walk in the park compared to what is coming for us now. We will be begging for hyperinflation instead of strong military governments raising taxes, capital controls, bail-ins, and hunting us all down.
Our one hope is the internet and privacy (anonymity) enabling technologies. Political solutions will not come until after the public is tired from the chaos by 2032. See the murals at the Denver airport which are aware of what is coming.
Shelby,
do you believe yourself in all these dates from Armstrong? I mean 25.6 year cycle? Seriously? Why not 25.6565656 year cycle, just to be exact?
And the confidence in German Bonds is collapsing? By what measure? Current Yield 0.84%? Armstrong keeps writing about how good he is with dates prediction, but it seems to be all in hindsight. He talks about how Spain will collapse any second now since at least 2011. Some predictor that he is.
@Jon
I’ve been reading every blog post he made, and he never stated it the way you’re attempting to spin it. What he said was that Spain’s was descending in economic collapse and chaos, which it surely is. His model also predicted in advance the rise in separation movements, e.g. Catalonia.
He has not stated that. How can post meaningfully if aren’t even going to read his blog from start to finish? (yeah I know that will require a lot of effort but you will learn a lot). You are conflating statements about the shift in international capital flows to the dollar and the imminent collapse of Europe (and Germany) with the fact that Armstrong has also admitted the core of Europe would get ingress of capital first (along the way to the end game).
As for his performance on specific predictions and dates, indeed is model has been able to predict the exact day of events years in advance. I suggest you review his record as follows.
His 1980s predictions made to US President and Treasury Secretary.
Shaming Jim Sinclair.
Why the mainstream press won’t quote him.
My expert (computer science) thoughts on A.I. as pertains to Socrates (his computer model).
All the major turns since 1980s that his computer predicted in advance.
Please understand what the model predicts and doesn’t.
It has been so stunning that governments have accused him of manipulating the world economy and imprisoned him in Supermax (overkill!) facility (where he almost died, I was following this back in 2009 or so) on a bogus contempt-of-court charge for 7 years in violation of his right to a speedy trial. He used to help manage 2.2 trillion of funds in Japan (Postal retirement fund and another sovereign wealth fund, both went bankrupt when Japanese government refused to allow them to hedge as Armstrong was advising at the top in 1989). There is (apparently very highly demanded) movie The Forecaster coming out about him and the manipulations he has uncovered and got him in trouble with the powers-that-be (specifically Republic Bank and the collapse of Russia in the 1990s). He has claimed his web site has over 500,000 unique readers.
Apparently Armstrong is legit and a very big time fish. He has connections amongst big bankers, billionaires, formerly heads of State (e.g. Margaret Thatcher), etc..
Shelby,
You are 100% right I did not read Armstrong from the beginning to the end very carefully and possible misinterpret his statements. N intention to do it on my part, though.
I really tried to read him, but his way of writing by often skipping from one subject to another in the same blog post and kind of hyping up things makes it difficult for me to understand specifics of his predictions.
You tell me, since you understand and follow him so closely, he predicted sovereign crisis (starting in Europe, I presume) in year 2015,75. That is as specific as it gets with the date. But is he saying the European countries start defaulting one by one right after the date? If not, what exactly happens starting October 2015?
In Armstrong Economic Confidence Model he identified 2011 as the bottom http://www.contrahour.com/.shared/image.html?/photos/uncategorized/economic_confidence_86_year_cycle.png
Ok, Shelby, now you tell me what to think of it.
@Jon
I agree Armstrong writes in disjoint blog posts which makes his theme incoherent to most readers.
You need to go to his ECM models page and understand that model first, so his disjointed blog posts can make sense.
2011 was the start of a 4.3 year turn up in the ECM which is currently in a 51.6 year overall Private wave.
2007.15, 2015.75, and 2024.25 will all be turns down in the ECM and will mean renewed contagion for government (Public) woes, getting worse each time. Until we finally reset the world monetary system and start anew in a 51.6 year Public wave starting 2032.
Shelby,
Anyone that uses that kind of precision on stuff like this is obviously spewing BS. The more complicated the model, the more quickly you lose precision. Anyone using that kind of precision for this kind of complexity has major red flags on their work.
@Suvy
Armstrong has pointed out that long-term predictions are actually much more accurate (less statistically noisy) than short-term ones[1].
I found the blog where he explained how he discovered the model and the statistical possibility being in in the 1-in-a-billion of the model being a random match.
I also found the blog where he explains the correlation between machine learning and density estimation in statistics.
[1] http://armstrongeconomics.com/2014/08/12/the-long-term-is-not-spontaneous/
http://armstrongeconomics.com/2013/12/17/bernankes-speech-at-the-ceremony-commemorating-the-centennial-of-the-fed-reserve-act/
@Jon,
Armstrong has the problem of writing incoherently at times because he is moving too fast. When he slows down, his intellect becomes clear, e.g. he nailed the mistake the West has made in Ukraine.
I don’t think “the West” has made a mistake in Ukraine. What’s going on in Ukraine is that the Americans smelled blood and are going in for the kill. Russia’s economy is teetering on the verge of financial collapse. In less than three years, I think the USD/RUB hits 100 in <3 years. I wouldn't be surprised if it hits something well above that.
Relying on other countries to buy your exports is not a reliable way to fund the purchasing of imports. Russia's economy isn't diverse enough and if global capacity keeps getting killed, Russia has little chance. I think Russia fragments (by fragment, I mean some of the heavily Muslim regions fly off).
I HATE John McCain, but there's a lot of truth to the statement he made about Russia: that it's a gas station masquerading as a country.
@Suvy, a 35 year CIA analyst claims what is really going on about the Ukraine situation. Bush promised Gorbachev “NATO will not move 1 inch east of the former Berlin wall”, then a few years hence NATO had 12 new nations east of the former demarcation. This is the geographic pathway that Russia had been attacked throughout history such as Napoleon. This is why Russia is now angry at the legacy of Gorbachev.
None of that really matters now. The reality is that Russia is on the verge of financial collapse. I’m also pretty sure the CIA along with the Saudis and others are funding rebels in the North Caucusus.
I understand the Russian view quite well and I think they’re in the right. That being said, it tells us nothing about what’s gonna happen in the future. Putin might be in the right, but that’s different from ending up on the top when it’s all said and done.
Also, we’re not headed towards World War III. I think we’re headed towards a bunch of Cold War-type scenarios and proxy wars. You’re seeing a containment policy on not just Russia, but China as well. The problem with Russia and China is that much of their trade is land based, which makes the trade around 10-100 times more expensive (not a joke with those numbers).
With the containment policy towards China, it’ll be Japan, Malaysia, Indonesia, Veitnam, India, Australia, and a few other countries against China. In the case of Russia, we’re seeing the lines being drawn. The line being drawn in Ukraine is a HUGE advantage for both the US and Europe.
The reason you had World Wars in the 20th century was, IMO, because you had European powers that effectively ruled the world. So a war in Europe meant a war involving the world. Now, we’re not in such a situation and a small shift in the map creates huge differences in the way the wars are being fought.
War is very different now than it was in the 20th century. It’s becoming very surgical and precise. On top of this, with the way information transfers, I don’t think the kind of World Wars we saw in the 20th century are possible in the 21st.
That being said, we could see a world war, but I don’t see it happening at the end of this globalization cycle. It could easily happen at the end of the next one.
It’s this simple: the map needs to shift quite a bit. However, it doesn’t require a world war for the map to shift. China’s gone back and forth between periods of fragmentation and unity. I suspect we take a swing back in the other direction–particularly if the economic transition is as difficult as I think it’ll be. Autocracy and authoritarianism doesn’t work over an extended period of time.
Suvy:
Just wondering, don’t you think that some of your assertions are careless, unsubstantiated, overtly hypothetical, potentially damaging and careless as to motivations, actions, activities, and similar. I have seriously watched the global system, for a very long time, and feel that many of your political assumptions, and assertions, are not dissimilar to Hollywood plots, and often very counter to the interests of those that you would imagine. Further, I tend to think it is very careless, even, highly related to what you suppose to be beneficial, when is likely counter to what you suppose.
This organization doing this, in interest of US and China to do that, order of magnitude in this direction linearly and causally leading to this, which is beneficial for that. Said. Done, As if, then they are doing this and that.
I see it as reckless.
Suvy,
you can draw all the lines you want and where you want . If other side is ignoring them, what you are going to do about it?
@Suvy
Suvy you pontificate without considering reality of history as a catalog of repeating outcomes.
1. The entire world is on the verge of economic collapse. Historically when countries implode economically, they start an external hot war to turn national disgust into patriotic sacrifice which is what we will see in those countries which are unified internally (e.g. Putin has 80% approval rating, Japanese and Chinese are still patriotic to the extreme of being xenophobic). The USA instead will fracture internally as the disagreement over socialism (Obamacare, police state, etc) reaches the boiling point.
2. As the global economy implodes, the price of oil falls, North America’s fracking and oil sands become uneconomic (below about $75/bbl). One of the pillars of the USA remaining relatively stronger was its recent upsurge in fossil fuel production.
3. Russia and China are nuclear powers. Japan and Australia are not and the rest you mentioned have no military capability except India which has no incentive to enter a hot conflict with China. Russia has been flying their nuclear bombers close to USA’s West Coast over the past year or so.
4. Russia and China are doing deals with countries all over the world. They both recently inked deals for example in Argentina.
5. The USA is now approaching a totalitarian regime (with its true nature as a police state to be more pronounced after 2015.75 as the USA economy starts to head down).
6. I have no idea what is your justification that wars need to remain cold? That was only the incentive while debt and global commerce were expanding. Now that everything turns down, the incentive to keep war muted is lost.
Shelby,
Russia is natural resource heavy and relies on revenues of exporting natural resources and commodities to fund imports. It’s not sustainable to finance imports and military expenditure with natural resource exports. The USD/RUB is already almost at 50 and I think we’ll see it go to a 100 and well past 100. There’s nothing more dangerous than relying on undiversified exports (particularly in natural resources). Putin can have high approval ratings, but that doesn’t mean anything in the long run. Russia has a very large Muslim population that causes a lot of problems and when you fund massive military spending with export income the way Russia does, you can’t sustain it for an extended period of time.
With regards to India not wanting a conflict with China, I don’t think that’s true. I was in India earlier in the year and India really doesn’t like China. Ditto for SE Asia.
Speaking of Southeast Asia, that’s a possible region that could take off economically, but I think they’ll need American help–mainly for security and protection of their trade.
“Russia and China are doing deals with countries all over the world. They both recently inked deals for example in Argentina.”
Russia can sign a deal with Argentina, but tell me how they’re actually going to trade extensively with a country like Argentina year round? Russia doesn’t have any warm-water ports and you can’t ship everything via air (most major trade occurs via water because it’s way, way cheaper).
The US is doing deals with Vietnam, Malaysia, Japan, etc and India is doing a deal with Japanese investors to take Japanese capital to invest in Indian infrastructure. What do you think the TPP is really about? It’s not about free trade as much as it is creating a trade network of pro-US countries near the South China Sea and the region where the Indian and Pacific Oceans connect.
Also note that the Asian countries China has allied with are mostly anti-Indian (ex. Pakistan, Bangladesh) and they’re connected by land. Being connected by land doesn’t create the same kind of economic benefit that connections by water does.
The biggest problem with China, IMO, is environmental degradation. It’s something that places all of the costs into the left tail. One of the dumbest things China did is the Three Gorges Dam (primarily its location). It’s like sticking a damn in Missouri; it makes no sense. Now, the creation of the dam has created all sorts of environmental issues that couldn’t have possibly been forseen. It’s stuff like that IMO, that really makes countries poorer.
Shelby, you said:
“Suvy you pontificate without considering reality of history as a catalog of repeating outcomes.”
“1. The entire world is on the verge of economic collapse.”
Seriously? Are you seriously saying that I’m not considering economic collapse as a possibility?
http://suvysthoughts.blogspot.com/2014/10/worldwide-supply-demand-imbalances.html
“2. As the global economy implodes, the price of oil falls, North America’s fracking and oil sands become uneconomic (below about $75/bbl).”
Not really. There’s a difference between natural gas and crude oil. Natural gas prices have actually gone up and the US is set up to be a net exporter of LNG in the next 5-10 years.
I don’t think nuclear weapons really matter any more and I think in 30 years, they’ll be completely useless. War is gonna be fought from space pretty soon. I’m actually pretty sure that in a few decades, nuclear weapons would simply be dismantled by missile defense systems in other countries. We’ve already seen the very beginning of the technology present itself, but only the very primitive forms are being used.
I’d like to add one more note on falling crude oil prices and possibly falling natural gas prices several years down the line. These may affect extractors and refiners negatively, but supply-side deflation is almost always good. Just think about an economy like an ecosystem where you’ve got inputs and outputs. You use your inputs to produce your outputs. A drop in input prices must either increase profits, the amount of inputs, or the diversification of inputs. Supply side deflation means it’s cheaper for producers that produce anything not reliant on exporting natural resources and it’s good for consumers as long as their income doesn’t depend on natural resource prices. In a demand driven economy, falling input costs are almost always a really good thing.
This is a point I hate about the inflation/deflation debate BTW. Inflation or deflation aren’t always good or always bad. It depends on how the inflation/deflation manifests itself and the supply side structure of the economy that determine whether the inflation/deflation was positive or negative. It’s an error that I see made everywhere (primarily by people with an ideological tint in one direction or the other).
As a rule of thumb (at least for a demand driven economy), supply side deflation is good and supply side inflation is always bad. Inflation on the supply side leads to less real demand and lower output. Supply side deflation almost always leads to more real demand, more purchasing power, and higher production/output.
“A drop in input prices must either increase profits, the amount of inputs, or the diversification of inputs.”
Can I vote for D) A drop in price of finished goods, to maintain output price as a percentage of input price. So if Natural gas falls, so must ammonia and electricity prices (regional of course). If a business is looking for ROI of 15%, they will be looking for the same vs. lower input prices. Or their competition will.
@Jon,
http://armstrongeconomics.com/2014/11/21/the-state-of-the-world-forex/
His point is the Euro will not break apart and thus German bonds are overvalued on a speculation that won’t come true.
Shelby,
point taken. Thank you.
The Euro will break apart. It has no way of holding together. Germany can keep bailing out everyone else for <10 years, then they won't be able to afford it as their version of the "baby boomers" retires. In the US, the population demography isn't nearly as bad as Germany. Something's gonna give and I think in about 10-15 years, Germany ends up as the "sickest" country in Europe.
I also don't see how you think Japan ends up in a better spot than the US. I think there's a realistic chance Japan won't grow for another 50-60 years. Japan's population demography is one of the worst in the world (China is the only country I can think of that actually has a worse demography) and Japan imports almost all of its food and energy. Also note that Japan has less arable land than Connecticut. These are not good signs for the Japan.
I think Vinezi is correct. What the world needs is traditional religion. Almost all of the world's problems can be solved by traditional religions. Those countries that can adapt will do well and those that can't will get lost.
Thanks. I’m not familiar with Armstrong but Robert Shiller provides data for US equity and home prices since 1871 and 1890 respectively (see Robert Shiller Online Data on internet). It doesn’t take so long of playing with these data to detect empirically the most consistent cycles whether of short duration (business cycle) or long duration (generational) for these two asset classes. My fiction is based on that.
“I’m not familiar with Armstrong”
I think you would have needed to be in jail for a few years to know him personally. It’s been a long time since I have written a research paper, so someone needs to refresh my memory if there is a special way to footnote references by convicted fraudsters.
@Derivs
Armstrong agreed to a plea bargain after being held for 7 years on contempt-of-court, because he refused to hand over the source code of his computer model to the courts (the CIA wanted it).
You need to do some research. Armstrong is not a fraudster. He has laid out a lot of evidence and explanation in his blog about he was framed for the Republic Bank fiasco as a way to cover up the fraud at the NY money center banks.
Indeed statist academia won’t allow you to cite the truth, they would rather pontificate in ignorant bliss.
Sorry Michael for this blunt comment. I will leave it at that. Enough of this about Armstrong. It is up to each reader to decide for themselves.
Yea, right. Armstrong plead guilty to criminal conspiracy. You can even find his guilty plea online.
I wonder what he’s NOT telling us.
Note I have also published this reply to another forum.
@Suvy
Since you continue to pontificate without doing your homework, then you have compelled me to spend several hours of my scarce time to do it for you, because I refuse to allow you to slander an innocent man.
The intentional ridicule implicit in his joke about being promised pizza should have tipped you off about the sincerety of his “guilty plea”.
He was forced under duress to plead guilty.
http://economicedge.blogspot.com/2009/11/martin-armstong-forced-to-move-to-high.html
http://www.topix.com/forum/business/TS8IHELKS6G8FDV65/post2
http://armstrongeconomics.com/wp-content/uploads/2011/10/martin-armstrong-legal-update-092811.pdf
@Armstrong wrote:
http://www.bangkokbusinessbrief.com/2012/10/26/martin-armstrong-fraud-or-genius/
@Armstrong said:
http://armstrongeconomics.com/2014/05/29/is-the-new-world-order-cracking-apart/
@Armstrong wrote:
http://armstrongeconomics.com/2013/09/04/the-truth-about-solitary-confinement/
@Armstrong wrote:
http://armstrongeconomics.com/2014/10/22/entire-court-in-california-had-to-step-down-all-judges/
@Armstrong wrote:
http://armstrongeconomics.com/2014/11/15/judge-rakoff-blasts-the-injustice-of-america/
@Armstrong wrote:
http://armstrongeconomics.com/research/rule-of-law/goldman-sachs-v-armstrong/
@Armstrong wrote:
http://armstrongeconomics.com/1113-2/schiavoni-cohen-of-goldman-sachs-demands-source-code-of-model/
@Armstrong wrote:
http://armstrongeconomics.com/2013/02/09/indefinite-detention/
@Armstrong wrote:
http://armstrongeconomics.com/693-2/2012-2/the-rapidly-approaching-demise-of-japan-2/
@Armstrong wrote:
http://armstrongeconomics.com/2014/05/04/conspiracy-or-just-one-step-at-a-time/
@Armstrong wrote:
http://armstrongeconomics.com/2013/07/12/so-who-really-tried-to-blackmail-yeltsin-takeover-russia-nsa-cia-or-investment-bankers/
@Armstrong wrote:
Suvy please don’t waste my time again with your laziness. You are younger than me with more free time to burn. And you are the student. Please respect that reality.
Suvy,
you fundamentally misunderstand Russian economy and what is going on in the country. Can not blame you though. It is basically impossible to get reliable information about what has been going on in the country. Just look at all the bullshit West wrote about Russia and USSR, starting from Stalin time. ” ALL the people were scared of him and he ruled them by fear”.
Ja, right. Because of fear alone Russia was at par or even developed more advanced technologies than the West by 1953.
But citing McCain? Seriously?
Look, Russian economy does not sell oil to the West “to survive”. It might look this way on the surface, but it is not true.
Ruble can go to 500:1 against US dollar. Other than financial institutions, who gives a shit in Russia about it, long term ( up to 50 next years). They have technologies, know how and guts to survive without West. I think West cutting Russia off the oil and gas money now will be the best thing that can happen to the country. It is like telling your 18 year old smart kid: ” Ok, cut the crap now. You are a big boy now, go make something of yourself”.
Jon,
Russia doesn’t have technology and Russia’s always been poor and economically defunct. They don’t even have many cities and most of the economy is agrarian. Countries designed like that don’t have any wealth.
Almost all of the Russian economy is built on natural resources (and the current budget forecasts assume $100/barrel of crude). It’s not sustainable to fund imports by buying exports.
You can think of an economy as an ecosystem. You have stuff coming in and stuff going out. An economy is just that process–there really isn’t a whole lot going on other than that. Your exports pay for your imports and if you don’t have an economy that can effectively substitute imports (and thus diversify economically), it’s not sustainable in the long run. It’s that simple.
You can be rich and backward/undeveloped. What usually (always) happens to those countries is that they go back to being poor when demand for exports drops. Russia is no different.
Suvy, I agree with you that the USA was more diverse (not controlled by a few oligarchs) which made it more competitive. Unfortunately the socialism has taken over and the USA is losing the freedoms (to innovate) that made us the most competitive. As the USA economy turns down after 2015.75, the police state and socialism will become more prominent and start to drag even more severely on the economy and plundering the high tech sector that made the USA strong. For example, I guess you haven’t been paying attention, e.g. Obama is ready to regulate the internet as a public utility using executive power to do so bypassing Congress.
Shelby, here is what I mean about Armstrong.
“The primary mistake many make with the Economic Confidence Model (ECM) is assuming it should be a perfect model for the stock market, gold, or some other market. It is a global model and does not track any individual market. It is tracking the phenomenon of international capital flows.”
http://armstrongeconomics.com/models/7219-2/
And then,
If we look at the 2007.15 turning point the Dow peaked later in October. What peaked with the ECM to the day? It was real estate that was even reflected in the Dow Jones US Real Estate Index. That peaked with the model in February 2007. The Dow did the same, but later made a new high briefly and then fell. BECAUSE the Dow did not peak in February, we were able to forecast that the low was in place a new highs would be seen after 2011.45. Even Barron’s correctly stated that forecast.”
http://armstrongeconomics.com/the-princeton-models-and-methodologies-a-users-guide/major-v-minor-what-is-the-difference/
What he seems to be saying, if particular market coincided with his ECM model, then it is a proof that the model is correct. And if it did coincide? Well, the model is correct, it just means we are not looking at the “correct” market.
In case of US real estate, his 2007 peak seemed to be right. That implies to me that the real estate will rally ( according to his model) until 2015, and then will continue on to slide until 2033.
http://armstrongeconomics.com/models/7219-2/
I just hope if 20015 does not work out the way he predicted, he will not try to find the way out saying we are not watching the “correct” real estate market and his ECM model is still correct.
Let us wait and see. 2015 is not that far out.
@Jon
Real estate was the thing being pushed into a bubble by the government (Fannie Mae, Fed, etc). And this ECM is in a Private wave against government. You have to understand that in order to know which market to expect to coincide with the turn date[1].
Now Armstrong is speculating that Private assets such as gold and collectibles will also include USA real estate and stocks and they will continue to rise after the 2015.75 turn in the ECM model. He is observing for evidence of this “phase shift” as it calls it.
[1] @shelby
Thank you.
I think I understand better his ECM model now.
I completely disagree with Armstrong that “highest price for gold by 2032 is $24,000 (not a prediction, just the highest it could go). ”
This is ridiculously low. $55000 makes much more sense, Conservative speaking. I just think it is better to be conservative and be wrong on the low side of the estimate, so I stick to $55000 by 2032. Realistically speaking, $70 000 makes more sense. Will see.
I just hope Csteven will be around to admit on this blog that he was wrong by not investing in gold and instead making another investment mistake by loosing his money while storing them in worthless paper US dollar equivalent.
Csteven, I wish you a good health. Please stay alive and well at least until 2032. Just do not listen too much to Irish songs, Csteven. They are depressing.
@Jon
I suppose each of us has some confirmation bias, myself included. I caution you on being married to one asset class, because it can cause you to be defiant of the market and lose your shirt.
Armstrong actually doesn’t think its very likely that gold will go much higher than $5000. And I agree. Because for gold to go as high as you are predicting would require the world be plunged into a Dark Age. But in Dark Ages, gold loses its value and food becomes money. There is only so far you can go with hard money before society resets the monetary system to satiate and address the problem that was making gold move higher, or society is unable to do so and we go over the cliff into the abyss of another 600 year Dark Age where for example only rice was money in Japan. This is because velocity of money and thus GDP falls off the cliff when hard money is hoarded.
Also don’t rule out crypto-currency. This could radically influence the equation of the future monetary system. I am working in that sphere (as well as continuing to program mainstream social media applications) and I know more about what is developing behind the scenes that is not public yet. The key to making a crypto-currency really matter ties in with giving it a reason to be adopted as a currency (i.e. high velocity) by common people. Bitcoin lacked that widespread reason, as well as having technological deficiencies. I think the entire internet model will change (and is underway).
Jon
the Gulf Council Gold Dinari report of 2006, pretty much highlighted the gold issue, funny enough, I figured out numbers that would be required for Gold to go to and they are not far off yours.
You realize, that while some have been talking Gold for a while, Gold didn’t take off until the Int Institutions received permission to sell their Gold so they could raise capital for investing and lending in the developing world, in the late 2000’s, thereafter, Gold spiked, tripled, and you actually think it is a real market.
What Gold would mean, is a further break on development for the developing countries of the world. The EU, with its limits on budgert deficits, and stability in currencies and low inflation was considered a union as near like what Gold would be, and then the current crisis. So, still keep singing some old tune, you are way out of the discussion on this matter. Discussing the irrelevant, whetehr or not the global economy implodes.
You fail to see if, or without that happening, the US, could merely create the structures to attach more of its own demand.
DvD
Where did you get your 5.5 capital number?
The BEA provides Nominal GDP.
The Fed provides Total Debt, including Mortgage Debt, as well as Residential Asset Value, so you can deduct Residential Net Worth.
Bloomberg provides entire US Stock Market Capitalization.
As an order of magnitude, we have Total Capital = Total Non-Financial and Financial Debt + Total Stock Market Capitalization + Total Residential Net Worth.
DvD,
There is a way out- tax the assets. Your analysis does not mention the constraint of high government debt which adds another complexity to the equations. If Fed would not engage in QE’s the US economy would have fallen especially in the local states and municipalities. Deflation is not good when debt is very high. You need inflation and growth to help pay for the rising debt. I know that Fed is not ideal place to control the structural imbalances but the Congress is gripped with self created fear. So the answer is how to create inflation and wage growth?
Stan WROTE: “DvD, There is a way out– tax the assets.”
———————————
Yes, this is exactly what is being discussed in Washington DC right now.
After having tried innovative policies like TARP, ZIRP, QE, NIRP, SLURP & BURP, a consensus is slowly building that the US must now begin to tax USD assets held by foreigners (especially central banks of China & Japan).
The policy will probably be rolled-out after the completion of the Federal Reserve’s ongoing SLURP & BURP operations and has tentatively been named the Foreign Assets Recovery Tax (FART) policy.
Please let me know if you have any questions.
Fine, like Brazil, and then let them dump the “assets”, this should clear up masses of the confused about these things function, such that many, on all sides of this divide can come to clearer understandings, and representations of reality in respect to their deluded, clouded and gravely confused relations of these matters to their value driven ideologies.
Never mind who holds what assets and who dumps what assets. Let us focus on the core issue– QUOTE: “Beyond 2017, the CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades. That projected slowdown mainly reflects irreversible long-term trends…..”
https://www.cbo.gov/sites/default/files/45010-Outlook2014_Feb_0.pdf
It does not look good. The CBO is projecting 2% growth for the next 10 years and then falling even further over the next 20 years. Average growth over the next generation may not surpass 1.5%. This is a SHOCKING conclusion by the CBO.
In the 1950s, US saw GDP growth rates surpassing 7%.
In the 1960s, it could not surpass 7%:
In the 1970s, it could not surpass 6%.
In the 1980s & 1990s, it could not surpass 5%.
In the 2000s, it could not surpass 4%.
In the 2010s, according to the CBO, it will not surpass 3%.
In the 2020s, according to the CBO, it will not surpass 2%
http://goo.gl/gE7EY4
The pattern is LONG and CLEAR.
http://goo.gl/12lj49
What has been the overall tenor of the discussion and debate during the periodfs of slower growth?
What has occurred more broadly?
What were the issues that the economy, the society, the state of technology, everything, what was being confronted?
What is being confronted now?
What were driving memes, theories and notions driving the national dialogue?
Have environmental factors altered? How? Which? What is possible? What is needed?
You see, in all this, well before the downturn, we were discussing on Brad’s.
Then all that has occurred. Then watching all the confusion. then watching a mass of detritus washed out to see. The watching how all the things suspected, have come to pass. Then watching markets move as suspected. then watching dialogues finally start to get discussed. Then watching issues start to get discussed by the likes of Summers, and so many others, watching these things percolate out. Things are moving.
The only thing that is clear, is that we are where we are because of the success of the system, not the failure. We find a new global center, and more this thing forward, or there are alternatives. I move in the direction of Rodrik on this. Especially since because of the excesses of places like East Asia, or the recalcitrance of Europe, we see places in Africa, becoming post-industrial societies before the even industrialize. Obviously, this is anew stage, requiring far more understanding of systemic linkages, or these will be ring-fenced, with advanced countries having a great amount of partners which which to cooperate.
The is an abundance of development need.
Perhaps confusing, China in 2050, larger retired population than all OECD nations of 2005, in 2050, combined. So, that answers the nursery notion.
^Csteven WROTE: “…..on all sides of this divide can come to clearer understandings, and representations of reality in respect to their deluded, clouded and gravely confused relations of these matters to their value driven ideologies.”
——————————
Continuing the pattern set by Michael’s earlier article entitled “the Four Stages of Chinese Growth”…….
http://blog.mpettis.com/2014/06/the-four-stages-of-chinese-growth/
Here are the FOUR STAGES of growth in the United States:
Stage 1) Start to 1870: The United States turned into the World’s Largest Farm during its Agricultural Stage.
Stage 2) 1870 to 1980: The United States turned into the World’s Largest Factory during its Industrial Stage.
Stage 3) 1980 to 2020: The United States turned into the World’s Largest Shopping Mall during its Indulgent Stage.
Stage 4) 2020 to End: The United States will turn into the World’s Largest Nursing Home during its Retirement Stage.
http://goo.gl/bmOV9u
http://goo.gl/T7xa54
All comments, whether for or against, are welcome.
Well, I assume you have done your fair share of 2050 reports.
2050 Oil, Agriculture, Water, Energy, etc….etc….etc….
For the place to look at demographic issues….
Vienna Institute of Demography….
I believe, considering of previous history and trends, that nursing home insofar as US is misplaced….
One stat, 2045-2050……China will have a post 65 retired population larger than the entire OECD of 2005 (35 countries, f which the US is but 1, the largest one, but one…..
Then, advances in battery, local manufacturing, and really so many other trends…..I should imagine a return, and localization of many of the things that enabled the mall.
And if inequality were to continue to fester, do you suspect banks, pension funds, large capital and REIT’s to just watch their capital assets degrade.
For sure, the zeitgeist has altered and the weltanschauung will follow not so long thereafter. I actually feel quite good about prospects in the US, medium term. As I said to Suvy, a new center is forming, the Republicans that got elected, got elected discussing democratic issues. This will be a first, I should imagine, since the Blue Dog Democrats left the D>P. in the 1960;s. Something big is afoot.
And what is your answer to your last sentence?
Who would you be referring to?
I wandered what had happened to you.
DvD was referring to the last sentence of STAN, who wrote above: “So the answer is how to create inflation and wage growth?”
Japan has been trying and failing for a long time. Well? Do you have an answer?
I think that Japan might want to be more open to Immigration, especially from SEA nations. Perhaps a guest worker type program.
I think that Japan should create a Romer City in one of the Southern Island, depopulating cities that is ringed off from the rest of the geography, enable investors to come, different set of rules (perhaps New Zealand or Canadian judiciary), this would be a first start.
They might also want to create a rural re-population program, again from some of the more populous SEA nations, for a fixed period of time, X number of years (20) let’s say with some process for greater integration based on practice of local language, culture, traditions, etc….
Who are they gonna be open to? The Chinese? The Koreans? They hate both of them.
If you have a certain, very specific, view of society, it’s very difficult to just get anyone to come into your society without creating risks of social unrest in the future.
There is no way out for Japan. Japan will default, the Yen will crash, and expenses will skyrocket for Japanese citizens.
Another problem for Japan (it’s biggest problem) is its geography. Japan imports almost all of its food and energy. If you increase the population size, you’ve got more people to take care of. That means you’ll need to import more food and energy.
BTW, Japan is no longer in deflation. Japanese households are expecting 3% inflation next year. Japan has staved off deflation, but the massive debt overhang has created a situation where the productivity from the spending and “investment” made by the government don’t cover the real cost of transferring resources. If the Japanese don’t eliminate the debt overhang, they will not grow.
The reality is that Japan has entered a stagflationary phase. The country is seeing higher inflation from rising input costs while growth has been dropping. They can use monetary policy to increase growth by a little bit in the short term, but every single use will become less effective than the last. The only solution for Japan is default, which will happen after (and while) the Yen goes to 0.
@Suvy
Japan is unique not only for having the highest sovereign debt-to-GDP ratio of any major nation, but also for that debt to be nearly entirely financed domestically. So in theory they could default on the debt (and/or increase taxes and decrease government services if politically palatable) without defaulting internationally on the Yen. The Yen might eventually rise in value because what would be remaining after implosion is a higher ratio of exports to imports, as well capital might rush in to invest in the much more competitively priced wages as labor supply would increase. In any case, I agree the burden is going to fall on the Japanese citizens in terms a greatly reduced standard-of-living.
Japan, China, and Korea are likely to resort (with the Senkaku a.k.a. Diaoyu islands as one pretext) to the old pattern of mutual war to make the unavoidable economic implosion to politically palatable.
The global implications of a collapsing periphery (i.e. all nations except the reserve currency USA) is that all capital is being driven into the dollar, and this dollar hegemony means the USA laws will effectively govern the world, because for example if your country doesn’t cooperate with FATCA and fledgling plans for internet licensing then the USA will blacklist your country or company. Essentially the same outcome of rising protectionism that worsened the Great Depression and lead to WW2 is repeating.
We are headed into the typical scorched earth paradigm (e.g. World War 2) that always throughout recorded human history exhibits at the times of peaking socialism. If we make it through to the other side, the balance of power will have shifted from West to East[1] and from multi-national corporations to individuals (by 2032), but the hell we have to go through before we get there is daunting.
[1] http://armstrongeconomics.com/2014/08/05/the-shift-from-west-to-the-east/
http://armstrongeconomics.com/693-2/2012-2/we-are-on-the-verge-of-a-very-profound-systemic-global-meltdown/
http://armstrongeconomics.com/2014/08/19/crisis-collapse-in-world-capital-flows/
Shelby,
I don’t agree. The map will change, but I don’t think we’re near World War right now. I think you’ll just see proxy wars. There’s more than one way to wage war and it doesn’t have to be with actual armies. It can be done with insurgencies and militias. I suspect Japan, India, the US, and a few other countries start funding insurgencies in China.
Also, war is fundamentally different in the 21st century. War is gonna start being fought from space. It’s not gonna involve large populations like it did in the 20th century (unless we’re talking about proxy wars). Instead, it’ll be almost like surgery.
To use historical data to predict the future is insane. It might look good on the backtest, but you can always find data that works that way. In complex systems, using such cycles and data is basically useless.
Suvy I already provided links on this page that showed the cyclic model since the 1980s has been accurately predicting events even a decade into the future If you are truly rational and believe in the scientific method, then you must adjust your wrong assumptions to the reality that has been observed and start performing your own tests with the model to continue to verify it predicts the future or disprove it.
Most readers and people in the West believe war and pandemic can’t touch them. The model says they are in for a nasty awakening over the next 10 years. Tell your assumptions about the nature of war to the headless and limbless corpses in Ukraine or Iraq.
You love to predict economic hardship for others but don’t think the USA will be harshly affected. Tsk, tsk.
“Suvy I already provided links on this page that showed the cyclic model since the 1980s has been accurately predicting events even a decade into the future If you are truly rational and believe in the scientific method”
Yea, methods like that are inherently unscientific. You can show me all the “evidence” you’ve got, but this is just backtested BS. There’s ZERO statistical validity to such nonsense.
“You love to predict economic hardship for others but don’t think the USA will be harshly affected. Tsk, tsk.”
Give me one time I’ve said this. What I said is that it won’t be as difficult for the US as it will be for others (for many good reasons).
Please continue to keep placing words in my mouth and distort the statements I’m making.
@Suvy
You haven’t studied the implementation of the ECM model so you have no way of knowing what statistical models are used. I haven’t either, because it isn’t open source (yet). But Armstrong has said astutely that all the economists are using statistical models with data that only goes back less than 100 years, so their models can’t possibly be valid. That means he (after spending over a $billion in today’s money) on collecting data since Mesopotamia has found that that the correct statistics requires a very long sampling interval.
I guess you haven’t noticed how much more developed the police state is in the USA (with a 99% conviction rate and paramilitized local “peace” officers) as compared to any where else, even communist China has a lower percentage of the population incarcerated.
@Suvy
Since Michael didn’t accept my prior reply on your assertion of “ZERO statistical validity”, let me phase it in a more concrete manner. Armstrong claims he trained an A.I. model with $millions of data (or $100s of millions if inflation adjusted to today’s dollar) that he acquired dating back from 1000s of years ago to present. He for example spent $10 million collecting ancient silver coins to construct an accurate chart of silver coinage during the Western Roman empire.
A.I. models are typically trained with a combination of methods including neural networks. A neural network is inherently a statistical model of the data it has been trained on.
Because I’m one to believe convicted felons on claims of how much money they made using their “models”.
There’s always a tradeoff between precision and accuracy. Anyone that says otherwise is straight up lying to you or using something they don’t understand.
I agree with you on the US incarceration problem (especially who it targets). It’s largely a result of the drug war, but that’s got little to do the structural advantages of the US (primarily geographic, but others exist as well). No matter what idiot you’ve got running policy, you can’t screw up having the largest navigable waterway across the Greater Mississippi Basin or bordering two oceans on two different sides or having some of the world’s most fertile farmland in the world (Kansas).
@Suvy
He did a plea bargain to get out of jail. He was never convicted with evidence. In fact, among other numerous anomalies in his favor, he even confronted the corrupt judge in his court showing proof the judge was changing the court record, and the judge couldn’t deny it. You have a habit lately of making proclamations without sufficient understanding of the subject matter.
You apparently do not understand mathematically what the terms mean.
Precision is related to the standard deviation and accuracy is a function of the sampling rate and sampling interval, because the Shannon-Nyquist theorem informs us that aliasing error (i.e. loss of accuracy) occurs if we sample below twice the highest frequency and for less duration than double the longest-tail.
So precision is a function of the variability of the data set. And accuracy is a function of the sampling quality. Armstrong’s model has sampled massive amounts of data from the entire recorded history of mankind. The precision of the model is dictated by nature. Apparently nature has some very precise cycles around the movement of international capital flows and the business cycle.
It wasn’t until after the massive DHS grants following 9/11 (Federal Dept of Homeland Security) that so many local law enforcement departments started to obtain heavy artillery such as armored tank-like vehicles. And it is well documented (Gary Webb, Oliver North, etc.) that the drug war was another massive corruption involving the government, HUD, etc, but I won’t detail that in this blog (please don’t debate me on that minutiae here, email me if you want).
Just look how the Perónists have bankrupted Argentina, once one of the richest countries in the world with a similar massive swath of fertile plains (they even have the tornadoes).
But you are way off the mark by targeting physical resources and transport. That is all very low value. We are in the fledgling knowledge age and all high value is created in high tech. The old resource based and industrial economy is peanuts and will become ever more so. So this NSA crap and now the drive to regulate the internet as a public utility is going to kill the high tech goose that laid the golden eggs. Did you notice India just orbited Mars with a project cost of only $74 million. Reality check your hubris.
I’ve dealt with jackass cops/cops with their head stuck up their ass plenty of times (for the record, not all cops are bad cops).
I’m aware of what accuracy and precision are (I’ve done a lot of work in computing and numerical analysis), but if you’re using a model without first bounding the error, I don’t take the person seriously. It’s just a model dude and simpler models work MUCH, MUCH better than complicated model. Usually, the use of complicated models doesn’t impress me and turns into a red flag (it makes me think why do these models need to be so complex to get such results).
One of Argentina’s problems was that they were relying on undiversified exports to pay for key inputs. When the demand for their exports dried up, Argentina got screwed. Argentina was screwed well before Peron. Basically, Argentina had the same problem that Russia does now. The US, on the other hand, produces almost all of what it consumes.
Stan,
What would be your answer to your last sentence?
Thank you
According to Csteven now,
Japanese will soon allow immigration.
What a great prognosticator that he is.
Hmmmm….you need to check with the optometrist, not said, the question was how, but then Japan does already have guest worker programs with many SEA nations. So, not going to allow, does, no path to citizenship but many people in business, education, finance, entrepreneurs, living in Japan for decades, otherwise. So, not an allow, does, but should do more, and even forgive sovereignty on a depopulating Southern city, and create a Romer city, to kick-start domestic industry. I am a big fan of Romer cities for politically, socially, and culturally ossified regions.
“peak of the 309.6 year civilization wave in 2032″
Decimals. That’s an awesome display of hubris in the powers of predictability. I can’t even figure, within 20%, how long it takes to get to the airport in traffic.
An illuminating post.
MP wrote: “4. Monetary policy. The transmission of monetary policy should be consistent both in timing and effect so that interest rates reflect the needs of the different parts of the economy. This is always hard to do . . . .”
Not just hard to do, I should say, but virtually impossible. Unless a state is very small, like the Netherlands, perhaps, or Singapore, the constituent economies are too varied and and proceed at too different rates of development. It’s like bidding everyone in town to wear the same size pants: a few will find them just right, but for the vast majority, they will be either too tight, thereby restricting their growth, on the one hand, or, on the other, too loose, encouraging wasteful and excess poundage.
Within the Eurozone, Spain serves as a convenient example: between 2000 and 2008 it was a victim of the latter; between 2000 and 2008, of the former.
In other words, what may have been good for Germany’s economy, was not at all good for Spain’s.
It is also, unfortunately, the case that many people mistakenly think that the problem could be resolved if the Eurozone split into its original states and Germany, for example, reassumed the use of the Dmark. It is important to see that this only reproduces the original problem at a new level.
In fact, Germany would still be unable to administer a monetary policy suitable for all parts of its economy. A policy good for Munich, for instance, would not be good for the Rhineland, nor for Berlin, for the simple reason that the economy of each, growing out of its own peculiar circumstances, develops in a different way and at a different rate from the others.
To reinforce the point, when we add to the interest rate the influence of the currency’s exchange rate, it is even more apparent that a common monetary/exchange-rate policy cannot be equally suitable to all parts of currency zone.
The proper remedy, accordingly, will lie at the level of the city/regional economy. As a start, Germany could create a new currency for its most productive region: the Munich metro economy. That way, Munich would be in a much better position to administer a monetary policy suitable to its peculiar needs, while the other city-regions, in turn, would enjoy a policy more in tune with theirs.
This is just another way of saying that each economy requires the proper feedback to grow to the best of its abilities.
This is to the ATTENTION of Michael Pettis & DvD, both of whom are ‘debt worriers’. Please see the following article in the Financial Times about China’s rising debt-service burden:
http://www.ft.com/cms/s/0/811dc582-59de-11e4-9787-00144feab7de.html
QUOTE from article: ” Total Chinese debt has virtually doubled since the financial crisis to around 240 per cent of GDP, according to Fitch, the credit rating agency. This means that debt service charges, assuming an average interest rate of 7 per cent, are set to reach about 17 per cent of this year’s prospective GDP, or $1.7tn …..xx…..
…..xx….. More germane to China, though, is the drag that such debts exert on domestic dynamism. The burden of debt service – measured as a proportion of GDP – remained well below the country’s growth rate during the blistering period of Chinese “catch-up” growth from 1980 until 2009. Now, however, it stands at more than double the 7.3 per cent growth rate that the economy recorded in the third quarter.”
QUESTION: What if we apply this analysis from the Financial Times to the US? How would the numbers look? Is the “burden of debt-service” “exerting a drag” on “domestic dynamism” in the US as well? Or are these theories only applicable to China?
It depends whom you ask.
The plain logic will tell you that the US is in far worse shape than China.
But if you ask Csteven, he will tell you otherwise. You take your pick.
Ok, since you stated….
Population (85%)…….India and China’s population is crammed into an area not as wide as the distance from the Atlantic Ocean to the Mississippi
Water, Energy, Food Security, Natural Environment….need I?
Human Capital Formation….whaddya think?
Social Capital Formation….whaddya think?
Outlet’s as to immigration, historical trends of easier assimilation than other places enjoy.
Had you merely lived here for the money, sacrificing more aesthetic pleasures for material fulfillment?
I live near a city, well-known for a finance-related industry, just drove past it the other day, hadn’t even noticed, but near to an area where they have built multiple entertainment, and living facilities over the past 2-3 decades, they have just put up 6 or 7 new buildings, all household names for finance, and related services, quite nice. A rather successful DC centered hospitality group who manages global brands (hotels, franchises, and is 20 years old), is opening new facilities next door, the quasi-public non-profit, along with city housing, LIHTC, and private funding funding leveraged thereof, has put up a few residential high-rises, the town has commercial high-rises, a population of 70,000 in the city, and millions within 50 miles, the suburbs, slowly, over the last 6 years, planning over a decade or three, it builds out, with a diverse array of partners adding value, minor leaugue sports teams, etc….
Toffler told us in the 1980’s-1990’s of the rise of much of what we see today. The only books I could buy in the 1990’s, in Korea, were his books, funny enough, and cheap Dover classics, I think he will be right about micro-manufacturing as well. GE seems to agree with their approach to manufacture of Smart devices. Google buys Nest for 3 billion, sells for a couple of hundred (but even they have PhonBlocks), GE, is manufacturing small, cheap and close to market. Rise of craft markets, etc….Where most trade is in intermediate goods, the future will see more local manufacturing of both intermediate goods, and high customization, tailored products. This is obvious, the engineering meme dies, along with it the associated philosophical principles (that influence zeitgeists and weltanschaungs). Redwing boots, Bauer hockey Skates, Roller Blades, Bicycles, Zara women’s fashion, the list goes on, and on…..Think the body scanners at airports, now see close to market, quicker than JIT, tailored options. They have been doing this since the 1980’s, and it gets much bigger. DIY, Makers, 3D (Airbus, Ford, GM, Boeing, Rolls Royce, turbines, and on and on, and on)
I liken some still being grasped to, as if a person hanging to a cliff in an old western, these perspectives as ridiculous Bloomberg or Forbes noise, not dissimilar from Raps inability to find something other than bling. However, Snoop Dog is spinning at clubs, and Gross just lost his 200 million a year.
Of course, it is easier to see that Millennials are telling us that something else is happening. They grew up with Social Security heading for bankruptcy, and during multiple crisis.
Look around restaurants are becoming brew-houses, everything is starting to be made on premises, fusion, fermentation, hand cut fries, charcuterie, cheesemaking, craft distilleries, 12 yer olds making robots, toys where you can make your own working micro-chips, it goes on and on.
Was at a place last night, that had 120-150 craft made beers, they cost more, and people are paying for them. Are things getting better? (what? For whom? What does better mean?)
Look around at all the new places that are forming, restaurants, new themes, new models, new foci are being built everywhere. People are coming back in. i follow these things, not ideological trash of barely processed and poorly translated philosophical principles of misquoted writers from previous era’s. From Bread, to Sausages, from New Types of Steel to new models of manufacturing, from changing political bases and interests, things are moving.
Do I think putting on the breaks, taking foot off the breaks, in institutionally weak societies, that have been trying to build institutions, while having very weak centers, who had to bloat assets, print money, and malign the trajectory of growth in their economic model, becoming more reliant on investment, printing money, asset bloat, channel pumping, false revenue creation, in a system that has recently been bloated to such an excess that it has multiple YEARS of inventory across as many sectors and product categories as can be imagined, can be likened to 3 decades of slow build-out in a city of 70,000, or the ongoing technological and material science advances, that are inevitably translating into greater material capabilities of average humans on a very broad scale, are comparable, not in the least. I hope for a better China.
Mere debt, well, China’s growth, corporate growth is an access to capital, finance scheme, they don’t have real revenues, but do have rising debt. Property loans are linked to prices paid for land, higher land values, more money for local governments, as higher land costs translate to higher loans for developers from branches of local government influenced banks (where most make money on the spreads in the financially repressed system, although this has lessened, which is why all factors point to Chinese growth numbers, at present to being much lower than stated, always a problem, now, likely highly fictional).
Michael has recounted that some believe that China’s GDP (overall, not mere growth) might be 30-60% over-stated.
Does that change your perspectives on debt?
All of this has been discussed. China has been positioned as a point of hope for peer developers, but it is, rationally, materially and otherwise an impediment to other peers development, and an exacerbating factor on others development (as it altered its development model in response to rising consumption more than a decade ago, it altered the development path of poor {and wealthy} commodity producers, and as it is forced to alter its model, which pushes the boundaries of the possible, it will likewise do so in reverse)
So, ….., please, provide the plain logic of your refutation without goods, bads and the ideological talking points of some interest group….mine is systemic development
Csteven does not seem to think the US highest debt total in the world is such a big deal.
He thinks 12 year old making a robot is an example of “systemic development”.
He thinks $86.8 trillion liability is a wrong estimate.
Ok, so let us hear from you, Csteven, a better estimate for actual liabilities of the federal government.
Jon
Exactly figure is a long term estimate, with no discussion of revenue, where you talk as if the lights will be turned of tomorrow without paying the bill.
Further, US liabiities are in no way or fashion outsized, nor the highest, proportionally, to any other, or in this do we prefer to see EU countries as single countries as opposed to a Union. If one were to take an equal proportion insofar as population, you would find a similar, if not gravely degraded situation. Same Japan. Take Russia, which has only recently, with very high commodity prices seen the institution of more generous social security programs, and rising wages ( a short term experienc, that is likely, along with political adventurism, bankrupting the economy, where 100 oligarchs own 35% of the wealth, where in america, 3,200,000 own 30%; a similar proportion in russia would be 1,2 million, rather than 100 oligarchs). This as their foreign exchange reserves before sanctions was 40% less than their foreign loans.
China’s Social Security net, may be weak, but as weak as it is, what do you suspect it to be, will be? (2045; larger population of retirees than entire US population of 2050, and more than all OECD nations retirees added together at time). Or will they be able to bloat their imbalances upon world to accommodate for this? Then, India, Indonesia, South East Asia, South Asia, large populous Africa? And you blather on about US.
have = (social safety net)
If not have, won’t have, then similar, wipes away the comparison, or presents the possibility, such that if not have, and a lessor worry, and can’t sustain, and not have (for US), then if not worry in case where not have, not a terrible worry where can no longer have. Or is there something larger to be concerned about, systemically and globally, but you, lobbyists, ideological zealots, want to harp on supposed dfficullties in US. Which, of course, the dialogue changed at least a decade ago, as this is such an old story, and others started to realize what they were facing, but you resurrecting?
If you want to look who has done better, than Poland and Chile. But, you don’t know enough to know that, both look well under fairly good growth experiences, and you only know the irrelevant discussion points, of lobbyists and extremist oriented, ideological, political and social pundits; coupled to the untested philosophical assumptions of depression era Central Europeans.
A 12 year old kid, not just, nor only, nor a small matter, or the 14 year old with the 6 cent test that replaced a 1000 test, or a very large percentage of all the innovations that you carelessly take advantage of.
Again, a proposed liability, is a proposed liability, the eventual experience of such a projection, the development, subject to forces.
Look at Suvy, he grew up hearing Social Security and US. Elsewhere, far more dire situation. Where? Where more generous? Where non-existent?
In all this do not forget, that in a mere 20 years, the world population is 66% larger? And you hope to red herring on liabilities in the US? Please, get a clue?
So, Suvy, Social Security, liabilities, deficit, bubbles, lessening opportunities (supposedly), free trade (an obviously useful thing, an assumption).
You use word estimate, and then act as if presently due, as if estimates can’t change, or aren’t subject to forces that drive the estimate, and fail to note time frames. You said presently due, that is what they owe, and, I suspect, hope to hype, and continue the same long-term technique of those with an agenda, and hold the same vitriol, as you switch from surety to estimate, and then make it the task of those who disagree with you, to argue as if estimate is real number, and static, where the number is meaningless without comparison to revenues, time frames, and potential to see how altering forces, will alter estimates. I have been looking at CBO estimates for decades, and understand how they are presented, so please, jettison the surety (required of zealous pundits) .
One thing without estimate, is that faced elsewhere, is far more difficult to overcome, either in servicing, or creating, and with the creating (along present state action, and economic policy preferences and without a new global condominium), I suspect we will see a world that grows in imbalances. Likely one that sees a difficulty in maintaining a cooperation as it does long before. In such a case, I see strengthening for the parties you least imagine, and great difficulties elsewhere.
These are very difficult issues,in the trajectory of the world. Your focus on the US, belies the rather more grave realities faced, elsewhere and globally. The US will be able to apply remedies when and where necessary. The emphasis on US conditions, acts as a break on others self-reflection on more severe conditions elsewhere. Both in the servicing of existent systems, and on the evolution of non-existent systems.
We use the USD as our daily currency, the government could pay its liabilities, via a process of monetization (to meet debts and obligations; this is not dissimilar to what has occurred in recent Growth miracles, but for the creation of assets, and their bloat). Many decision-makers who could have never imagined saying such, are now saying such. While Suvy may worry, he needs to take with a grain of salt the vast slew of assumptions, that have been repeated during his youth, of images, and belief constructs, that have held such a consistency in the popular dialogue that they just make sense.
The world will still spin, and I would spin in a place as abundant as the US
(natural-tech, socio-economic, political-legal-institutional capital).
Wherever you live, start a massive campaign for them to switch to Gold, and jettison the dollar, I hope that for you.
This pertains to Michael’s bet (linked below) with The Economist:
http://www.economist.com/blogs/freeexchange/2012/03/china-will-overtake-america-within-decade-want-bet
http://goo.gl/9D0qD8
~~~~~~
BACKGROUND:
1) From 1984 to 2014, China grew at an average rate of 10%
2) From 1984 to 2014, the US grew at an average rate of 3%
http://goo.gl/Hmng7F
TODAY:
1) China has an economy (GDP) of about 10 Trillion$ in current USD
2) The US has an economy (GDP) of about 17 Trillion$ in current USD
http://goo.gl/Obgxky
Effective Currency Correction Trends (including exchange rate & inflation differential):
http://goo.gl/qo0QGT
~~~~~~
FUTURE SCENARIO 1:
1) China slows down to an average rate of 3.5% over the next 10 years due to REBALANCING
2) The US continues to grow at an average growth rate of 3% over the next 10 years UNCHANGED.
If this happens, then 10 years from now:
1) China will have an economy (GDP) of 14 Trillion$ in today’s USD
2) The US will have an economy (GDP) of 23 Trillion$ in today’s USD
Effective currency correction needed over next 10 years for China to match US economy in Nominal USD: 65%
~~~~~~
FUTURE SCENARIO 2:
1) China slows down to an average rate of 3.5% over the next 10 years due to REBALANCING
2) The US slows down and grows at 1.5% over the next 10 years due to DEBT-LOAD DRAG.
If this happens, then 10 years from now:
1) China will have an economy (GDP) of 14 Trillion$ in today’s USD
2) The US will have an economy (GDP) of 20 Trillion$ in today’s USD
Effective currency correction needed over next 10 years for China to match US economy in Nominal USD: 40%
~~~~~~
CONCLUSIONS:
1) If China SLOWS to 3.5% average-growth due to rebalancing while the US continues its 3.0% average-growth UNCHANGED, then the 65% currency-correction needed for China’s economy to match the US economy in nominal USD within 10-years is ALMOST IMPOSSIBLE. In this event, Michael will WIN the bet.
2) But, even as China SLOWS to 3.5% average-growth due to rebalancing, IF the US ALSO slows to 1.5% average-growth due to its debt-load problem, then the 40% currency-correction needed for China’s economy to match the US economy in nominal USD within 10-years is POSSIBLE. In this event, Michael may LOSE the bet.
Where would all the other blog participants want to place their bets? With Michael or with The Economist?
Id place my bet on scenario 3: japanization. Unsustainable debt dynamics and ageing societies will crush both, China and West. So whats in store are decades of no or very low growth. Only a technological breakthrough could change this, but theres none in sight.
And in that case it will be meaningless which economy is larger, because both(all) will be inward-looking in an increasingly protectionist world.
It’s a lot better to have a falling population than a sharply rising population, in many cases. You need to keep and preserve your wealth. Sometimes, that means you have less kids. They just need to design a system that can handle falling populations. In the post-industrial world, it costs lots of money to raise children and accumulating human capital can take time. This means we’re likely to see fertility rates drop across the board once they hit the post-industrial stage.
The US is the only country with a rising population, but most of it is from (legal) immigration. Fertility rates are falling in the US and will stay so until the economy picks up. That being said, some states are having high fertility rates while others have dropping fertility rates. I think the US will end up being pretty robust to population shifts because the country is barbelled, welcome to immigrants, and can sustain a larger population.
I agree with your first point that falling population does not need to be a problem by itself, it´s the fate of every single country on this planet after all. I know of no country that can magically increase its size, so after reaching the saturation point, population will start falling everywhere. It´s just that Europe, Japan and China reached this point sooner than others, owing mainly to longer history, i guess. It´s also true that US, compared to Europe, still have some room for immigration, ie population increase, while Europe(and Japan, and China) are esentially full.
India is overpopulated too, by the way, and should have adpoted one-child policy long time ago, as i see it.
As for near-future prospects for US, I would be more cautious though. Since the start of the financial crisis in 2007, US federal debt rose faster than nominal GDP in every single year. And we are, supposedly, in good times, what happens when next recession starts? US has clearly unsustainable debt dynamics just like any other big economy.
^^PeterL WROTE: “I agree with your first point that falling population does not need to be a problem by itself…..”
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A falling population is a problem in the Capitalistic system if it leads to stagnation (i.e. GDP growth = zero).
By definition, capital needs a ‘return’. If there is growth, then the incremental capital that is always needed in an economy can get its additional return from that growth and still leave something (however little) for an increase in wages. In other words, even though inequality might increase in the capitalist system, growth allows the poor to ALSO be better-off than before. To put it another way, it is the growing of the pie that allows capital to carve a larger slice for itself even as the labor slice ALSO grows. As long as growth continues, the argument that it is not a zero-sum game is valid and the traditional ‘win-win’ political justification of capitalism holds true.
However, if growth stops, then capitalism will become ‘cannibalistic’ and system will become a true zero-sum game. Capital will take a larger and larger slice of a stagnant pie, while labor will get a smaller and smaller slice of that same stagnant pie. In effect, the dreaded condition in which the rich get richer and the poor get poorer will then come true. Under these circumstances, it will become politically impossible to justify capitalism any more. Therefore, capitalism itself will then come to an end. A country facing a situation like this will be entering into a post-capitalism stage, about which nothing is really known today. It would be a giant leap into the UNKNOWN.
Therefore, we need to keep a close eye on countries in which the population is falling to see what happens there. This is why Japan is so interesting.
What matters is the ratio of young to old.
One child policy is the stupidest thing you can ever imagine and will lead to massive problems down the road.
What matters is the entire dependency ratio, but age dependency, insofar as old age, has been stressed because of global costs realted to baby boom retirement, the youth (0-14; 0-18) ages are similar, a fixed cost that need to be considered by policy makers, investors, development professionals, etc….
There are impacts on society, not just related to aging (pensions caring for, time, etc) but impacts from young age (raising, nourishment, human capital development, education, health, etc…)
This is another case of how dominant dialogues, skew the realities at play in these matters, and often, more tightly focus reviewers, on issues, that are only a portion of the story, often not the most important one.
Of course some globalists will heighten African population growth as portending a great site for future global growth (despite South Asian growth)….but forget the costs of poor urbanization, political instability, costs to nourish, raise, educate, impact on natural environment, increased susceptibility to spread of contagious diseases, and pandemics, impact on the ability to create 2 wage earning households, impact on women more generally, and their ability to transmit, beneficially impact the lives of multiple children, need for intervention, etc, etc, etc..
@Vinezi Karim and @Csteven,
This is a post about the Europe discussion that we were having earlier. I forgot that I did a blog post on this exact topic. This may be something you guys wanna look at. I talk about the debt problem in Europe and how bad the problems actually are. Half the continent is in a depression with the other half in a massive bubble. It’s a terrible situation where the bank assets are several multiples of GDP.
http://suvysthoughts.blogspot.com/2014/08/europes-conundrum.html
Suvy WROTE: “I talk about the debt problem in Europe and how bad the problems actually are….”
——————————-
I agree with you. Europe has huge problems.
Suvy
this is one of the lessens of the development, the overuse of the development model, while it has become fashionable to criticize the Washington consensus, it is sure that the failure of industrializing nations to evolve, socially and politically, inhibits a broader based prosperity in these nations, and this is exhibited by their continued reliance on the banking system and banking, rather than creating transparency, openness, the development of a more diverse array of financial assets that can be relied on and trusted and traded, where the banking system is far more easier to manipulate and bloat by social and political elites. This si the story from present day Europe to East Asia, and elsewhere.
Im sorry, but why would be corporate financing via stock market superior to banking loans? It´s just a matter of choice. The main reason why corporations in Europe choose banking loans for investment financing is their size. There are more small and medium size companies and they simply have no access to bond markets.
Anyway, it´s a misunderstanding that European banks are full of government bonds. They are not. Eurozone banks have assets of around €30 trillion, while the eurozone government debt is around €9 trillion, much of that held by pension funds and some by foreigners. Banking sector is not Europes Achilles heel. Excessive spending and public debts are.
Did someone also forget to tell you that capital ratios in Europe are, on average, less than half of the US banking system while the banking systems are several times the country’s GDP. The smallest shift in those assets would completely wipe out the entire capital base of the European banking system. Whether you’ve got shocks in the private sector or the public sector, any one of those shocks will eventually send the European bank equity to ZERO.
If I had enough capital, I’d be short almost every single one of the European banks. Unfortunately, I don’t have capital to take such a position.
Suvy,
Your comment on comparative bank capital ratios in Europe and the US is formally correct. But, it is almost impossible to make a like-for-like comparison in this matter because of difference of structure (GSEs in the US, not in Europe ; higher level of credit intermediation via the banking system in Europe vs. higher share of the bond market in the US) and differences of accounting standards (GAAP vs. IFRS, different approaches of netting or not gross derivatives exposures, etc).
At the end of the day, one can only observe from recent experience that thousands of pages of banking regulations have totally failed to prevent a severe credit crisis on both sides of the Atlantic and one can only be skeptical that thousands of additional pages will be effective in preventing the next credit crisis.
The intricacies and technicalities of bank capital regulations, while necessary to inject some discipline into this inherently unstable sector of the economy (assets longer dated than deposits which are available on demand, hence latent liquidity risk), easily obscure a simple yet profound reality: the more total debt values rise relative to production values, the less likely it is that cash streams generated by future production will be able to service the debt, both interest and principal. Relative debt levels are about the same in the US and Europe and so the likelihood that future production cashflows will be enough to service it is also about the same, ie. small.
In fact, the biggest advantage of the US could have been the larger share of the bond market in credit intermediation as it is inherently much more stable (the “deposit” funding the “loan” is of the exact same maturity so that run on the bond market should be impossible compared to run on the bank) but then US capital markets regulation makes it possible – and it is in fact widespread – to speculate in longer dated bonds with on-demand funding, so this benefit is in fact greatly diminished.
At the end of the day, bank capital ratios – while important – are only of secondary importance to the overall relative debt load. The whole bank capital adequacy edifice was down in a matter of days in 2008 on both sides of the Atlantic.
“At the end of the day, bank capital ratios – while important – are only of secondary importance to the overall relative debt load.”
I agree with you here. What’s the opposite side of a banking asset? A banking liability, right? So when you have countries whose banking systems are 3-4 times their GDP, that’s a very effective way to measure the total debt burden.
I’m just looking at it from a fragility standpoint. They have a much larger banking system that holds much less capital. What does that mean? It means that there’s less of a cushion of error while the costs of recapitalizing the banking system could be much higher in the case of a negative shock.
If we take a country like Iceland when shit hit the fan for them, their banking system was over 1000% of their GDP. If your bank assets move 3% in that case, you’re basically screwed. Sure enough, something of the sort happened.
Currently in China, the bank assets/GDP ratio is around 4-5 times GDP for a country that’s not even developed. That’s red flag number one (out of many).
Agree. But the fragility of the credit system is not confined to the banking system. It is broader than that. It doesn’t matter at the end of the day if it is Northern Rock or a Spanish Caixa or AIG or the securitized bonds in the pension account of an individual person that fails. The credit system is fragile, in all its ramifications, because there is too much debt compared to cashflows available to service it. Not just in Europe. Not just in the US. Not just in Japan. Not just in China. Globally.
Suvy:
You realize that of advanced countries, only Germany and the US, with Germany slightly lower, are at this low level of Wealth to income, and that everyone else, is far higher.
I tend to believe that there is a difference as you, between developing and developed countries, in this matter. So, Chinese figures, might portend and extent beyond Japanese trials.
This has to do with rapidity, and as Michael notes, all the malivnvestment that goes on with that process. As with everything, rhythm and timing, aid speed, erratic paces tend to be less fruitful.
It is obvious, that a new global agreement, condominium is in order, yet so much noise predominates the dialogue, to absolutely no ones benefit.
While I may love French movies, the underlying sense and sensibilities of these extend to far into too many dialogues, as to unreconciable controversies of Philosophy past, present and future. People must move away from the contradictory values in these matters, used by all (politicians, rhetoricians, interest groups, fanatics and similar).
Prior to the Internet, I had never experienced such a mass of reconcilable notions that some coagulate into one belief construct (oh, by the way, this is not directed at you, just to remind to challenge our assumptions, the very first step in critical thinking).
Csteven,
I completely agree that developed and developing countries are completely different, which is why I believe China’s debt burden (as measured by banking assets/GDP) is a such a large problem. It’s not even a capital rich developed country, which means such a high debt burden is an even bigger red flag than it would be for a corresponding country in another part of the world.
DvD,
I agree. There’s too much debt globally and there are imbalances that’ve been built up over this past globalization cycle. Governments across the world have tried to sustain these imbalances as long as possible by increasing debt levels. This process is not sustainable and it will crash. I suspect it’ll crash by global aggregate supply and demand falling with supply falling faster than demand.
Note: I’m assuming that there’s way too much capacity and not enough demand across the world as a whole, which I’m sure everyone here is in agreement with.
I talk about this view in the post below in much more detail if any of you are interested.
http://suvysthoughts.blogspot.com/2014/10/worldwide-supply-demand-imbalances.html
Then buy some gold.
csteven,
where do you even find time to write such extended replies?
Or did you stop listening now to the Irish songs about all the currencies being fiat in nature, (never mind the reality) so you have nothing else to do now other to write your famously convoluted “systemic development” posts?
More to the point,
“The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP”
http://online.wsj.com/articles/SB10001424127887323353204578127374039087636
Is it “systemic” and “logical” enough for you? Go find these kind of debts in China, I dare you.
Jon
Perhaps this is the problem, it says future, and that states a number as if.
Again, this is CBO estimates, over a time frame, against a current GDP number in one year.
There is your problem.
I would seem to take no more time than you, but, perhaps write rather more quickly, hence spelling mistakes (and omitted words).
Jon
These are 75 year projections. 75 years ago the USSR and Nazi’s were treaty allies, there hadn’t begun a cold war, IndoChina was under French Control, British India extended from (borders) Afghanistan to Malaya. There were far fewer countries in the world, the US was by far the largest producer of oil in the world, and had been the largest economy for the previous 65 years, there were few planes, automobiles, homes electrified globally, limited TV, no internet, etc….
But some use the number and wave it about as if a real number, of course it isn’t.
However, 0 growth in Japan for decades is a reality. China for more than 15 years swinging toward investment from growing consumption in its economy, and resultant rise in debt and asset bloat (and systemic functions that cause and enable it) are true. The skewed nature of the global economy is true. High commodity prices, = high development costs.
Raising FICA costs by .6% for employer and employee, and raising the upper end limit on salaries alters that 75 year trajectory. Other alterations will do the same. Similarly, will the changing nature of global production over time, and the changing nature of the US economy.
Do, I worry, when I look around the US, as opposed to the dozens of countries that I have been to, not really.
@Suvy & @Csteven,
Please tie this reply together with my other comments today. Although I agree the more acute economic adjustment will be in China (and Japan and Europe), going forward from that long-term China, Japan, and Asia will bottom and are on the way up, and the USA (and Europe) is systemically on the way down. The USA has an aging population and will eventually lose its high tech edge. And I also think there will be a massive brain drain out of the USA as the shakers and movers in the high-tech industry will jump ship as the NSA and Obama take control over the internet. I count myself as one who already did. I think there is coming shift where the incomes of the middle class of the developing world approaches critical mass especially as they start intertrading, e.g. the coming Asian Union free trade and employment migration zone starting 2015. The high tech sector is going to jump to greener pastures. China will correct (probably harder than Pettis’ optimistic soft landing), then start moving up again probably within a decade or so, as the West falls over the cliff towards decadence. The new financial center of the world will move to Asia by or just after the global monetary reset by 2032.
If you’re looking for short term flows of capital and talking about a “brain drain”, I don’t think you understand how wealth gets accumulated.
First off, the brain drain phenomenon as we call it is overrated. Secondly, there are people in China trying to get out in droves. Just walk onto a college campus of a good university in the US and you’ll see what I’m talking about. There’s been a surge of EB-5 Visas as the best and brightest are fleeing to the US. I see it everyday.
You’re gonna need better arguments than citing convicted felons.
Another problem with China is geography. The US has some of the world’s most fertile soil (Kansas), borders two oceans in a temperate cool zone, and holds the largest portion of the world’s most navigable waterway all concentrated into the Greater Mississippi Basin. China will never be able to replicate those advantages.
I am not so sure that European companies are small, I believe this is a misstatement.
If you are talking of Germany, or Austria, perhaps Northern, and similar, that there is a mittlestrand, perhaps, but, rather than small, I believe you would find Europe to be replete with very large companies. Even the Germanic countries, if they do have a healthy middle sector, which is altogether another matter, and really not dissimilar from other advanced countries either, but for the sector is very well known, for very advanced, high quality, niche producers, but again, this might not be too dissimilar than other advanced nations as well, but stressed in the case of the Germanic countries.
As to banking, the systemic forces are as described.
All the problems can be solved with gold. Buy some while it is still cheap.
Csteven,
sometimes I am not sure if you can understand English. The article I referred to is using a PRESENT TENSE, not FUTURE TENSE. Do you see a difference at all? It says ” already exceed $86.8 trillion”. What PROJECTIONS are you talking about? $86.8 trillion i snot in the future, it is NOW.
“The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP”
http://online.wsj.com/articles/SB10001424127887323353204578127374039087636
Jon
When are they do? No, i read the article, but don’t read WSJ since Murdoch bought it, and I read in how it was stated was somewhat suspect, but Cox and Archer as, former Republican Congressional members who are now, Lobbyists are not the sources that I run to. Yes, grammatically, it doesn’t state what you say, if you look at the entire sentence, and the words around it, actually, so, you might want to hit the books.
Having a wide a varied set of resources, creates more innovation and competition, and of course is less easy to manipulate, such also enables innovation and limits risks. I believe these countries have purposefully tried to keep the finance industry centralized, so as to control, and direct..
If you want innovation, centralization isn’t the best way to do it. For example, I think it wouldn’t have been possible for the industrial revolution to have been financed in Scotland and in the US if it weren’t for free banking.
The real reasons for centralization in finance are two:
1. The banking sector can be used by the government to fund wars, imperial expansions, build armies, etc.. This is a very useful and important function of centralized finance (anyone arguing that infrastructure is an exception is missing the obvious point that infrastructure plays a critical role in war).
2. The formation of the banking cartel allows them to prevent and cut out competition. Banking is naturally competitive and it’s important to keep that in mind. The banks usually end up getting bailouts for being “too big to fail”, which usually means that they end up being even bigger to fail and it leads to a larger crisis the next time around. Since the 80’s, this is what’s happened all over the world. In the case of the US, there has only been 1 new bank charter since 2007 while a whole bunch of banks failed.
Keep in mind that banks, over a long run, often times don’t make money. Most banks/bank employees/bank executives/etc. don’t have the incentives lined up properly. They get a salary and a bonus if they’re right while salary if they’re wrong (blow the bank to smithereens while the taxpayer is on the hook). In China over the past decade or so, the banking system has been used to fund absolutely insane projects that have no chance of being profitable while households have been on the hook for padding the wallets of the Chinese elite. Hell, the problem (at least to me) seems to be worse in China than it is in the US. This is basically what’s happened across the entire world while we’ve seen income/wealth inequality spike.
What most banks today basically do is take a massive amount of risk, while claiming they take no risk and show steady profits. They push all of the possible losses into the left tail, which is borne by households who end up becoming entrapped in debt.
Csteven,
You seem to have difficulty understanding the concept relating centralization of decision making to fragility. The key aspect of fragility is not whether or not you’ll be right or wrong. The key aspect to determining fragility is determining the impact of what happens to you IF you’re wrong. They’re two completely different things. When you centralize decision making, one small error at the top blows up the entire system because of its top-down structure. Centralization may drop the probability of failure, but in fat-tailed distributions have very different properties (everything that occurs in nature is fractal-like and the probability distributions are fat-tailed BTW). Under fat-tailed distributions, as the probability of failure drops, the cost of failure increases at a much faster rate (at an exponential scale).
The classic example would be a Pareto distribution. Let’s take a simple example where we’re assuming a Pareto of 80/20 (20% of the events account for 80% of the variation). Not only does the distribution mean 20% of the events account for 80% of the variation, but 20% of the 20% of events account for 80% of the 80% of the variations. In other words, 4% of the events account for 64% of the variation. If you kept going, you could show that 1% of the events account for around 53% of the variation. The costs of centralization work in a very similar manner where, as you drop the probability of failure, the costs of failure shoot up according to some sort of a power-law.
For some reason, you always talk about something being positive-sum or zero-sum. How can we say if something is positive-sum or zero-sum over an extended period of time in complex systems? That makes no sense unless you can predict the future. The only thing we can say is that the fragile will break given time. We do not know when or how or, most importantly, what the costs will be.
Peter is making a very important point about how large corporations have access to bond markets that small enterprises do simply do not. Also keep in mind that large corporations are very fragile due to their pure size and structure. This kind of system benefits large corporations over entrepreneurs and small businesses. Keep in mind that entrepreneurs and small businesses are the same ones that’re the real economic drivers. Very little economic advancement comes from large corporations and almost all comes from the bottom up.
Now, is centralization completely useless? No. It’s there for purposes of war. However, it’s nonsensical to tell me that centralized finance helps limit risks; it does the exact opposite. It multiplies risks by many orders of magnitude (except in case of war).
Ok, Suvy, not exactly sure why you perceive as such, a statement of what you believe my assumptions are might be illustrative.
If you are speaking to what i said i believed, then yes, I believed that.
I am as concerned as you, with as many matters as yu, although not hyperventilating. In fifteen minutes one day I lost 200K, of my own money. Over the last few years, significantly more than that, due to no error of my own, very long story. I have watched each of the over-zealous on all sides, the hyperventilating, the over-optimistic, and have long been a moderating voice of reason.
But, all policy, can not be predicated on notions of statistics, nor economic philosophy, nor should you be overly worried I think. Frankly, despite the shallow global depression, made worse by too many, going in different directions, I see over the horizon, even with what might happen, that could be disastrous.
If I were you, I would focus a little more on the brightspots.
Look at what CVS is doing for those who use doctors ( I don’t, and had a friend who didn’t even use antibiotics until her mid 80’s, once).
Look at what GE is doing with Smart devices and their micro-,manufacturing.
Look at CAFE standards; and long-term rising.
Look at all of the advances in material science.
Simply amazing, and while I am not old, I was probably one of the first to have computers in the classroom. Can remember paying 1500 for a slow limited laptop. Even used a typerwriter or digital word processor as a kid.
As to the global system, the economic system, merely, more will need be done to engage on a more balanced platform for development, or there will be a retrenchment, simple. As to technology, and advances in standards of living, it rolls on, and really. This, while the cackling masses winge over their unmet intellectual and emotional desire based beliefs (worse yet, fears). Frankly could die tomorrow or yesterday, or a hundred years from now, what a wonderful time to live. If it all blew up, got enough blankets to live through any whither, and my own well, so…
(and while Charleton Heston and I might not have been close friends, we do see eye to eye on some matters).
Go invent something, do, and don’t worry. You ave a lot to do, and will do. Enjoy. With such abundance around you, don’t worry that the system couldn’t be rebuilt if it were actually destroyed, but I don’t think it will be. I think, as I have said, there is grave misunderstanding as to what is possible, because political and social differences create dysfunctions in the system. I tend to think Rodrik is right on this.
When I discuss zero-sum, I am speaking of the frames employed by people in their sense-making, which would impact their decision-making (of at least what to believe as true).
I too believe that entrepreneurship and small business is too be stressed, I have even built programs that aid small businesses, and build entrepreneurs. I believe when this is picked up, it will an important component of the new center I believe to be forming in US politics, or that will inevitably be formed after another crisis, along with inequality.
But, there is more than economics, material fulfillment, and financial security. There are similarities and differences in beliefs, values, mores, ethics, worldviews, understanding, desires, and so forth.
While you rail against this or that, realize that these things move more slowly than your brain, than your choosing, decision-making on each of those things that I just suggested.
The FED is not going anywhere, banks will exist, large companies, risk, in our personal and financial lives, politicians, political viewpoints, economic beliefs, etc, and these will vary.
With that said, what is likely to happen? And how can we make the best of it. This decentralization you speak of, under current system configuration, would be disastrous (insofar as I understand how you prefer to decentralize, which could be wrong), my “assertention” of your perspective, that is)..
Euro is similar to the gold standard, but there are important differences between Euro and the gold standard, namely Euro attempts to remedy the shortcoming of the gold standard, which is the gold standard does not allow you to do QE, while you can do QE with Euro.
However I believe ECB will only use QE in a real emergency, and not like what Paul Krugman wants which is use QE eveytime inflation reaches 0%.
look at this chart
http://1.bp.blogspot.com/-pijKL-I9KOQ/VCaZm_l3KKI/AAAAAAAACjk/vzDERRkxgyU/s1600/ECB%2Bbalance%2Bsheet.png
ECB ｅｘｐａｎｄｅｄ ｉｔｓ ｂａｌａｎｃｅ ｓｈｅｅｔ ｄｕｒｉｎｇ ｔｈｅ ２０１１ ｃｒｉｓｉｓ， ｉｔ ｉｓ ｎｏｗ ｓｈｒｉｎｋｉｎｇ ｉｔｓ ｂａｌａｎｃｅ ｓｈｅｅｔ ａｎｄ ｐａｙｉｎｇ ｄｏｗｎ ｄｅｂｔ ａｓ ｔｈｅ ｃｒｉｓｉｓ ｈａｓ ｐａｓｓｅｄ． Ｉｔ ｗｉｌｌ ａｇａｉｎ ｅｘｐａｎｄ ｉｔｓ ｂａｌａｎｃｅ ｓｈｅｅｔ ｔｏ ２０１２ ｌｅｖｅｌ ｉｆ ａｎｏｔｈｅｒ ｃｒｉｓｉｓ ｏｃｃｕｒｓ．
In a world as complicated as ours, countries both want to avoid placing themselves in positions where deflation is likely, but also, in very complex economic systems, want to avoid deflation at all costs. It is easy to see both what is happening in Europe, but also its effect on others in the global system; similar China, etc…
Anyway talking about inflation in 2008, was really just beating a slew of ideological chatter, and illustrated they hd no idea what they were talking about. While people may be concerned about added debt on public coffers, imagine what would have occurred had such debt not been placed.
Csteven,
lost 200K? Really?
If invested in gold instead, would never happen.
“If invested in gold instead, would never happen.”
Because gold prices have never crashed before.
But ECB prices its asset to gold.
http://fofoa.blogspot.de/2011/07/euro-gold.html
Suvy,
there is one big flow in your analysis of Europe. Each of the countries has sizable chunk of gold as their collateral. When properly priced at 55000$ / once, their gold will be enough to bail them out. It is not as bad as you think.
If you notice, Europe CB mark their assets to gold in their reports, with gold taking more and more of the asset role compared to US dollar.
http://fofoa.blogspot.de/2011/07/euro-gold.html
Yea, I don’t think gold is worth $55,000. I’m not even sure it’s worth $1000.
Suvy,
It does not matter what you think the gold is worth.
$55,000, That is the correct price. After the global economy crash in about 2030, it will be obvious to you. You still will be around to see it.
When properly priced at 55000$ / once (sp)
This is better than waking up and reading the funnies…
Keep laughing, Derivs boy.
When you wake up finding out your pension and Social Security is gone and your currency is worthless, it will be not as funny.
But it will not happen until 2030, so have a great time until then. Laugh it all up.
The currency need not be worthless in our own country, and foreign remissions would be even that much greater in the less valued against other currencies, with switching (and shifts of production) and higher impact form remissions, how is that a bad thing..
And why couldn’t the Fed just pay as Friedman advised; helicopter, but directly for liabilities. remember, I am for the other countries using the dollar less, you realize, that is a good thing. You relaize their bloat is so extensive that while the USD is used 20% less in reserves than it was in 2000, it comprises an even greater share, of an increasing holding of foreign FOREX reserves around the globe, and you think this is a US problem. Put on your thinking cap, my friend. this means global bloat, and increasingly advanced unsustainable global imbalances, as Michael has show aptly shown.
Suvy
Agree with you, again, on small business and entrepreneurship.
Agree with you on innovation and need for flexibility, lessor risk, and the demassification of corporations; economies of scale are for the engineering mindset. With that said, you move from linear projections to almost Daoist fluidity in your argumentation.
Further, there are very many forces you don’t address in your linear step of rationale for the complex and adaptive system, of benefit from a version of decentralized self-organized complexity, which self-organizes in relations to a rather large set of forces than you acknowledge, in the single-minded focus on decentralization of everything. So, I think to quickly you get to this point, perhaps. This while supporting most everything you say.
Automotive
Suppliers- Agglomeration Effects – Formation of Industrial Clusters around industries, the cycling of cities to be organized around certain industries;
Connecticut –Insurance; London – Finance; Wilmington Delaware – Banks; Detroit – Automotives, etc….
Lack of Diversification where Industrial Clusters form; but then the formation of industrial clusters, leads to a slew of services, that accompany the agglomeration of industry, from retail, through marketing, design, logistics, legal, etc, etc, etc, which is a diversification, but centered upon an agglomeration.
But of course, specialization is an over-used, Taylorian construct, where there is a great deal that boundary spanning knowledge, skill and ability of both these large corporations, smaller suppliers and smaller service suppliers. This is the logic behind Joint Ventures creating competitors, and the reasons why some contract manufacturers go on to brand. Or, why innovations can come from these suppliers. Republic Wireless provider’s voip services to large telecom, and then creating a new model service provider. BTW, they weren’t required to be near their customers, which goes against industrial clusters, which may have been more an evolution in lessor developed societies and economies, because with technology, the opportunity horizons do alter, but are cited in a smaller city known for innovation, well outside the few venues discussed globally.
“Keeping Alive areas that would typically go bust”
I am afraid you do try to explain too much with your theory, remember, theories can be accurate, simple and generalizable, only two of these at any time, thin about that. Now you will perhaps say that yours is not theory, these are probabilities of statistics, and mathematically sound, but then of course, this is another debate, no….and no surety is gained of your assumption, because again, the axioms supporting the proofs need be very confined, well-defined, and extremely narrow, and not so nearly as ranging and assumptive as your conclusions tend to be.
“Be willing to bet”
That statement acknowledges the lack of surety, of certainty, the use of statistics themselves, acknowledges the lack of certainty, in and of itself, and this under a far more delimited set of assertions, normally.
As to go bust, Suvy, you are young, if you want to ensure assets long-term, find the artists in Detroit and buy cheaply within several blocks. Pay attention to proximity to entertainment, large empty tracts that will be targets for reinvestment, and transportation routes. Also, character of properties, which the artists will already be doing. Your use of fluidity, should not discount ebbs and flows, and regeneration.
Nor should you assume because practice or policy, zeitgeist and weltanschauung, which has influenced past practices, and past understanding, of what is “true”, alters, and with it the forces that you must account for, if you want a better understanding of what is possible and plausible, let alone what is likely or beneficial. You grew up with a lot of garbage, on Madison avenue and K street, meets Hollywood assumptions become popular misconceptions, that some still use today (Jon). Actually, I am quite happy to see that you are quite close to my conceptions, personally, that is reassuring. Take doom with a very large alka seltzer tablet and rest assured. These notions, too, shall pass.
Lastly, more than certainty, and surety, there is more too be learned in challenging our assumptions, and in questions, than in answer’s.
So, more generally, as to agglomeration, I agree, but this has been a by-product of the massification of everything, which can not be divorced from both the success of the system, but humans more generally in populating the earth. This has been a byproduct of the efficiency seeking tendencies of humans, whether in cutting costs on the margin, or in seeking a short-cut through a neighborhood to reach another a highway, or in movement form the wagon, to the steam engine, to the fossil fuel combustion, and onward.
I believe localization and mass customization is the likelihood, considering the mental and spiritual frames of what millennials are supposed to be prefer, value and “be like”, recent experience of economic turmoil, and recalcitrance of some to make the political and social transformations required, as others haplessly enabled them thinking that if they gave the crackhead a place to sleep, food, and a new set of clothes, this was all that was required (the work of Larry Diamond) {that statement is a little harsh, and just used for illustrative purposes, but descriptive as intended but for causticity and assumption of forces for brevity in exposition}.
*Sidenote
I know you speak to something different, but with local currencies you might want to look at the work of Bernard Lietaer;
https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=bernard+lietaer&spell=1
http://en.wikipedia.org/wiki/Local_currency
http://en.wikipedia.org/wiki/List_of_community_currencies_in_the_United_States
You say artsy, or mere philosophy, when I discuss frames, sense-making and a changing zeitgeist that later weltanschuangs, but the Silicon Valley garage or basement, is a growing, yes longer term influence that undergrids intelelctual, spiritual, emotional and belief based thought, and spiritual, even physical relations to the world that is evolving around us.
Look at GoPro, guy got idea surfing in Australia, mythology has got money selling shell bracelets, reality born in Santa Clara, son of High Tech Boutique Investment firm founder. Some of a certain mental ilk will rail on class notions, but GoPro needs the mythology of selling out of VW van and getting money to start company, because of changing zeitgeist and weltanschaungs, of altering demographics and their intellectual, emotional and spiritual relation to the world they see, and want around them.
This is what those within the box of the system as it works, and those well far off on an ideological fringe, fail to see, are undesired to realize, of their own assumptions, that embody their sense-making, and framing choices, themselves.,
Some see a lockin, and others rail against bogeyman as the ground moves beneath their feet.
Mr. Pettis gave an interview to the US website called “Financial Sense”.
http://www.financialsense.com/financial-sense-newshour/michael-pettis/why-we-need-new-global-monetary-system
(Subscription required for $ 100).
Vinezi: thank you for the response. I think the misunderstanding here is one of misplaced concreteness. You seem to be focused on how any expansionary fiscal policy will be financed. Summers/de Long are addressing unemployment and hysteresis. Imagine a bi-partisan commission of civil engineers, after due cost-benefit analysis, come up with a list of projects (roads, bridges, harbors, airports, smart grid etc) which are economically viable. With interest rates near zero and relatively high unemployment, why is it not a good time to invest? S/deL argue that such labor intensive investment would lower long term debt.
A related but slightly different issue: David Beckworth and Ramesh Ponnuru, Oct. 6 National Review (I didn’t see it on-line) disagree with Summer’s secular stagnation by re-defining real interest rates. The stagnationist real interest rate includes a “risk premium:”
“The real risk-free interest rate has been stable over the long run while rising and falling in response to the business cycle.”
“Imagine a bi-partisan commission of civil engineers, after due cost-benefit analysis, come up with a list of projects (roads, bridges, harbors, airports, smart grid etc) which are economically viable. With interest rates near zero and relatively high unemployment, why is it not a good time to invest?”
Yea, why not create a commission that’s “bi-partisan”? That’s just a bullshit term for these politicians to get their wallets padded and help out their buddies. I was actually at a talk by a Silicon Valley entrepreneur who was talking about how often Congressmen and Senators get bribed to pass their bullshit projects.
BTW, just because government bond rates are zero doesn’t mean that the real cost of transferring capital goes down (i.o.w. the NGDP growth rate). Just because central banks can artificially manipulate short term rates by expanding their balance sheet doesn’t mean that it’s a good idea to transfer capital by doing so. This is just statist thinking.
You need to stop spewing this statist nonsense. Almost all infrastructure spending is done by state and local governments with the federal government only spending 30% of the transportation budget–that’s it. If you wanna “invest”, you need to repair state/local government and private sector balance sheets.
http://fivethirtyeight.com/features/why-we-still-cant-afford-to-fix-americas-broken-infrastructure/
You don’t fix a debt problem by adding debt. That’s sucker thinking. You should stop advocating such nonsense when it’s my generation and future generations that suffer the costs if you’re wrong. This is just a way for bureaucrats to pad their wallets while the young (me and my friends) get fucked.
People like you are extremely dangerous. You wanna listen to people with no skin in the game and let them make decisions about things we don’t understand while future generations pay the price. You’re citing guys like Larry Summers, but it was people like him that said 2008 could never happen before 2008.
Look at this bullshit:
“The real risk-free interest rate has been stable over the long run while rising and falling in response to the business cycle.”
This is some economic theory bullshit that people who don’t look at balance sheets say. None of the guys you’ve cited even understand business cycles and what causes them. They completely ignore private debt.
What are you gonna do? Call me some crazy right wing nut? Go right on ahead because many of my arguments have been made by people on the left (although they have sharply differing solutions).
Guys like Beckworth and Summers are academic economists. They’re the last people we need to listen to. They’re talking about the “risk-free interest rate” being “stable” over the “long-run” without even defining what the long run is. Then, they call themselves “Keynesians” without ever seeming to have read Keynes and ignoring the most important lessons and teachings that Keynes has to offer.
What arguments are you gonna use? Do they involve more economic or social science theory? I don’t buy it because I’m not a sucker.
Suvy:
If you don’t mind me asking, how old are you?
23
If 23, you are in trouble financially no matter what happens.
Sorry, just your bad luck I guess.
Jon…the RT board is calling, there you can find Max Keiser, you prefer that, don’t you?
Here you go…http://www.maxkeiser.com/
Much better stuff for you.
You clearly don’t have your head up your ass, which puts you ahead of 99% of the people out there. You’ll be more than fine.
@Jon
Being older and either having savings or a pension is going to be much more difficult. The bankrupt governments are going confiscate it all. The only asset remaining with be knowledge and vitality. I wish I had more of the latter (suffering from potential brain cancer, afraid to go for a CAT scan, attempting alternative treatments).
Shelby
Do not be afraid, many would say go for the CAT scan, perhaps, but do not habituate fear, this is ground of sheeple and socio-pathes
@Jon,
Thanks for the empathy but I am not if you are insinuating I habituate fear in my comments on this blog. I am a realistic. Realistically the survival rate from brain tumors is very low, conventional treatments very destructive, and the risk of a false positive test result in the Philippines high. Since I would unlikely do conventional treatment, it is somewhat pointless especially given I can’t travel at the moment because I am committed to completing some important work first. I am hopeful that alternative treatment (including ramping up my remaining athleticism) can alleviate these symptoms interim, which might be caused by neuropathy possibly not caused by a tumor.
Dan Berg WROTE: “S/deL argue that such labor intensive investment would lower long term debt.”
—————————–
Which debt? Will absolute debt be lowered or just the debt/GDP ratio? If they are referring to the debt/GDP and not the absolute debt, then which ratio are they talking about? Government debt/GDP or TOTAL debt/GDP?
America’s problem is NOT the government debt/GDP ratio. After all, as Krugman has repeatedly pointed out, the government debt/GDP ratio was even higher after WW-II than it is now. As Krugman has often asked, if it was successfully reduced from that high-point, then why should it raise such concerns today?
America’s problem today is the TOTAL debt/GDP ratio, which represents the SUM of the debt-loads of ALL END USERS of debt (government, household and business). This TOTAL debt/GDP ratio which was more or less constant from 1945-1980, has been rising in a secular fashion since 1980.
http://goo.gl/WUYpbo
This is an unsustainable trajectory and must necessarily end in either stagnation or collapse. When debt rises faster than GDP in the economy as a WHOLE (government, household, business) for an extended period, then much of the GDP growth during that period is merely being borrowed from the future and will eventually have to be given back (i.e. prove to be illusory growth) either by a collapse in GDP or a long period of stagnation (or slow growth).
This is America’s problem and it has little to do with whether the government spends more borrowed money on infrastructure or not.
~~~~~~~~~~~~~~~~~~
Dan Berg WROTE: “David Beckworth and Ramesh Ponnuru ……xx……. by re-defining real interest rates.”
—————————–
If we were to redefine stagnation as growth and collapse as prosperity, then America would have no problems. In fact, there may well be a school of thought that claims that the problem is not that the growth-rate of debt was HIGHER than the growth-rate of GDP over the last 30 years, but that the modification-rate of definitions was LOWER than the growth-rate of debt over that period. Such a school of thought would recommend that the US government keep modifying definitions at a rate faster than the growth-rate of debt in order to make everything look normal and sustainable.
If we could only redefine the world ‘hunger’, then more than a billion people at the bottom of the global income scale would be immediately satiated. We could re-define horrific emaciation as stylish slenderness. We could re-define ragged clothes as alternative fashion. We could re-classify the homeless as ‘outdoorsy’. The possibilities are endless, and heaven on earth would seem to be within reach, once we start down this road of redefintions.
But when we have finally exhausted ourselves re-defining everything under the sun, the terrible reality will manifest itself as we are overcome by the inescapable bitterness of the truth that we tried so hard to deny for so long.
Here is the bitter truth– the US now has to choose between the following three options.
(1) TURN BACK: LOWER the debt/GDP to the historical average of 150% of GDP. In this option, 1% growth is the best the US can hope to achieve over the next generation and it will be accompanied by a reduction in the fear of rising interest-rates.
(2) STAY PUT: Keep the debt/GDP ratio CONSTANT at the current level of 250% of GDP. In this option, 2% growth is the best the US can hope to achieve over the next generation and it will be accompanied by the constant & debilitating fear of rising interest-rates.
(3) GO AHEAD: Keep RAISING the debt/GDP ratio to get more of the same growth we have seen over the last 30 years. In this option, 3% growth may be possible for a while, but it will eventually end in a violent, catastrophic and ruinous fashion.
Do you see any other options?
Vinezi:
Your debt chart clearly shows rises in household (see Global Growth) and financial debt (see Dot.com, recent bubbles, financial globalization, and global growth).
EU, JApan, SEA, North Asia, Commodity producers, and dwindling appetite of the largest most open market.
Again, clearly we are in need of a new compact, with provisions for more structured developing country, then developed country, growth, on unstructured markets, with a vast manipualtion of perspectives adn belief constructs, and some grave over-simplification by zealous, ideologists.
Clearly, Rodrik’s perspectives must grow in acceptance, but more than the policy space required to mollify domestic constituencies. Really, the development of the world hangs in the balance, with so many very parochially minded. People worry this, or that, US involvement, US retrenchment, etc, etc, etc…..but more than just return to previous, and Free trade agreements are necessary.
There’s one thing you forgot. Much of the debt has been securitized, so when one loan gets paid off, several others do as well. You need to take a look at the debt adjusted for this part of the financial system (both Steve Keen and Krugman talk about this, and Krugman is right on this occasion). I found the chart somewhere, but I can’t find it right now. It’s NOT the total debt/GDP (which runs at around 250% or so), but it accounts for the securitization–it should be around 170% or something around there.
In this picture (which is from Steve Keen), he ignores the debt of the financial sector. I assume this is because of all of the MBSs that’re backed by American households.
http://www.debtdeflation.com/blogs/wp-content/uploads/2014/01/010814_0559_Secularstag4.png
This is the full post.
http://www.debtdeflation.com/blogs/2014/01/08/secular-stagnation-iii-minus-the-irony/
I’d like to add that the rest of this post and the “statistics” used to support it is all junk. Steve Keen uses the correlation coefficient like it means something, but he doesn’t even show a residual plot. So he’s using a model without first looking at how appropriate the model is. Even with all of his mathematical sophistication, even Keen’s work (much better than most economists) lacks rigor. I know this is a tangent, but it’s an important one.
Keen also doesn’t touch on the international imbalances, which is a major problem. The problem is that, over the past decade, poorer countries have been exporting capital to rich countries. We have the rich part of the world borrowing from the poor part of the world to consume until you hit 2008. From then on, QE started in the US which sent massive capital outflows into other countries. This capital was used to turbocharge investment in countries like China which replaced their export driven growth by sticking a shovel in the ground. Note that this behavior from China coincided with a massive explosion of private sector debt.
I guess Keen just isn’t very well versed in the international aspect of things, but he’s a better economist than most. One of the points I’d have against him is on the issue of Paul Davidson vs Michael Emmett Brady, where he has (I know this for a fact as someone I know questioned him about this topic in person) taken Davidson’s side. Davidson clearly has no clue what he’s talking about when he tries to personally attack Brady. Another problem I have with Keen is the way he does some of his analysis. The clearest example was how he uses correlations without looking at residual plots.
Honestly, some of the best economic analysis I’ve seen has been from Nate Silver’s FiveThirtyEight page. Silver and his team’s work is excellent and, usually, very rigorous. Also, Silver actually admits mistakes and doesn’t rely on BS theory, which is a fresh breath of air. Unfortunately, most economists aren’t the same.
@Suvy
Ah thanks. So perhaps that explains why I have seen a global total debt figure from Armstrong of $158 trillion while I’ve been citing the $227 trillion total debt figure I had read at a WSJ blog.
Dear Professor Pettis,
I’ve been following your writings and your blog avidly, and your explanations have profoundly shaped my thinking.
I was wondering what your take is on a possible increase in labor productivity in peripheral countries (in particular in Spain – Italy and the rest are still too far behind and have yet to implement meaningful reforms) that would increase output notably and push up Spain’s current account and help rebalance Europe?
Vinezi Karim,
When you look at Japan it is running third time its export driven model. One would expect they would have accumulated trade surpluses by now as high as the Mount Fuji. But if one climbs the mountain, one will probably not find any substantial cash. This proofs that Prof Pettis is right about using the model and reversing it to continue the benefits of international free trade. Japan cannot even run investment portion of the model without running against the debt. So the question becomes how you force the model to reverse when your trading partners do not cooperate?
This problem afflicts EU also. I wish Prof Pettis would comment on how long will it take for the Greece to return to normal unemployment without forgiving of the debt?
Prof Pettis suggest that US should tax foreign countries purchase of US Bonds. This would slow $ from appreciating versus purchasers currency.
In summary,the US cannot create demand for the world without reversing the running 17 year trade deficit , paying of substantially government(18T) and private debt(17T). And gaining wage growth for the US consumers and abandoning low interest rates. Otherwise US will be in the 2-2.5% GDP range for a long time.
Japan’s fucked. The problem with trying to stimulate demand by driving your currency lower is that you see diminishing returns on the margin. Say you reduce the value of your currency by 20% in order to stimulate exports, you’ve reduced the cost of your goods in terms of FX by 20%. Let’s index the cost of your imports and the cost of your exports at time step 0 at 100.
Step 1 Imports: 100*(1+.2)=120
Step 1 Exports: 100*(1-.2)=80
Step 2 Imports: 100*(1+.2)^2=144
Step 2 Exports: 100*(1-.2)^2=64
Step 3 Imports: 100*(1+.2)^3=172.8
Step 3 Exports: 100*(1-.2)^3=51.2
Step 4 Imports: 100*(1.2)^4=207.36
Step 4 Exports: 100*(1.2)^4=40.96
So after 4 time steps, the price of your goods vs other countries on a relative basis is about 41% of what it was before while you’re paying >200% for anything you import. After 10 time steps, the cost of imports is over 600% while the price of exports for FX is 10% what it was. Each time, the price of exports vs FX diminishes on the margin because there’s an absorbing barrier at 0 while the price of imports faces no absorbing barrier on the upside. On top of this, Japan imports almost all of its food and energy, which means they import key economic inputs. If they keep going down this path, they’ll see input cost inflation, which means inflation on the supply side.
This policy by the BOJ is gonna reduce both productive capacity AND real demand. In other words, the guys in charge are fucking idiots. On top of this, they’re trying to stimulate exports at a time when there’s no demand in the world and both supply and demand are collapsing. That makes no sense. Who’s gonna actually be able to buy their products.
Once inflationary expectations flip in Japan and households stop being long monetary assets, the Yen will collapse. The real question is not if, but when. If commodity prices aren’t falling the way they are, Japan would be in a much tougher situation, but once commodity prices hit bottom, Japan is gonna experience a productivity collapse. On top of this, Japan has a major debt problem so an increase in inflation will put upward pressure on rates. It’s gonna set off a feedback loop the BOJ. How do we stop inflation? We do so by inverting the yield curve. If Japan raises short term rates to 2%, the Japanese Finance Ministry goes bust. What’ll the guys in charge do? Probably do the Japanese thing where they kill themselves. Abe will commit suicide within 7 years if this shit continues.
Suvy, that doesn’t make any mathematical sense to me. If FX value is reduced by 1/10th then both exports income and import prices rise by 10 times. I think what you are implying is that to stimulate exports with this Abenomics plan, the export price is not readjusted, so thus you have less exports income but hope for higher production so wages are lifted via higher demand for labor. Or you are pointing out that import price inflation can not be politically hidden, even if wages rise either by increased production or readjusted export prices. I thought the point of Abenomics is to create inflation in order to reduce the value of the debt the government holds? Are you saying most of the Japanese debt is held in short-term maturities?
Bond holders (predominately domestically financed) pay for the cost of the write down.
So you think bond holders will sell and move their capital to the USA or tangible assets within Japan?
“If FX value is reduced by 1/10th then both exports income and import prices rise by 10 times.”
This is wrong. You see how much a 20% move on the down side at the first initial time step and how large that benefit is, don’t you? From the 9th step to the 10th time step, that benefit drops off considerably because an exchange rate can’t go negative.
Also, just because your currency falls by 10% doesn’t mean export income has to rise by 10%. That makes no sense. It depends on how it affects the feedback loops. When you have food and energy as key inputs you must import, a 10% reduction will not boost export income by 10%. The dose-response curve isn’t linear Shelby.
@Suvy
Don’t make the category error of conflating the lower bound of FX devaluation with the relative effect of devaluation on imports versus exports.
@Suvy
You are repeating what I wrote as follows:
@shelby
@Suvy
Don’t double count imports in a comparison of the relative effect of devaluation on imports versus exports.
“Don’t make the category error of conflating the lower bound of FX devaluation with the relative effect of devaluation on imports versus exports.”
I’m not conflating the difference between anything. If I’m buying in dollars, the shift of the price of Japanese exports in the first time step is 20% cheaper. From the 9th time step to the 10th, the shift is virtually nil.
“Don’t double count imports in a comparison of the relative effect of devaluation on imports versus exports.”
I’m not double counting. An economy has inputs and outputs. There’s always a nonlinear effect of how a shift in inputs affects total production. Similarly, the effect of a currency devaluation on a country depends on the structure of the country’s supply side. If it doesn’t rely on importing key economic inputs and consumes most of what it produces, a currency devaluation has a completely different effect than if a country relies on importing economic inputs to produce outputs that’re then bought elsewhere. You can’t look at the impact of monetary policy without looking at the supply side structure of a country.
After the lower growth trend seen from the early 1980’s, the developed world has tried to boost growth by resorting to credit expansion. This strategy failed and led to the 2008 crash and recession (Japan was leading the rest of the developed world by about 18 years with this strategy). Among the developing world, China followed the same credit expansion strategy from 2009 and has also failed as bad debts are now rising. By 2014, it is finally clear that the credit expansion strategy has failed everywhere. The legacy is world debt to GDP over 300%.
Now comes the currency debasement strategy, which is all about how to allocate the losses internationally. Japan is again leading the way. Last week, it fell back into recession thus failing in its Xth attempt at QE over the past few decades. Notwithstanding this (re)confirmation that QE is unable to boost nominal growth, Draghi spoke today to repeat that the ECB asset purchase program is intended to boost inflation and support the economy. Draghi had barely finished to speak that the Chinese central bank cut interest rate, suggesting that it is starting to find its currency a bit too strong at a time where NPLs are rising in the credit system. In effect, China is also taking steps to weaken its currency and export some deflation back to the developed world, instantly sending the ball back to Draghi.
Three observations:
– Good thing there was a G20 last week-end, otherwise one would be forgiven to think that international cooperation has completely degenerated into beggar thy neighbor policies. The question of how to allocate the losses is shifting from a domestic one to an international question. The G20 has effectively failed to formulate a coordinated solution. In fact, it never came close because it never made the correct diagnosis of the 2008 crisis (not because they didn’t understand it, simply because they didn’t want or couldn’t). It was just for the show, spinning off empty words to reassure the markets and (to a much lower extent) the people.
– It is easy to predict that the currency debasement strategy will fail like the credit expansion strategy failed: if everybody tries / needs to devalue against everybody else, it is a safe bet that relative FX levels won’t be very different a couple of years down the road compared to today. This is what happened in the 1930’s. By the time everybody had moved out of the gold standard in 1936, relative exchange rates were about the same as un 1930 when it all started (one thing had changed, though: the nazis were in power in Germany).
– In the meantime, we are now in the phase where the mistigri is being passed back to the US which won’t be too long in finding it unbearable. At that point, the financial oscillator – which has continued to see amplified swings – will turn, as per the fiction above.
Which leaves the same old question, the one that not too many people are interested in (Michael Pettis being part of in a small minority in that respect): if the credit expansion and the currency debasement strategies fail, how do we get out of this precarious situation? The time lost so far addressing this crucial question is really astonishing. Of course, currency wars are the logical prelude to trade and perhaps military wars. Soon time to write the sequel to “Lords of Finance – The Bankers Who Broke the World”?
You need to reset the monetary system. See my post at the bottom of the comments page. You need to decentralize currency issuance across the board.
EVA,
I am glad to see that productivity increased somewhat in Spain etc. I have questions for you. Who will buy your products? Who will pay off your debt? or even who will provide almost zero interest rate for your debt? And
how long will it take until unemployment returns to previous norm?
So you see why Prof Pettis recommends to rebalance the trade for Spain or forgiving substantial portion of the Spain debt by Germany. In order to rebalance for Spain , Germany or other big countries have to run deficit trade balance. I do not see at this time any country running trade deficit balance?
Stan, I agree, and this is precisely my question.
First, can Spain actually get productivity up without seeing increased demand from outside the country? I would not exclude that, but then again, isn’t this the exact same thing that Germany did, i.e. forcing their underconsumption onto other countries (in this case, Spain)?
Second, if Spain succeeds in increasing their productivity, this should effectively increase household income. Given that they’re coming off very high unemployment, they are likely to spend a lot of it, but probably not all of it. So savings should go up compared to the current level (unless a lot of investment is made at the same time, but let’s exclude that for now), while consumption will go up my proportionately more than that. They might still run a current account deficit, but now domestic investment could actually increase and pave the way for a more efficient capital base in the future, when the country will be able to reverse repay the capital inflows from Germany. Where is the link that I’m missing which tells me that the rebalancing in Germany will not be orderly?
Eva, You might have another problem. Once your productivity increases and GDP increases EU might force Spain to pay into general EU FUND (as Great Britain illustrates) to keep low interest for all, instead of payments to German Banks to lower the specific Spain debt.
Eva, “if Spain succeeds in increasing their productivity, this should effectively increase household income.”
Prof Pettis about six months ago explained the difference between National account and Household account. As I understand productivity increases increase National account not necessarily Household account. In US we use “Trickle Down Economics” to transfer income to Households. But lately, the whole California and west is suffering from drouth even with trickle rain, so I do not know how this theory works in economics?
Stan,
the twist I don’t understand is why capital flows have to reverse bilaterally in the case of Spain and Germany. I agree that Germany’s trade surplus will eventually (have to) reverse, but I’m not sure this has to go hand in hand with an improving Spanish economy. Or, stating the contrary, why an improving Spanish economy (through for example an increase in productivity) would not be enough to pay back the money that Germany invested in the country before the financial crisis.
In particular, if productivity increases in Spain, it should help the many unemployed people get a stable job, they will be able to save more as their income increases compared to their unemployment benefits. This should increase the national savings rate in Spain, which in turn would be paramount to paying back Germany’s investments bilaterally.
If productivity in Spain does not increase and the country is not able to reduce unemployment, why does that imply that Germany’s trade surplus will have to reverse?
Meanwhile, back to the topic of optimal currency zones: https://www.notenstein.ch/sites/default/files/publications/white_paper_eichengreen.pdf
Michael – even as you point out the headwinds facing us, the fact that anyone with an Internet connection can get access to the incredible information on this blog for free is still reason for hope. Sincere thanks for your words of real wisdom…
Prof. Pettis and others,
@Shelby
@Vinezi Karim
@Jon
@Csteven
I don’t know who brought up Jane Jacobs, but the way she thinks and tries to understand economies is GOLD. I’ve been reading her quite a bit and it seems to me like the entire world’s economic system in basically every country kinda needs to be reset. National currencies and centralized monetary systems don’t really make any sense if you want a nation’s monetary/financial system to be designed to accumulate wealth; they only seem to make sense in times of war.
That being said, how do we effectively change the monetary system so that we can radically decentralize it? It seems pretty clear to me that population and wealth are like everything else in the natural world–they have scaling effects and follow power-law distributions. What this means is that most of the population and the wealth is accumulated in a small portion of the land mass. This means wealth is effectively concentrated in cities.
For those not familiar with Jacobs, she starts off by looking at an economy like an ecosystem with inputs and outputs. The outputs effectively pay for the inputs and economics is just the study of how people pay for their inputs via their outputs. She ends up arguing that for a city to be growing, it must constantly be diversifying its inputs and its outputs. Her main points (at least as I gather them) are:
1. If the inputs aren’t diversified, a shift in the price of inputs can have huge impacts on not just inputs but the total production and economy of a country. Since inputs are used to create outputs, a rise in input prices would reduce the amount of outputs produced and possibly increase their production costs.
2. If the outputs aren’t diversified, then a small shift in the price of the outputs elsewhere or a small shift in the preferences of outputs in another place could cause export income to collapse thereby making inputs unaffordable.
3. Cities must constantly be replacing inputs in order to keep growing and expanding (or even just surviving). If they don’t, you run into the problem cited in #1. Jacobs brilliantly describes a city as a constantly evolving organism that’s must constantly be diversifying its inputs and outputs.
What do those points imply? They imply that a state, city, province, or even nation that relies heavily on exporting a few key materials is inherently fragile. It also implies that cities, nations, and countries must focus on having cities and city regions that’re constantly evolving with one another to try to consume as much of what they produce as possible while subjecting the firms in the cities to be subject to constant volatility. Decentralized/localized currency issuance works as a feedback mechanism for a city, state, or locality of some king to get information about its own production. Centralizing the currency prevents this feedback mechanism from taking effect and can even create faulty feedback as one region would be getting proper feedback while other cities would not. Effectively, centralized currency issuance is economically destructive, except in the case of war.
The question now becomes how do we get these feedback mechanisms to behave properly again. Jacobs suggests that tariffs can play this role of feedback (and I agree), but they can create nasty negative side effects and problems down the line. If tariffs aren’t used properly, they end up exacerbating the underlying problems.
The current system and set up for monetary policy simply is extremely fragile. We’re expecting guys in empty suits to make decisions about what national currencies and money market rates are supposed to be while there’s so much information that needs to be transmitted while those making the decisions don’t suffer the consequences of their actions. On top of this, we’re playing around with systems so complex and difficult to understand.
We’ve had centralization in the private sector whereby large corporations have grown at the expense of small businesses and entrepreneurs. These larger corporations may seem more “efficient”, but how can you talk about efficiency without talking about risk. The sheer size of these large institutions makes them much less flexible and makes it very difficult for them to improvise, but it’s the improvisation process I described above (where inputs are constantly being diversified and replaced while new ways of designing outputs and new outputs themselves are the source of a city’s life and wealth). What we’ve effectively done is create this massive system that’s not only extremely rigid and inflexible, but the current alignment of incentives has made it so that the entire system is designed to suppress volatility. Unfortunately, volatility IS information and provides a natural feedback mechanism for the system.
It’s not just a few countries that have these problems–virtually all economies today do.
Csteven,
I’d like to address the point of the bailout of car companies again. The problem with the way the suppliers are set up is that these regions pay for their imports by exporting what they produce to other areas. There’s very little diversification here, which is why these companies and suppliers will keep running into the same problems. These areas and companies must fail eventually and the longer we wait, the greater the imbalances will be. Many of these small towns in the country that effectively survive of one or two large industries in the area producing only a few items to be exported elsewhere are inherently fragile. As I said before, the only sustainable way to create wealth over an extended period of time is to have cities that’re able to diversify both their exports and their imports whereby there’s a constant process of volatile trade. What we’re really doing with these regions is that we’re keeping alive industries, towns, and areas that need to go bust. The cost of the “bailout” isn’t really the bailout; it’s all of the other stuff and the way the necessary feedback mechanisms of the system are suppressed. How much is that cost? I’m willing to bet that the cost of suppressing the feedback mechanism is orders of magnitude higher than the maximum cost of the bailouts could’ve ever been.
It’s not just in cars where this has happened, but in finance as well. Finance has effectively become extremely centralized which means that you’ve got these mega-banks who effectively control basically everything. They’re not robust at all.
BTW, the reason you’re saying that radical decentralization immediately would result in disaster is because you’re right, it would. However, it’s really the only sustainable way to preserve and build on top of what we have.
@Suvy,
Well I have only been writing since years ago on Michael’s blog about the need for decentralized systems and simulated annealing being nature’s only known optimization method for dynamic systems. I have mentioned Taleb’s Antifragility both in this blog and on my “blog” in the “Information Is Alive!” essay.
The more degrees-of-freedom in a system, the more granular adjustments to change can be.
You raise the fundamental natural quagmire that capital follows a power-law distribution, because the majority of people are contented to not devote their vocation to capital accumulation and the Iron Law of Collective Political Economics.
The way nature deals with this is by destroying (decaying) capital at a sufficient rate such that capital aggregation can’t subsume innovation. When you have central banks that have been captured by the large capitalists, they attempt to violate this natural decay. They do fail in the end but not without great overshoot and dislocation since the process is a discontinuous event. For example, the capitalists can accumulate as much fiat and hard assets as they want, but this genre of capital is decaying and losing value in the fledgling knowledge age. Knowledge can’t be financed, and thus can’t be printed by central banks.
So we really don’t have to do anything. Nature has been winning since the beginning of the dawn of time thus I doubt nature will lose this time around.
We don’t like the waves of boom and bust that result from this epic battle between capital aggregation and nature’s “it will grow wings and fly away”, but nature never promised us a boring, smooth ride.
Relish the discontinuities. These are the time great fortunes are lost and made. I’ve been preparing.
In more concrete terms, I expect technological innovation on the concept of money as I have been alluding to decentralized crpto-currency. The world simply won’t be able to agree on a global, centralized, digital, real-time retail digit fast enough any other way. The global monetary reset will come far too late to fulfill the need for a this by the high tech sector well before 2032. We will begin trading our knowledge decentrally. You can see the beginnings of this in terms of trade on social networks and for example smartphone apps. The 3D printers are coming. Etc.. I can’t see it all, but I expect massive acceleration of this as we write this.
Note there will be fiat monetary reset for that old world sector of the economy, which will probably still be significant in relative size compared to the knowledge economy even by 2032 but small enough that prosperity has taken over and we can stop the wars that will occur between now and then.
My problem with optimal currency zone theory always has been that it doesn’t cover “cultural convergence” (common language, prevailing ideologies, spending and saving habits,etc.). I understand why it doesn’t. Culture is very ambiguous term for economic theory right now. But without this, theory is too simplistic for my taste.
Hi Prof Pettis,
First, thank you for maintaining an incredibly thoughtful, patient, and educational blog — it’s a joy to follow.
This may be a dead thread, but I’m wondering if you have any thoughts on how advanced technology development (digitization, robotics, automation, predictive analytics) could impact the relationship between labor and productivity, and more specifically how a non-linear technology development curve could further undermine economic convergence theory. In other words, to what degree is economic convergence theory based on the assumption that labor pools in poorer regions can effectively compete with more affluent regions, and do you see the validity of that assumption having changed significantly since China’s initial liberalization/reforms.
Thank you.