Latin & Hellas

In today's global economy ...

2007-05-30T11:22:00.000-05:00

... mobility is cheap, permanence is expensive ... for as long as the energy supply lasts.

Thanksgiving Week's Dollar Decline

2006-11-26T03:10:00.000-05:00

In these last few days, the US dollar has broken out on the downside of its comfortable 1.25-1.28 range against the euro where it had been for the previous five months or so.

The dollar's erosion is slow because there are indeed countervailing forces around the world: other countries have structural problems too.

We have to give due consideration to the fact that markets on Thursday and Friday were thin and also that the most recent low point for the dollar was December 2004/January 2005, reaching 1.36 vs the euro, and then it recovered somewhat, up to around 1.18.

So we'll have to see whether in December 2006/January 2007 it breaches the 1.36 level vs the euro. Beyond that is 1.46 going back to 1995. These are the significant levels. See article Erosion Of The US Dollar? (http://tinyurl.com/y98fcr).

In my view, relative productivity growth is a key driver in long-term foreign exchange rates, though little talked about.

What is more worrying this time around is that productivity growth ground to halt in the US in the third quarter. This is a sign that the potential growth rate of the US economy will be lower for years to come, on par with Europe's anemic growth rates in these past 15 years or so, not to mention Japan.

I agree with those who expect that, in view of high debt levels and historical performance, inflation/stagflation camouflauged as growth is a more likely scenario than deflation/recession, regardless of how salubrious a relatively short period of deflation/recession would be for the structure of the US economy.

But history shows that neither political leaders nor society at large have enough discipline for that; they usually need to be hit over the head.

Anyway, let's wait for at least mid-January before declaring a debt/inflation-induced dollar melt-down endgame: countervailing forces, combined with intervention - mostly
verbal, (see http://tinyurl.com/yyb8a9) -, may indeed give the dollar another year of respite, with slow, orderly erosion as we've seen in the past several years.

The Meaning Of Inflation

2006-11-20T15:13:00.000-05:00

Inflation can be a double-edged sword, can't it?

And it has been throughout history since ruling groups have imposed a supply of money - the means of exchange, unit of account, and store of value - on societies that they govern.

Enlightened when used to help keep a society moving, producing new income, insidious when used to otherwise usurp wealth.

In the US and Europe in the last few years, consumer price inflation has been moderate, but asset-price inflation has been "through the roof".

The rest is up to you.

G20 2006 Summit – More Muddling Through

2006-11-20T12:14:00.000-05:00

Not exactly the long called-for energy summit leading to a resolution of armed conflict, the G-20 meeting did release a communiqué (http://tinyurl.com/y3my49), one-fourth of which devoted to global energy and minerals markets.

In all fairness, the G-20 is an informal annual meeting of the finance ministers and central bankers of twenty of the world’s key countries – Canada, United States, Mexico, Brazil, Argentina, European Union, Germany, France, Italy, United Kingdom, Russia, Turkey, South Africa, Saudi Arabia, India, Indonesia, Japan, South Korea, China, and Australia – and not of the actual key “business” players around the world’s hot spots with decision-making powers to affect such a resolution.

Instead, we receive some useful information on what to expect on the global economic outlook in general, economic policy, energy policy, immigration policy, and several other issues: in short, more muddling through, onward with economic globalization.

I. Global Outlook

Along with the usual projections on economic growth rates, there are three noteworthy points.

First, finance ministers and central bankers recognize that free trade is still of fundamental importance to economic growth and globalization, protectionism needs to be avoided, and talks to extend trade must be revitalized.

Second, upward pressure on inflation continues and inflation rates in many G-20 countries will remain stable at current levels or increase, implying steady or increasing interest rates going forward.

Third, we can expect further immigration flows from developing countries with young populations to countries of early industrialization with aging populations.

II. Global Energy And Minerals Markets

In short, the path to long-term energy security for this set of policy-makers is to let price signals, i.e. free market forces, and domestic and international competition to determine investment and research in the effort to increase supplies as global demand for energy and minerals commodities is set to increase significantly over the coming decades, driven by a strong world economy, rising incomes, and ongoing industrialization and urbanization in many economies.

In this context, cooperation means domestic policy coordination to favor investment, expanding global trade, and efficient management of both private and state-owned energy production firms. Well-functioning markets, they argue, will support investment in new supply, generate efficiency and new technologies, encouraging the use of renewable and alternative energy sources, and allow knowledge and resources to flow.

Two further points to note in this regard: 1) the recent new energy law in the US is a hodgepodge of subsidies for a far-flung array of initiatives; 2) The Economist recently ran a special report (http://tinyurl.com/ydfvjp) on such initiatives and the dubiousness of subsidies to support them: take away the subsidies, and many of these initiatives are simply not viable.

The conclusion is that we are going to muddle along for the foreseeable future with a mix of conventional fossil fuels and investment in increasing their supply, amidst armed conflict or the threat of it in several regions where such supplies are abundant but probably peaking, nuclear, coal, renewable (hydroelectric, solar, wind, waste) and alternative sources, all the while hoping for technological breakthroughs, and that policy-makers are satisfied with that.

III. Demographic Change

In terms of demographic trends, countries of early industrialization and many developing countries are moving in opposite directions, so we can expect current migration trends to continue. In this context, the G-20 recommendation is to focus policy adjustment on financial markets and further aspects of labor mobility.

As mentioned in the previous post, the function of financial markets is to facilitate the movement of goods through space and time, assuming efficient energy, storage, and transportation. This also means, according to the G-20 communiqué, emphasizing to people, especially in the early industrialized countries, the need to be aware of their retirement income needs and that international policy and financial flows with respect to migrant labor remittances, pension payments, and healthcare payments must be flexible, low-cost, and efficient.

In conclusion, do not expect the new US Congress to pass a strict new immigration law, if any. Do expect a continuation of the shift in the burden of pension and health expenses from US corporations to individuals privately. At the same time, also expect inflation to continue to devalue government pension payments and healthcare payments, accompanied by a general lower quality of healthcare in both the US and Europe, on the one hand, while the citizens of developing countries start to receive some kind of pension and healthcare benefits from their governments: in short, the two sides are slowly converging towards a mediocre middle somewhere; there are simply not enough resources to go around to provide everyone with a top quality education, healthcare, and pension.

IV. Several Other Issues

The communiqué also had sections on reforming the IMF and the World Bank, advancing growth-oriented domestic economic reform within member countries, aid commitments and effectiveness, exchange of tax information, sovereign borrower/private-sector relations, and money laundering and terrorist and illicit financing. Of these, probably the most important are the exchange of tax information and money laundering and terrorist and illicit financing, for various reasons.

The Meaning Of Finance

2006-11-18T14:29:00.000-05:00

Finance means transferring goods, ultimately, across space and time.

There is no finance without physical storage, energy, and transportation.

A financial system, then, can only go as far as an economy’s capacity for storage, its energy, and transportation.

We must be productive in this sense. Anything beyond that is inflation.

The Long Called-For Energy Summit?

2006-11-12T04:01:00.000-05:00

Since 2003 and the debacle at the UN over how the big power groups should divvy up Iraq's oil resources, Latin & Hellas has been arguing in favor of a world energy summit to decide on the what is probably the most import issue facing the global economy in a relatively more peaceful manner.

Now that some of the countries of early industrialization may be heading into a recession in 2007, perhaps such a summit is about to take place.

The full article, "Host Says G-20 Summit To Discuss Energy Security" was released by Reuters on Saturday, 9:30 p.m. EST
(click on post title for direct link).

Here is a summary below.

*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/

The Group of 20 meeting of finance ministers and central bankers will discuss ways to ensure energy and resource security in light of strong demand from China and India, Australian Treasurer Peter Costello said on Sunday.

Mr. Costello will host the G-20 summit in Melbourne on November 18 and 19, with finance ministers and central bankers from the world's biggest economies, including China and India, the United States, Japan and Britain.

Mr. Costello said the meeting would bring major oil producing nations Saudi Arabia and Russia together with major customers, including China and India, which are experiencing growing demand for energy and resources.

"How does the world satisfy those economies that there will be continuity of supply at realistic prices, with no need to lock up supplies, without cartel activity which would rig those international markets?", Mr. Costello told Australian television.

"If we can get an agreement on adequate supply, adequate security, proper international pricing, then I think we can actually ensure that what could otherwise become jostling and instability over resources over the next couple of decades will be taken out of the system."

*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/*/

At least it may be a step in the right direction.

Warriors For Globalization

2006-11-06T05:34:00.000-05:00

It is clear that many of those who have not been warriors for globalization, in the business sense, have missed out on the economic growth of these past fifteen or so years, in some cases causing disruption in their local circumstances.

It is equally clear that many of those who have been warriors for (or against) globalization, in the military sense, have been maimed or died.

But was it any different in other episodes of globalization in the past?

Some scholars estimate that a career Roman soldier had a 25% chance of surviving twenty years of service before being eligible for retirement when he would be rewarded with some farmland and perhaps a house.

I leave further analogies to the reader.

... What They Deserve ...

2006-10-30T14:11:00.000-05:00

In their own stupidity, fear, ignorance and laziness, the soon-to-be former middle classes of the early industrialized countries are allowing their ruling classes to tax and overprice them out of the internationally isolated, comfortable material existence that they enjoyed for about four decades running after their imperial civil wars of the mid-Twentieth Century, thinking, erroneously, that those times would last forever.

It is time to humble down and live a little bit more like everybody else!

Mid-Fourth Quarter Blog Review:

2006-10-23T11:52:00.000-05:00

Latin & Hellas On The Global And US Economies
– Swimming In the Mud

So far, since its inception in January-February 2006, the writer of this blog has focused on globalization, the US economy, and the economies of the early industrialized countries in general, in the context of the globalization of the industrialized economy. Building on previous posts, here we will review 1) the basic historical framework for globalization, the current situation, and likely developments, 2) the global financial system and the debate over the fiat currency system vs gold, and 3) current economic policy in the US, mainly from the viewpoint the central bankers, and the quest for a soft landing which, I argue, is more like swimming in the mud, possible but dirty.

I. Basic Historical Framework For Globalization

In the essay Diffusion and Darkness (posted July 28, 2006), we mentioned the thousand-years spread of agriculture across the globe as humans emerged from hunting and gathering. As Douglass North pointed out in one of his books, the political history of the pre-industrial world is humans’ working out the social implications of that shift in economics: agriculture was practiced over the centuries under any number of political structures and regimes, from isolated subsistence farmsteads to extensive monarchical empires, based on religious ideologies, spanning land and sea, complete with transport and monetary systems based on metal coinage.

In their public speeches, US central bankers often address the topic of globalization. In a recent speech (August 25, 2006), current Federal Reserve Chairman Bernanke even offered a brief outline of the history globalization, citing the Roman Empire as the premier example of the achievement of globalization in the ancient world.

Another culminating moment in the history of globalization was the European “discoveries” period, led first by the Portuguese and Spanish, and later the British, Dutch and French (roughly 1500 to 1750), spurred by advances in European shipping technology and navigation, leading to the globalization of trade, not to mention colonization.

Industrialization, which began in the United Kingdom and spread to certain parts of Europe, North America and certain other European colonies during roughly the 1750-1914 period, was the most important revolution in human economic history since the shift from hunting and gathering to agriculture, and political history since then is humans’ working out the social implications of that shift in economics: spawned under the auspices of the Western liberal revolution, representative democracy and market economics, industrialization over the span of some two-hundred fifty years has spread across the face of the globe, complete with transport, financial, and information & telecommunications systems, and today it is practiced under various political structures and regimes ranging in size from city- and island-states to empires spanning land, sea, and air, from various types of dictatorships to various types of semi-anarchy.

The current situation

Most of us are aware that organizers of a consumption-driven, market-based industrialized economy perceive the need to expand the scope of production, consumption, markets, and the supply of energy.

In the essay Musings On The Global Economy (posted February 21, 2006), we noted that, in political economy terms, globalization today means that big power groups – mainly national governments and multinational enterprises – can organize a truly global division of labor, allocation of capital, and consumption in a system largely driven by market prices mixed with government intervention.

Following the energy crises of the 1970s, the US reacted in the 1980s and early 1990s with policy reforms, while at the same time introducing new technologies to implement them on a global scale.

First, in terms of policy reform, the US overhauled its domestic tax and financial systems, then led the drive towards international capital market openness and free trade and travel policies, stimulating also Europe’s drive toward a single market and political union, openness and restructuring in eastern Europe and Russia after the end of the cold war, openness and industrial development in China and India and other emerging countries of east Asia, the “Washington consensus” policies in Latin America, greater involvement of especially energy-rich sub-Saharan African countries, while relations with Islamic countries remained complicated and uncertain, and, most recently, migration of low-cost workers, especially toward the countries of early industrialization.

In terms of technology, generally speaking the early industrialized countries learned how to use energy for transport and especially power generation for industry and services more efficiently. But the application of information & telecommunications (ITC) technology on a global level and scale, coupled with improvements in management techniques and more flexible labor and capital markets leading to productivity gains, especially in the US, has been the culminating point so far in the process towards the globalization of the industrialized economy whose social, political, and economic implications are still being played out.

Technological and economic change brings about social change. Study of human history shows that, speaking of big power groups (governments and big business), any change in territorial relations due to any combination of technological, economic, social, and political change also gives rise to the challenge of how to manage potential and real social changes that result within the territories of the respective big power groups. In other words, the policy, technological and economic changes that are the driving forces behind the globalization of the industrialized economy are posing challenges to domestic social models organized and managed by respective big power groups, on the one hand, and relations among big power groups on a global level and scale, on the other, and they are in turn mutually influencing each other’s domestic models, on friendly and unfriendly terms as the case may be.

Now, as a rule, established power groups do not want to lose control, and this stage of transformation of the global economy is no exception. Generally, big power groups exercise political and social power through control of the energy supply and of strategic commodities, control of military force, control of the money supply (the means of exchange, unit of account, and store of material value), and control of ideology and mass media.

The will of the current main big power groups is that there be no fundamental changes in the matrices of the current social political models, based on the cultural ideology of consumerist materialism as a result of the mere global extension of the industrial economic model organized through a combination of free markets and government intervention. For example, through domination of international capital markets and organizations such as the IMF and the World Bank, the countries of early industrialization have, so far, maintained control of the global money supply.

Nevertheless, social models are changing – in the countries of early industrialization, in Islamic countries, in east Asia, in Latin America, etc. – and several political conflicts, economic imbalances, and social structure problems have emerged as a result.

One economic imbalance, for example, is energy: demand has increased because of the need to fuel the growing number of factories in countries such as China, for example, and the need to transport all this merchandise to the centers of consumption over mountains and oceans, throughout sprawling suburbs, while supply has not kept apace. Here a political conflict arises: still the most efficient sources of energy (oil & natural gas) are found for the most part inside or around countries where major groups aspiring for power, with another ideology, want to increase and legitimize their power, and so to achieve this objective they make war, through whatever means available to them, where the stakes are the price of energy, to whom to sell it, and how to redistribute the income so generated. Here, of course, I am referring to the conflict between the Islamists and the countries of early industrialization (including here Russia), with countries like China and India lurking in the background.

The wave of change in social models also probably explains the current conflict with North Korea, a regime trying desperately cling to an old social model that is clearly obsolete – not even the Chinese subscribe to it any longer (Cuba is a special case, not discussed here) – and to obtain nuclear weapons to defend itself.

Another example of a change in social model is in the United States and Europe: the union, welfare and pension systems developed towards the end of the 1800s and during the 1900s in the countries of early industrialization that upheld the majority of the working population in the middle class clearly cannot be sustained going forward because of cost competition elsewhere: the golden age of a restricted and protected middle class in the US and Europe is just about over and the gains of industrialization are now being dispersed over a greater number of people throughout the world.

Likely developments

Most likely, through trade, direct investment, immigration and war too, we will all become a little bit more like each other: demographically-challenged US, Europe, and Japan are accounting for an increasingly lower proportion of global output, and probably within the next two or three decades the average Chinese and other east Asian, Indian, Latin American, Arab, and African and so on will have non-agricultural jobs, have access to money to purchase basic consumer goods through wages and credit, as well as access to some kind of healthcare, education and a pension, and the quality of the consumer goods, wages, healthcare, education, and pension will reflect the average quality of the masses of both the older centers of industrialization and the new, for better or worse – those of the masses that survive the global social shift and the energy wars.

II. The Global Financial System

In two articles, i) The Finances Of The Nation-State And The Global Foreign Exchange System and ii) Reform The International Monetary System Or Reform The Nation-State System?, both posted February 23, 2006, but written in April 1995 in the wake of the collapse of the European Monetary System in 1992 and the North American currency crisis of 1994-1995, during a period featuring high budget deficits in the countries of early industrialization, we argued that tinkering with the international monetary system may have some tangible effects in a series of short-runs, but that the underlying cause of chronic macroeconomic disequilibria is fiscal imbalance. In the ensuing years, fiscal balance was restored in the United States and improved in Europe in the run-up to the introduction of the single currency.

The expanding global credit bubble since 2001 spawned by historically low interest rates in attempts to revive or maintain consumption, the return in the US to budget deficits and the expanding trade deficit as well as consumer debt, persistent budget deficits and now a trade deficit and burgeoning consumer debt in Europe, and high energy and commodity prices, have all been associated with the rising price of gold in the past several years, sparking a debate, among other things, over the future of the fiat currency system, even as some central banks have begun to replenish their stocks of gold.

In the past eight months, we have contributed to this debate with three articles – The Global Financial System: To Plough Into Gold Or To Plough Seed (published April 24, 2006), Erosion Of The US Dollar? (published May 16, 2006), and More On Gold And The Global Economy (published July 17, 2006).

In these three articles, the focus of the analysis shifts to relative productivity which, however, is not unrelated to fiscal imbalances, debt, and inflation. Briefly tracing the history of the US dollar’s value against the JPY and the DEM (and now the EUR), we pointed out that in the early 1970s, amidst a relative rise in productivity in countries like Japan and Germany, leading to an erosion of the US dollar among other phenomena like inflation and an oil crisis, the gold standard and fixed-exchange rate regime came to an end.

Now, in the mid-2000s, in the face of rising inflation and debt, especially in the US and to a lesser extent in Europe (asset-price inflation – equities and real estate – and in non-exportable services like healthcare and education, coupled with consumer and government debt and trade deficits), leading to an erosion of, and constant pressure on, the US dollar, a debate has arisen whether gold is a speculative ploy or emerging once again as a store of value.

But we argued that the real question is, from the US or European or even Japanese perspective, to what extent do we believe in our own ability to maintain productive enterprises on our own soil, to discover and/or invent new forms of energy, renewable energy, and protect that technology from those that would do us harm? Gold is as much a fiat measure of value as paper currencies or as electronic accounting systems: it is valuable because people view it as valuable; there is no “intrinsic” value in gold or in anything for that matter. The global industrial system can only go so far as the real economic cost of energy for production and transportation. Perhaps we should design our “monetary” system based on units of energy.

As for the practical matter of the dollar exchange rate going forward, in short, we argued that the US economy is operating on an unsustainable consumption and energy model, a significant contributor to the several imbalances in the global economy and tension in the global political community. On the other hand, the eurozone economies and its satellites in eastern Europe are beset with their own structural problems (see also A Foursome On European Monetary Union published July 28) and, though certainly the Chinese and Indian economies have become relatively more productive than the US and eurozone economies, at least over the past three or four years, arguing in favor of a stronger Chinese and perhaps other Asian currencies, nonetheless the competitiveness of US manufacturing, both in high-tech fields and possibly also in the lower rungs of the technology chain once again in the future (see massive inflow of low-cost immigrants), as well as the overall productive potential of the US economy, the dollar cannot be easily dismissed.

Overall, then, we expect the dollar to remain under pressure against the euro and the other major currencies, especially while the yuan remains, what many perceive to be, artificially low. However, there are enough countervailing factors that argue in favor of further see-saw movements rather than some kind of dollar meltdown and, even more remotely, a return to the gold standard. Therefore, the speculative play on gold, and on commodities in general for that matter, is not a one way bet going forward.

III. Current Monetary Policy And The Search For A Soft Landing: Swimming In The Mud

In a series of four articles – i) Inflation, Interest Rates, And Short-Term Market View (posted May 25, 2006), ii) After The June Hikes, What Next? (posted July 5, 2006), iii) Governor Kohn Indicates Higher Interest Rates, Lower Real Estate Prices (post July 6, 2006), and iv) More Fed Watching, The Dilemma Of August 8 (posted July 29, 2006), we focused on the US economy, some of its structural imbalances as reflected in debt, deficits, asset prices, and inflation, financial market performance, and the monetary policy response, all against the backdrop of globalization.

Led by the corporate sector, the US still has the most productive, or at least the most efficient, economic system in the world in terms of the production and distribution of goods and services. It is even the top exporting nation in dollar volume terms. Though the manufacturing sector has lost nearly five million net jobs over the last 25 years or so, the number of high-skill manufacturing jobs has risen by 1.2 million, and the sector as a whole still accounts for 20% of total output. In short, the US manufacturing workforce in now smaller but more skilled and highly productive in such sectors as transportation equipment, aerospace, steel, forestry, and of course information and telecommunications technology. It is also among the world’s top agricultural producers and exporters, and the US economy as a whole makes the most efficient use of energy as measured by GDP per barrel of oil consumed.

Yet, if the US trade and budget deficits are any indication, it is clear that, on the aggregate, economic participants in the US consume more than they produce. While productivity is concentrated in the corporate sector, the household sector and the government are heavily indebted. In this context, in order to maintain sustainability, it is not surprising that US monetary policy-makers focus heavily on two main variables, debt and productivity. Closely related to these variables are inflation, reported and real, and interest rates and credit standards, the main policy tools of the Fed and the credit system.

To a large extent as a result of relationships with countries like China and India, reported US consumer price inflation and interest rates are low. But the imbalance between consumption and production and the concentration of surpluses in the corporate sector show up in other areas of the economy, such as asset price inflation (lately the real estate market) and prices for non-exportable and to a large extent captive services for most US residents, such as healthcare and education, the fact that headline inflation is reported with energy stripped out when on the rise but with energy included when on the decline, and that real wage growth has not kept up with even reported inflation and is way behind real inflation, hence easy credit and high levels of household debt. A similar dynamic is at play also in Europe. All these are indicators of the real relative decline of the middle class in the countries of early industrialization, though consumption continues, abetted by easy credit.

The Fed, along with many other observers, knows that debt-based spending in the United States, both household and government, cannot continue. Some are seriously concerned about the possibility of higher inflation combined with not only a slowdown, but even a recession, perhaps prompted by excessive tightening by the Fed, but more so because of the weight of excess debt. Others argue, on the other hand, that despite the high debt levels, the situation is under control by virtue of the high productivity of the US economy and so the expectation that the debt can be overcome in the medium/long-term through growth, with some slowdown now, followed by renewed acceleration later.

So the Fed must do a tight-rope walk at high altitude, seeking a balance between curbing inflation and maintaining the value of the dollar in the face of high levels of debt supported to a large extent by foreign purchases of treasury securities, on the one hand, and consumption and economic growth on the other, equally in the face of high levels of debt.

One way out, the Fed hopes, as US economic growth slows, in part through a downward correction in real estate prices, is that investment and consumption will pick up in the rest of the world, mainly east Asia (as mentioned, the US and Europe account for an increasingly smaller proportion of global output), allowing US exports to increase, by virtue of the productivity and investment potential (saving) in the corporate sector. Productivity may even rise in the meantime, supporting corporate earnings and so the stock market, helping to offset the reduction in the wealth effect caused by the adjustment in the real estate market, allowing interest rates to rise less than expected before the second quarter GDP report, leaving enough excess liquidity also to support emerging equity markets and international bonds, while foreigners would also agree to keep holding US debt paper, now at more competitive interest rates than eighteen months ago, in the interests of maintaining stability.

In the event, so far, economic growth has slowed to around 2.5%, though reported inflation, at around 2.9%, is still stubbornly higher than the Fed’s comfort zone. On the other hand, oil prices have dropped to below $60 per barrel and other commodity prices have also retreated, while the stock market has reached new highs, to a large extent driven by still high corporate earnings growth rates. But this may be a backwards looking indicator. We still have to gauge to what extent the recent run-up in stock prices is also the result of a switching of credit-induced speculative excesses from the real estate market back into the stock market.

In conclusion, one way to frame the main issue facing the US economy going forward is to ask the following questions. Is excess household and government debt cutting into productivity in the corporate sector? Is the US economy, mainly the government and the household sector, spending productivity gains filtering through the corporate sector at a faster pace than it can actually achieve them? Is the corporate sector side-stepping this dynamic through overseas investment, locking both the government and the household sector out of the profits at a faster pace than tax revenues and real asset-price gains?

On the one hand, US productivity and its manufacturing sector should not be dismissed so easily and it may even make a come-back in lower-level technology industries in the coming decades, as mentioned. But the vaunted high productivity of the US economy – which at some point must be put to the test in the face of high levels of international competition and the ongoing energy war – and interest rate policy alone are not enough to solve its imbalances, particularly its unsustainable consumption and energy model. And we do not believe that fiscal and trade policy is the problem either: low taxes, high levels of production, and free trade seem to produce positive results on the aggregate.

Instead, a rethink of the US domestic credit, community planning and transport policies, for example, and the conduct of the global energy wars is necessary. And, by the way, a change in such policies, in addition to a financial re-organization of the healthcare system and improvement in the quality of primary education, is necessary to stave off the decline of the middle class, if that is sincerely among the intentions of the ruling class.

But, as oft repeated, the art of economic policy is mostly pursued in a series of short-runs. As the US heads for a period of slower growth, stagflation, or recession over the next six to eighteen months – whatever it takes to bring overall economic growth back into line with real productivity growth, and no longer inflated by debt-based spending – the slack in overall global growth will most likely be picked up, if at all, by east Asia which, for the moment, still offers the most competitive conditions for manufacturing, even when adjusted for productivity, while at the same time its domestic markets deepen and domestic demand rises. Japan follows, though it largely depends on east Asia, while Europe in the past two quarters may have already reached its potential growth, mired as it is in its own structural problems, retarding its productivity growth. As for Latin America, the recent retreat in commodity prices may reveal how much the region’s economic growth has been dependent on the commodity price boom and how much on real structural gains, if any. As for the oil-producing Islamic countries, the onset of the slowdown has already led to a retreat in oil prices, possibly leading to a lessening of political tensions and a pause for reflection in the conduct of the energy wars by all parties to the conflict.

It is against this backdrop, then, that the US Federal Reserve attempts to engineer a “soft landing” using the few policy tools at its disposal, and it may even succeed, though not onto an “airport runaway” but rather into a “sea of mud” where the US and global economies will have to sink, in conflict with each other, or swim, in some kind of dirty cooperation, going forward.

Musings On The Global Economy:

2006-10-21T06:57:00.000-05:00

Pharaohs
Old and New

(originally published February 21, 2006)

Dear Maurizio,

I remember a few years ago or so, in 2003, we were speaking about the economy and, in particular, we said that, after the ITC technology boom of the 1990s, there is nowhere left to invest in the real sense of the term (and not in the speculative sense).

Obviously such a statement requires an explanation of the factual details that stand behind it.

Political conditions allowing, instantaneous global communications mean that big power groups – mainly national governments and multinational enterprises – can organize a truly global division of labor. Under these conditions, they can optimize the allocation of resources in the several sectors: for example, on the one hand, the industrial production of manufactures in regions where labor costs less (now Asia – led by China and India – compared to old centers of industrialization such as Europe, English-speaking America, and Japan) and, on the other hand, in the development, design, and planning of the application of the technologies that stand behind it in regions where managerial methods, university education and knowledge are at a higher level of quality, i.e. still, for now, in the same old centers of industrialization.

Meanwhile, these same old centers of industrialization – literally old also in the demographic sense – import persons of low education to work in the low-level service and construction sectors. More in detail, the United States imports not only low-cost goods from China, but also low-cost persons from Mexico and the rest of Latin America. Europe too, though to a lesser extent and with reluctance, imports low-cost persons from Africa, from western Asia, from central Europe, and in some cases (Spain and Italy) also from Latin America, all regions were the demography is “young, but lacks, however, the strong industrialization that in contrast is now the case in India and eastern Asia.

So far so good: investment in ITC technology means goods and services at lower cost and so, in the aggregate, higher productivity for all and a higher quality of life for all on a relatively global scale, at least in principle, including also, and perhaps in particular, “intellectual” workers in the countries of old industrialization. Perhaps the only true losers in this scenario are poorly educated workers employed in manufacturing based in the same old centers of industrialization, but there are also retraining programs and in any case many of these workers are close to retirement.

However, in this scenario there are several economic, political and social structure problems, which are also reflected in the financial scenario. In the following paragraphs I summarize only a few aspects of the most important problems on these four levels.

On the economic level, I focus on the supply and cost of energy, a sector which once again emerges as a central point in human affairs since, on the one hand, there is a need to fuel the growing number of new factories in countries such as China and, on the other hand, there is a need to transport all this merchandise to the centers of consumption over mountains and oceans. We can also add the need to heat the houses of the old pensioners in the old industrialized countries (not so old pensioners in some countries, especially in western Europe, led by Italy) and fuel their SUVs., etc.

Now the political problem arises: still the most efficient sources of energy (oil and natural gas) are found for the most part inside or around countries where major groups aspiring for power, with another ideology, – that certain other, already-established power groups label as “terrorists” – want to, no surprise, increase and officialize their power, and so to achieve this objective they make war where the stakes are the price of energy, to whom to sell it, and how to redistribute the income so generated.

Obviously I am referring to the Arab countries, and to those that extend from northeastern Africa to central Asia and even to Indonesia, and to the Islamists. Something similar is ongoing also in Latin America, though not at the level of a shooting war and with milder ideologies, specifically Venezuela (the world’s number five oil producer) and now in Bolivia (enormous quantities of natural gas have recently been discovered) of which more below. Struggles in African countries like Nigeria and Angola can also be viewed in this context.

Addressing now the social structure issue, I would like to point to one general phenomenon and one particular one that regards us even personally. The general point is that historically, speaking of big power groups, any change in territorial relations due to technological and/or economic and/or social and political changes also gives rise to the challenge of how to manage potential and real social changes that result within the territories of the respective big power groups.

As for the particular phenomenon, as mentioned above, investment in ITC technology means goods and services at lower cost and so, in the aggregate, higher productivity for all and a higher quality of life for all on a relatively global scale, at least in principle, including also, and perhaps in particular, “intellectual” workers in the countries of old industrialization.

It is not so simple in reality, however, neither is it simple to understand the reality, and perhaps even less so to describe it in an economy of words. However, I shall try, as God commands.

Obviously the societies of early (old) industrialization cannot bring forward their social models developed towards the end of the 1800s and during the 1900s, especially those after the second world war until the end of the cold war. At the same time, the established power groups – neither in the countries of early industrialization, nor in the emerging countries, nor in the so-called underdeveloped countries (I refer in particular to Latin America), nor the “traditional” countries (I refer mainly to the Arab countries) – do not want to lose control during this stage of transformation of the global economy.

One proven method of control throughout history for two thousand five-hundred years – and here I address the financial scenario – is social and financial indebtedness, together with its partner, inflation: in other words, control of the money supply, of the means of exchange, the unit of account, and the store of material value. (There is also the military method, still employed, among still other methods of control.)

In principle, lower-cost goods and services and higher productivity at the aggregate level should mean a stable price level or even a moderate deflation. In such a scenario, there could be a true higher quality of life for everyone on a relatively global scale, also including, and perhaps in particular, intellectual workers in the countries of early industrialization: imagine what social, political, and cultural changes could occur through a true liberation of creative intellect, tempered by a sensibility for maintaining what has conserved true moral and cultural value throughout the centuries.

But the will of the current big power groups is that there be no fundamental changes in the matrices of the current social political models, based on the cultural ideology of consumerist materialism – whether of the so-called capitalist, socialist, or communist variants – as a result of the mere global extension of the industrial economic model organized through a combination of free markets and state intervention. The only alternative offered by the current global political agenda would be radical Islamism, which in my opinion would mean, stated briefly, the reversal of the gains of the industrial revolution of these last two-hundred years.

Instead, assuming that the established power groups beat back the challenge posed by radical Islamism, the social structure will continue to transform toward one that combines the gains of the industrial revolution of these past two-hundred years on a global scale on the economic plane – as in parallel fashion, the gains of the agricultural revolution have spread since around ten thousand years ago – with a widening gap between wealth/income groups (relatively few hyper-rich and many relatively poor) and an increasingly small middle class (including intellectual workers), just so reminiscent of a "traditional" agricultural society.

And the key instruments in implementing this transformation are the control of the energy supply, and of other commodities, and then control of the money supply, indebtedness, and inflation, and so control of the manipulation of published inflation data, implying also the huge sphere of control of the mass media.

As a result, the working classes, intellectual and non-intellectual, will be fixed and/or flexible in their places, both physical as well as social economic, by the will of the leaders of the big power groups (rule by telecommand), under the dominion of a consumerist materialist ideology, at the global level.

The details, among others, of this implementation are, in the countries of early industrialization, in the costs of the pension, healthcare, and university systems, in the speculative bubbles in asset prices – ten years ago in equities, now in the residential real estate market –, in the spread through the banking system of consumer credit and household indebtedness, the manipulation especially of the inflation data, and, at the global level, of migration flows, especially towards the countries of early industrialization.

As a result, stated briefly, at a certain point there will be a greater balance in the production of manufactured goods and services among the several regions of the world (and so also in the balance of payments): the number of factories will one day grow again in Europe and the United States, but the workers will not necessarily be the descendents of the current and soon-to-be pensioners, and the associated social costs will be of lesser proportions than those of the models in effect for several generations now in the countries of early industrialization.

Summarizing, then, the opening reference, I see the investment and application of ITC technology on the global level and scale in the last fifteen or twenty years, and since the end of the cold war, as a second wave of the industrial revolution, whose social, political, and economic implications are still being played out (e.g. military conflicts, financial speculation, imbalances in the balance of payments among the several countries, government and private debt, attempts to manage real and imagined climate changes, among other phenomena that generate uncertainty).

However, for the foreseeable future, perhaps the next fifty to one-hundred years, in my view, we will have a social structure that combines the gains of the industrialization of the last two hundred years with several social aspects reminiscent of the social structure of "traditional" agricultural societies, based, however, on a dominant consumerist materialist ideology in the hands of the current big power groups, leaving the conservation of culture and moral values to the efforts of smaller groups and individuals that still have the time, the will, and the strength.

And this space there will be: the current big power groups are exactly that, big and powerful, however they are not totalitarian (e.g. nazism, communism, and radical Islamism), and a good part of the leaders of these groups also see that to leave free a part of this sphere of human life on earth is also to their own benefit.

In the following paragraphs I offer a few observations, in the framework of the scenario delineated above, on the social economic situation in the regions and in several of the countries where I have enjoyed the privilege – in part also thanks to investment in ITC technology in these last fifteen/twenty years – of living, working, and studying.

As is well known, in Europe there is a struggle going on for many years now among those social forces that want to conserve as much as possible the old social model noted above, on the one hand, and those that are in a position to gain from the globalization of the economy, on the other (at times, these forces overlap and are contradictory among themselves, as often is the case in politics).

The result so far in countries like Italy, with rigid social systems (including the political system, the bureaucracy, and the labor market in particular) is that the society is consuming the wealth generated in the past at a faster pace than it is generating new wealth, and young people find relatively little space to gainfully express their talents, i.e. in jobs that pay well and in the formation of new, successful businesses (instead of being suffocated by the bureaucracy before generating even a euro of profit), allowing them to facilitate the formation of new families. I see that the Italian companies which are prospering are precisely those that are involved in the globalized economy, even in the traditional sectors of the modern Italian economy, such as the fashion and clothing sector, but likewise companies involved in the construction of infrastructure in key sectors such as energy and transport, among others.

One possible solution for domestic Europe, as opposed to a more flexible society achieving an increase in productivity, maintaining at the same time, nonetheless, the same expectations for the standard of living, would be a return to the protectionism of the past, a fortress Europe, which, however, would still have to find a solution to its energy needs, perhaps integrating more with Russia, central Asia, and possibly also with countries like Iran, quoting the price of oil in euro.

As for the United States, it seems that there an almost total political consensus that globalization is the only path forward. So the most striking aspect is the ongoing change in the social structure. It seems to me that the key to avoiding serfdom at the individual/household level is to avoid indebtedness due to excess consumption (also with moral implications).

The speculation in the real estate market is no longer sustainable. As a long-term result of the overproduction of oversized houses in the last seven or so years, I see the subdivision of these constructions into multi-family housing and a change in the zoning laws, allowing in zones – that so far are otherwise strictly residential – small industrial and commercial operations – reminiscent of what I had seen in Portuguese villages only seven or eight years ago and what I see as still the dominant model in Latin America – in part to offset excessive transport costs (job commuting, in some cases nowadays up to two hours one way only) and the carrying costs of these constructions, consisting of mortgage debt, energy expenses (light, heating, air conditioning), local property taxes, insurance, physical maintenance, and other items, all expenses that have gone or are going almost literally through the roof in the United States, not to mention healthcare and university education expenses.

One way out for both the United States and Europe, apart from a fresh outbreak of both trade and migration protectionism, would be new investment and widespread application of a new form(s) of energy and transport. However, in the current political economic structure in which big oil dominates, I do not see such a change on the visible horizon.

As for Latin America, then, judging from what I see so far in only one country, Ecuador, I have learned the meaning of an "underdeveloped" country (we may by now discard the term “third world” and for different reasons): there is industrial development, but at a much slower pace compared to both the countries of early industrialization and the emerging countries, in the grips of a ruling class with a "traditional agricultural" mentality who at the same time maintains strong cultural and political, as well as economic and financial, ties with "old world" Europe and the United States.

However, in contrast, Latin America maintains in a much more widespread way several aspects of the old "traditional agricultural" culture that are really worth the effort to conserve, in my view, such as the family and the art of enjoying life regardless of material conditions. I observe this referring to a concept of relative wealth and poverty and with all due respect for those suffering absolute poverty. I repeat, there is industrial development in Latin America, though at a very slow pace, and above all there is hardly a lack of food and in many environments the climate is favorable to the sweet life for people who know how to do it, in their own way; what is lacking, however, stated briefly, are social institutions (political and economic) that would allow the great mass of persons to achieve a level of material life “enjoyed” by those in the countries of early industrialization.

However, in my opinion, such a level of material life is overvalued, not only nowadays in market terms, but above all in human terms, and the people in the countries of early industrialization continue to pay an excessively high price in terms of social rigidity (the lack of freedom?) to conserve the system, in part because of notions of nationalist propaganda, snobbism, and downright racism: a little personal multi-lingualism and real experience in situ go a long way in helping to value the way of life of others, while at the same time wishing them the sweeter fruits (and not the bitter ones) of the systems of the countries of early industrialization, while they conserve those fruits of their own traditions that have real value.

In this context, several current political trends in Latin America perhaps merit comment, even if, in my view, the underlying issue is the same as always: are the ruling classes, of whatever flavor in terms of political propaganda, sincere and do they have the skills to transform the income generated by few commodities into durable social institutions that are capable not only of giving a higher standard of living to an increasingly larger share of their respective populations through a redistribution of income, but also more opportunities to grow, to express their talents, in a more diversified and competitive economy in the global context? Or are we witnessing the usual populism whose economic strength is based on a boom in the price of a single commodity which sooner or later will go bust according to the international trend, ending with the defenestration of the demagogue of the day? Nowadays I am referring in particular to Hugo Chavez of Venezuela and even more recently to Evo Morales of Bolivia.

Certainly more regional integration would make each one of these countries more competitive at the global level, and perhaps Brazil is the leading example in this sense, being the only country capable of standing alone as a global economic power, not only because of its territorial size but also because of the quality of its industry and its skills in research and development. Other countries are attempting to combine regional integration with global trade openness: I am referring in particular to the free trade agreement among the central American countries (plus the Dominican Republic) and the United States, the negotiations for a similar agreement among the Andean countries – Colombia, Ecuador, and Peru – and the United States (the final executive signatures are expected this year, 2006), the free trade agreements with Chile, Mexico’s NAFTA, and, finally, there are similar agreements being negotiated among different Latin American countries/regions and the European Union, and even with some Pacific-rim countries, including China.

It is worth mentioning that, at least in the Ecuador that I see, among the ones who prosper the most are those involved in some way with the global economy, both through emigration and the remittances that they send back to the country of origin and through trade.

Therefore, even a combination of populist socialism and free market in an open economy regime would be good in principle. The question remains whether the Latin American ruling classes are willing and able to give their respective societies social institutions adequate to the current global scenario and to curb, at least, the corruption that so punishes those who are for the most part good people.

As for the east Asian countries and India, obviously I cannot make personal observations, limiting myself instead to a few general remarks. First, it seems to me that the gap in the level of material life between an Asian worker and a worker from a country of early industrialization is set to narrow significantly over time. In the meantime, these countries are improving both in military terms and in terms of home-grown technology (improvement also reflected in the sphere of autonomous university research).

This development strengthens the idea and the reality that the systems of the countries of early industrialization are by now, or in any case will be, overvalued and they will have to maintain their hegemony, if they can, through a combination of propaganda, further technological and managerial development, and perhaps some social reinvigoration. Otherwise their destiny may be to become second-rate players in a global system dominated by the Asians, more numerous by far, while the Chinese laugh at the war between the "West" and the Arabs to determine who will sell them the commodities, energy first of all, for the industrial development through which they would come to dominate everyone.

In this overall context, at the personal level of one who, in some way, is part of that “middle class” that is decreasing in number and in importance, at least in comparison to the society of the countries of early industrialization during the last hundred years or so, I would say that the risks and the opportunities – in terms of mere survival, in general economic terms, in terms of personal moral choices – are not much different than they were in similar social situations of the past. I am thinking in particular of the Roman Empire of the first Two Centuries in comparison with the Third Century, for example. At any rate, often in history there is a complaint about the disappearance of one sort of "middle class" or another. Apparently the destiny of humanity does not revolve around this point, and there are more important things, even at the individual level. At any rate, I always remember something that I read in connection with Egyptian history, a letter from a father written to a son, conserved in the sands of the desert, precisely at the dawn of written history, in which the father exhorts the son to become a scribe, i.e. to know how to read and write, to know languages, because such knowledge would give him the skills and the flexibility to survive in the world of big power groups, of the pharaohs, old and new.

Peace of soul to all,

Latin & Hellas ™

4-5 January 2006

Italian version follows.
Segue versione italiana.

More Fed Watching, The Dilemma of August 8

2006-07-29T09:49:00.000-05:00

In the post of July 5, After The June Hikes, What Next?, we wrote "unless the second quarter GDP data clearly show a significant slowdown in growth (say below 3%), the balance of risks, in my view, still suggests further 25 basis-point rises in policy rates by the Fed."

In the post of May 25, Inflation, Interest Rates, And Short-Term Market View, we wrote “We may be headed for a period of stagflation, or at least slowing growth and stubborn inflation in the next six months, possibly very slow growth or a mild recession in 2007”.

In the event, the 2^nd quarter GDP growth data came in at 2.5%, apparently lowering the probability of an August hike, but even core inflation, the narrow gauge that the Fed officially touts as its most watched (the so-called personal consumption expenditure minus food and energy), accelerated to 2.9%.

The dollar weakened against the euro, apparently because of the higher probability of a pause in the US and expectations of further hikes in the eurozone. The stock market rallied, also on renewed expectations of a pause, or even an end to the tightening cycle, and the bond market rallied, in part on expectations that a slowdown will, in and of itself, help to cool inflation.

But again, the dollar weakened, the yield curve is noticeably inverted, inflation is stubborn, and consumers, along with the government, are still heavily indebted.

The dilemma the Fed faces is, on the one hand, to what extent to i) recognize real inflation – i.e. the rise in prices of what real human beings actually need, like food, energy, housing, healthcare, and education –, risking what may prove to be a sharp, but healthy, slowdown or recession, and ii) prop up the dollar, or, on the other hand, to prop up the stock market and possibly the real estate market, rolling over, or at least sustaining, the asset price bubble in an attempt to keep consumers feeling good while the government pursues overseas energy wars.

The purported high productivity of the US economy alone is not enough to solve this dilemma. At some point, this productivity must be put to the test in the face of high levels of international competition and the ongoing energy war.

Diffusion and Darkness

2006-07-28T11:39:00.000-05:00

(written on July 6, 2005)

It took some ten thousand years for agriculture to spread across the face of Eurasia and about another 1500 to spread to the Americas, as humans emerged from hunting and gathering, mostly like through chance observances of what happened when they dropped seeds in one place or another, leaving the area in the fall and returning in the spring.
When agriculture became consolidated in ancient civilization, nobles and kings pursued hunting as a sport, at times banning all others from pursuing it.

It has taken industrialization some two-hundred fifty years to spread across the face of the globe.
For some years now, people in the early industrialized countries – like retirees who worked all their lives in factories or, more likely, offices – pursue traditional agriculture (gardening) as a sport or hobby.

Now with the emergence of China, India and others as industrial powers, the headstart enjoyed by the early industrialized countries of Europe and their main colonial offspring is being overcome.

It may be the case one day, perhaps soon, that people in the early industrialized countries will pursue industrial enterprises as a hobby or sport, or at least they may attempt to do so for a while, sitting on their wealth.

Through the various stages of hunting & gathering, nomadism, agriculture and industrialization, vestiges, as well as significant groups, representing each stage remain, and in the midst of it all there have been wars, barbarians waiting at the gates, plunging the various civilizations into a dark age.

Europe, for example, has not yet recovered psychologically and spiritually from its two civil wars in the Twentienth Century – and it may never do so for as long as Tietmeyer says "No!".

Of course another dark age is still possible as the early industrialized nations compete with the newly industrialized nations for control over energy resources and with the nations that sit atop the main geological/geographical locations of one of the main such resources still in use today.

A serious world energy summit would be auspicable, but for the moment corporate and nationalist egoism still rules the day. Meanwhile, the barbarians still wait at the gates.

A Foursome On European Monetary Union

2006-07-28T11:13:00.000-05:00

I repropose here a series of four articles I wrote just over a year ago on the European economy and European Monetary Union at a time when economic growth was basically flat, as it has been in some European countries, especially Italy, for almost a decade. Most recently, however, the pace of growth seems to have picked up.
Nevertheless, if the US goes into recession towards the latter part of 2006 or into 2007, then we will have a chance to witness a real first test of the robustness of the European economy and monetary union and its energy relationship with Russia, even against the backdrop of the latest flair up in the decades-long war in the eastern Mediterranean (and don't think that this has had no impact on Europe, especially the Mediterranean Europan countries).

Here goes.

mercoledì, 01 giugno 2005

1. Something Has To Give

Sandwiched between the competitive forces converging upon them from Asia and across the Atlantic, the Europeans paint themselves into a corner with contradictory economic and social policies. The French rejection of the proposed EU constitution, itself absurd as far as Constitutional documents ought to go, is an expression of utter confusion as how to lead and act in the face of demographic and social stagnation while major portions of the rest of the world industrialize, erasing the two-century or so headstart that the Europeans had.

Now there are reports of German leaders talking about trashing the euro as a failed experiment, acknowledging growth and inflation differentials across eurozone countries.

Something has to give and perhaps competitive devaluations are a less worse solution than contradiction and utter confusion, than subliminal slow decline, unperceptible to the majority of citizens because blinded by the spectacle posed to them by the two-headed monster, i.e. the contrived spectacle of petty party politics.

Many energetic, talented good-willed people would have given their hearts and souls, while still in their precious youth, to forming new economically and culturally creative enterprises on European soil.

But in the event they didn't.

Because the two-headed monster, affectionately known as Teitmeyer, said, "No".

venerdì, 03 giugno 2005

2. Something Has To Give II: future of euro

Italian labour minister Roberto Maroni added his voice to figures in Europe casting doubt on the utility of the euro going forward.

While actual scrapping of the euro is unlikely, these latest statements are tantamount to acknowledgment, at least to some extent, that the structural rigidities of the European economy are unsustainable.

The question is: will this acknowledgment spread to more senior figures among the ruling classes in Europe?

I'm going to ask Tietmeyer. And I bet you I know what Tietmeyer will say.

Tietmeyer will say, "No!"

martedì, 07 giugno 2005

3. Another Useless Mouth

European Central Bank governor Trichet says Europe needs reforms to grow.

Thanks.

His and other useless mouths of overpaid bureaucrats have been uttering this and similar platitudes in various European countries for some fifteen years now.

Europe does not need another several years of the same useless mouths repeating platitudes like "Europe needs reforms to grow".

Europe needs a dynamic, creative, courageous, forward-looking ruling class that talks less and actually implements reforms.

But even this is easy to say.

And Tietmeyer still says, "No!".

mercoledì, 22 giugno 2005

4. The Real Meaning of European Monetary Union

The recent back and forth between Chirac and Blair, Shroeder and Blair only serves to confirm what we already knew about monetary union in Europe back in 1997.

Back then we wrote ... "The purpose of monetary union in Europe is to give the ruling classes of Europe more time to manage some of the underlying fundamental moral and economic problems. There is no question of resolving them as a result of EMU, but just to give more time to manage them in the hope that some solution may evolve, assuming of course that the ruling classes even pose themselves the question or attempt to actually resolve them. History shows that this is not a given."

Indeed, politicians can be great actors, building merely their own careers and leaving it at that.

In the meantime, the best creative energies of millions of wide-eyed young people have been sapped away.

And Tietmeyer still says "No!".

More On Gold And The Global Economy

2006-07-17T10:49:00.000-05:00

You asked me to review the article Why Gold Will Break All Records (http://www.egoli.com.au, weekly feature).

Overall the article has merit because it gives a balanced view between some of the fundamentals that may be underlying the bull market in gold and the speculative element (the emergence of ETFs).

From the point of view of a speculative investor, there are indeed strong fundamental arguments in favor of a long-term bull run in gold, but it remains a bet that could go either way.

From the point of view of an economist, the "gold is gold is gold" argument doesn't convince. Sometimes a piece of wood or a sheet of paper or a ceramic shard is worth more than gold, and sometimes other metals are worth more than gold.

Gold is as much a fiat measure of value as paper currencies or as electronic accounting systems: it is valuable because people view it as valuable; there is no "intrinsic" value in gold or in anything for that matter. And while it might be conceivable that the gold price would determine the allocation of resources for, say, big energy infrastructure investments around the world, it could be as, more, or less practicable in comparison to any other system – even war – depending on its design and its enforceability. In the case of war as the determinant of the allocation of investment in international energy infrastructure, I think there may be commodities other than gold which are more valuable. Nonetheless, they could still conceivably be priced in gold, but then the focus of the war effort may shift to seizing the sources of gold, not energy. I think the global human community is facing a different problem. Perhaps we should design our "monetary" system based on units of energy.

A few quibbles. The article states that "more and more imports have flooded into the US while fewer exports have left its shores": not true. The volume of US exports is at all time highs and the US is the number one exporting nation. The problem is that it is also the number one importing nation to the tune of an around 7% trade deficit measured against GDP.

Also, I reiterate a point on inflation. The flood of Chinese imports has kept inflation down in terms of incidental consumer goods, those which account for most of the official CPI, but US inflation of domestic assets and services, like housing, healthcare and education, has been sky-rocketing, and little effective has been done to address it; the current cycle of interest rate rises may arguably be timid and may prove to be like shaking a stick at a tidal wave: credit and prices of non-exportables are out of control, though of course this is to some extent related to international linkages.

Nonetheless, the competitiveness of US manufacturing, both in high-tech fields and possibly also in lower rungs of the technology chain once again in the future, as well as the overall productivity of the US economy, cannot be easily dismissed. On the other hand, however, these real and potential strengths may be nullified by some of the recent blunders in domestic economic policy (too easy credit for too long, for example, leading to the gross misallocation of resources, both human and material, flooding out real, productive investment domestically, not to mention the social implications of a debt-burdened, fast-declining middle class) and domestic and international energy policy, in no small way contributing to the current global political tensions and the depletion of country's fiscal reserves, among other things.

In short, the US economy is operating on an unsustainable consumption and energy model, a significant contributor to the several imbalances in the global economy and the tension in the global political community. One offshoot of this situation may be a speculative bull run in gold prices as fiat currency systems lose their credibility as instruments for determining the peaceable allocation of resources around the globe. The speculator will focus on the former, the economist, perhaps, on the latter.

On Proper Monetary Policy

2006-07-16T06:05:00.000-05:00

Investments must stand on their own merits and not fly high on overdoses of money supply.

Governor Kohn Indicates Higher Interest Rates, Lower Real Estate Prices

2006-07-06T14:56:00.000-05:00

Today the Vice Chairman of the Federal Reserve Board, Donald L. Kohn, offered remarks at the European Economics and Financial Centre Seminar, House of Commons, London, England, entitled Reflections on Globalization and Policies.

http://www.federalreserve.gov/boarddocs/speeches/2006/20060706/default.htm

As is often the case, the language is hard to decipher for a non-economist, but my take is that the Governor is indicating higher interest rates and lower real estate prices going forward, highlighting

in my view, asset prices on the one hand, and the dollar, inflation and interest rates, on the other.

Here are quotes from his remarks mentioning these variables (the bold type is mine).

1) Mention Of Asset Prices

a) "Various asset markets have experienced rather sharp fluctuations in prices in recent decades, some of which have threatened disruption in the United States and have contributed to sluggish growth elsewhere, as in Japan following the real estate boom and bust; we certainly cannot rule out the possibility of further sharp asset price movements as product prices and spending adjust."

b) "Sound public policies ... can contribute by facilitating needed adjustments in spending, production, and relative prices and by taking steps to foster strong, flexible product and financial markets that are resilient to more abrupt changes in asset prices and spending patterns, cushioning the effect of any such fluctuations on output and product prices."

c) "By ensuring that financial institutions are adequately capitalized and are managing risks well, and are in general well prepared to deal with major changes in asset prices, they are in a better position to weather any necessary changes in policy settings.”

2) The Dollar, Inflation, And Interest Rates

a) "Continued strong demand for dollar assets will be critical to keeping that unwinding smooth and not disruptive."

b) "The lesson from the 1970s, however, is that an unchecked or permanent increase in inflation would only feedback adversely on demand for dollars. Such an unmooring of the anchor of price stability could only elevate the odds on abrupt changes in interest rates and asset prices, instability in the US economy, and disorder in global adjustments."

In short, the Fed, along with many other observers, knows that debt-based spending in the United States, both private and government, cannot continue. One way out, the Fed hopes, is that investment and consumption demand will pick up in the rest of the world, allowing US exports to increase, by virtue of the productivity and saving in the corporate sector, and that US domestic demand will slow, in part through a downward correction in real estate prices (stock prices may come down, but most likely will continue to fluctuate and even drift upwards since the corporate sector is not so heavily indebted and is highly productive), while at the same time foreigners remain willing to hold US debt paper by virtue of competitive US interest rates.

In his remarks, the Governor is obviously addressing these variables from a long-term point of view. But he also states elsewhere in these same remarks that the long-run consists of series of short-runs. So, in my view, these remarks are further evidence that we can expect at least two or three more rate hikes by the Fed in the next three or four meetings, and that the downward pressure on the real estate market will continue, perhaps with some abrupt drops in several regions of the country in the next six to eighteen months, even as economic growth slows to a pace more in line with real productivity growth, and no longer inflated by excessive debt-based spending.

After The June Hikes, What Next?

2006-07-05T04:37:00.000-05:00

Any doubts during the interim between the previous two FOMC meetings about what the Fed might do were resolved by what appears to have been a coordinated series of hawkish statements by various Board members in the remaining weeks before the late-June meeting, making the result a foregone conclusion, sending stock markets into a tailspin and buoying the dollar, staying afloat at the lower end of its current 1.25-1.29 range against the euro, even as long-term rates surged ahead to the 5.20 level and beyond.

Buy The Rumor, Sell The Fact

In the event, the Fed once again raised policy rates one one-quarter of a point, and the markets reacted with a stock market rally, firmer bond prices, sending the long-term rate back down to around 5.12, while the dollar shot back down to the upper part of its current range against the euro. I interpret this as the stock market with a dovish interpretation of the FOMC statement explaining the policy action, profit-taking on the bond market and, perhaps most significantly, caution on the part of currency market participants concerned about the twin deficits in case of a pause at the next meeting or meetings.

In the most recent days, however, stock markets are back in the red, at least in Europe with the US slowed by a holiday-shortened week, the long-term rate has inched back up to around 5.15%, while the dollar is in the middle part of its range against the euro.

For some months now, the Fed has clearly indicated that policy going forward will be data dependent. Now, in this blog I have already addressed the issue of the quality of the inflation data, and GDP data for the second quarter has not been released yet, though the Fed certainly has a more up-to-date picture than most other market participants. In the end, the stock market enthusiasm may prove to be pre-mature, or perhaps the move up has been more profit-taking on short positions rather than expectations of faster corporate earnings growth going forward based on fundamentals.

In the United States, some are seriously concerned about the possibility of higher inflation combined with not only a slowdown, but even a recession, perhaps prompted by excessive tightening by the Fed, but more so because of the weight of excess debt. Others argue, on the other hand, that despite the high debt levels (both private and government, reflected in the gaping trade deficit), the situation is under control by virtue of the high productivity of the US economy and so the expectation that the debt can be overcome in the medium/long-term through growth, with some slowdown now, followed by renewed acceleration later.

So the Fed must do a tight-rope walk at high altitude, seeking a balance between maintaining the value of the dollar in the face of high levels of debt supported to a large extent by foreign purchases of treasury securities, on the one hand, and economic growth on the other, equally in the face of high levels of debt supported, however, by what probably still is the most productive, or at least the most efficient, economic system in the world in terms of the production and distribution of goods and services.

Depending on the second quarter GDP data, then, and indications that the Fed may have at mid-third quarter, the monetary authority may indeed risk a pause at the FOMC meeting scheduled for August 8 when many people are on vacation. But it may also prove to be too risky, in the face of real inflation, especially at a time when currency markets are relatively thin.

So, once again, unless the second quarter GDP data clearly show a significant slowdown in growth (say below 3%), the balance of risks, in my view, still suggests further 25 basis-point rises in policy rates by the Fed.

Inflation, Interest Rates, And Short-Term Market View

2006-05-25T03:12:00.000-05:00

I think at this point the chances are that interest rates will continue to rise: anybody who knows how to count, knows that the real rate of inflation is closer to 10% than the 3%-4% stated in the announced inflation data (the same goes in Europe) and that slowly, subtly, the Fed (and the ECB with a lag) will begin to acknowledge this.

Personally, as an economist, I think that the economy would be better served with short-term rates at 6% and long-term rates around 8%, reducing liquidity and, hopefully, getting the real level of inflation down to 4%-5% (2%-3% as stated is a joke).

We may be headed for a period of stagflation, or at least slowing growth and stubborn inflation in the next six months, possibly very slow growth or a mild recession in 2007.

Productivity may also rise in the meantime, supporting corporate earnings and so the stock market, and interest rates may not rise as much as anticipated, leaving enough excess liquidity to support emerging markets and international bonds.

But I think the balance of risks is on the side of recognized inflationary pressures, higher interest rates, a draining of some of the excess liquidity, a slowdown in consumption, and a slowdown in growth, at least during the next six months, possibly into 2007. A recession, albeit mild, may even be a good thing.

We'll know better by the end of this year.

Therefore, please quote me your best 3-month and 6-month CD rates at this time.

Erosion of the US Dollar?

2006-05-16T13:55:00.000-05:00

May 16, 2006

Seems the dollar has been losing ground as measured by the USD Index. What’s your take on further erosion?

Paul

Hi Paul,

Erosion Of The US Dollar?

There are two ways to view it, fundamental and technical, and the two combined, of course. In either case, the most important underlying factor, assuming political peace and a level commercial playing field, is relative productivity.

Even in the real world, relative productivity is still a major factor.

No doubt that after WWII, the US economy was the most productive, while others, like Germany and Japan, caught up relatively speaking from the 1950s to the 1970s, hence long-term erosion of the dollar's relative value and the end of the gold standard the early 1970s, among other phenomenon like inflation and a couple of oil crises.

The dollar held its own in the early-to-mid 1980s in conjunction with the economic reforms with global reach of the Reagan era, but at the price of high twin deficits. The dollar hit lows in the late 1980s-early 1990s, but right now I don't remember off the top of my head what the low point was against the D-mark, perhaps in the 1.50s area.

The dollar remained mostly strong until the Mexican debt crisis of late 1994/early 1995, dragging the dollar down with it, to a point where it reached 1.34 against the D-mark (about 1.46 against the euro vs 1.28 currently) and 88 against the JPY (against 110 currently). It recovered nicely in the late 1990s in the face of the Asian crisis on the one hand and government budget surpluses on the other.

In late 2004/early 2005 the dollar fell to about 1.36 against the euro (about 1.44 against the D-mark) and around 103 vs JPY.

So the most recent USD lows did not break the all-time low records of 1995.

I'm no technical guru, but usually it takes three attempts for a movement to break through an all-time level. So if we take the EUR/USD at 1.46 in 1995 as the low, the 2004/2005 low of 1.36 can be viewed as a first failed attempt (also USD/JPY at 88 vs 103).

Now we have EUR/USD at 1.28 (USD/JPY at 110) so there is some ways to go to reach 1.36 (103) and eventually 1.46 (88).

Now, I'm not sure that the US economy is relatively less productive than the eurozone economy in the past ten years or even in the past two years, or that its structural problems are relatively worse than those of the EU during the same periods of time, but one can certainly bet either way in view of the massive quantity of US debt – government, trade and household.

For example, this massive investment in oversized, overpriced housing, especially in exburb McMansions, certainly cannot prove to be productive, especially in the face of rising energy prices, unless many people start doing even more highly productive jobs at home and/or we develop an environmentally more renewable and politically safer form of energy to power industry, transport vehicles (both private and mass), offices, and households.

In this context, Europe has been slowly muddling along, and it faces

some highly challenging demographic and structural issues which may

impede new productivity breakthroughs, even if European scientists develop new forms of energy first. Nevertheless, it is conceivable that over the next ten years, the eurozone could become relatively more productive than the US. So the currency bet can go either way, really.

Certainly the Chinese and Indian economies have become relatively

more productive than the US and eurozone economies, at least over the

past three or four years, so there is a strong argument that the Chinese,

and perhaps other east Asian currencies, should rise against the dollar,

perhaps even sharply. The question here is, are Asian consumers, Chinese in particular, ready to pick up the consumption slack that may result from a slowdown or even a recession in the US?

Overall, then, I expect the dollar to remain under pressure against the euro and the other major currencies, especially while the yuan remains, what many perceive to be, artificially low. However, there are enough countervailing factors that argue in favor of further see-saw movements rather than some kind of a dollar meltdown. One key to this, I think, is further rises in US interest rates. I think the Fed needs to keep raising rates, if nothing else than to wring some of the inefficiencies out of the system. But it will continue to tread lightly, trying to maintain a balance

between the countervailing forces.

The long-term way out for this country is to restore social and moral discipline in terms of deficits and debt, production and consumption, on the one hand, and the implementation of more serious energy and transportation policies, on the other, combined with prayer, and some hard, focused research, that we discover better forms of energy, especially, for private vehicle transport, over the next ten years or so.

The biggest caveat, however, is that history teaches us that it is not always wise men who have power and make policy.

So let us hope for the best, and prepare for the worst.

Sincerely,

Steve

THE GLOBAL FINANCIAL SYSTEM: TO PLOUGH INTO GOLD OR TO PLOUGH SEED?

2006-04-24T11:53:00.000-05:00

Hi Rick,

Again, as I've repeatedly stated in the past, it is certainly possible to make gains by ploughing fiat currency into gold, implying a speculative ploy or that gold may prove to be, in the coming years and perhaps decades, a store of value with respect to obtaining goods and services in the global market in the future, or some combination of speculative ploy and store of value.

No doubt that policy-makers, especially in the United States, to a lesser extent in Europe, have debased the currency, with real inflation rates of probably 10%, perhaps higher, instead of the stated 3% or so.

Let's look at a few fundamentals.

The leaders of the one-party Chinese hold something like 1,300,000,000 people under their sway, the population is relatively young, they are growing, they are educating themselves in fields like engineering, and they are industrializing rapidly.

The leaders of the United States have around 300,000,000 under their sway, the population is aging, and though the economy is officially growing the industrial base is not self-sufficient, being geared towards a few high-tech industries (many of which dedicated to an aging population), housing construction, and services (including financial services - like you and me), and relatively few people pursue the hard sciences (like you and me) and a significant portion of those that do are foreigners from east Asia.

Similar statements can be made of Europe. We can also say of the United States and Europe that any population growth is based on immigration from regions with poorly educated populations (Latin America in the case of the US, Africa and central Asia in the case of Europe).

The Muslims, and other "problematic" countries like Venezuela, still sit atop what is still for now the most economical source of energy.

The east Asians and the so-called West are both cooperating and competing in the process of determining the new allocation of global industry and division of labor, not to mention wealth and political power. Meanwhile, the Muslims seem to hate everybody.

The global industrial system can only go so far as the real economic cost of energy for production and transportation: it would be useless for the Chinese to produce shoes for the world and for the US to produce corn for the world, for example, if we do not have the fuel to ship the goods to one another.

Politics, and sometimes war, determine the global allocation of resources and political power itself.

Now, the financial system is also to a large extent a function of the economy of energy as well as political economy.

Yes, the world is transitioning, and gold may be a profitable speculative ploy and/or store of value during the years of the transition, or it may also prove to be one vehicle of speculation and/or store of value competing with many others, recently the housing market, previously the stock market.

There also used to be something, and there still is something, known as forming and running an economically viable enterprise, producing real products and services, as an ongoing concern, based on hard work.

Do you or any American or European or Japanese (or even an African or Muslim for that matter) really relish the idea of being second class citizens in a world dominated by an east Asia-based global Chinese empire? Think about the 1,300,000,000 for a moment: they could send a 1,000,000-man army like throwing water at flames. And then do it again and again and again while the fuel to fire the flames runs out. It would be like another Flood, in terms of the vicissitudes of the various human civilizations that have come and gone throughout just recorded history; it has happened before and it is likely to happen again. But so what?

So this: the question is, from the US or European or Japanese perspective, for example, to what extent do we believe in our own ability to maintain productive enterprises on our own soil, to discover and/or invent new forms of energy, renewable energy, and protect that technology from those that would do us harm?

No doubt the war-based strategy to seize oil assets has been a disaster for the moral fabric of the US and all which that implies for the industrial and financial systems. There really were and are better alternatives, but we are governed by the powers that be, whether we like it or not, and so, as individuals, we better learn to like it, just as a matter of personal peace of mind, even as we seem to be gearing for a shooting war with the would-be Persian empire, aiming to expand to the shores of the eastern Mediterranean, like it did in the days of old.

Are we heading for a corporatist fascist system in the US and Europe? As a matter of a global trend, in the face of Chinese competition and some of the other phenomena we have been experiencing and reading and writing about, it indeed may be the case. So what? This is the underlying trend in the cycles of history; democracy, whatever that is, is the exceptional cyclical peak, not the norm.

I have always firmly believed that the best investment is in one's own culture, the product of real work, real love.

If by doing this we can also contribute to the world so much the better. If not, it really is none of our business anyway.

To answer your query in more "concrete" terms, then, it may not be a bad idea to allocate one's surplus money a bit into Asian currencies (the yuan in particular), gold, energy exploration, and good old-fashion, economically viable, producing enterprises, no matter what means of exchange they use, while at the same time hoping that the global energy and financial systems hold up and that the US army doesn't, at the least, lose the war.

Because, otherwise, even if you "invest" in gold, if there is no underlying global energy and industrial and financial system in which the US remains a major player, what are you going to do with the gold you "invested" in, grow tomatoes in your back yard? Because, in that case, it would have been better to plough your excess money into an investment in good old-fashioned seed, because growing tomatoes in our back yards would be what we would need to do to survive.

Thanks for the stimulation to write something meaningful.

Sincerely,

Steve

The Role Of The German Economy In Europe And The World

2006-02-23T06:41:00.000-05:00

This essay was written on November 16, 1998, at the end of the Kohl era in Germany and what proved to be some eight years of socialist party government, years in which the eurozone economy has staggered along at around 1% growth rates. In retrospect, then, many of the predictions made in the essay materialized in the event.

The Role of the German Economy in europe and the World

The likely impact of the new Schroeder government’s economic policy on the German and European competitive position

The end of the Kohl era and the ushering in of a new governing coalition in Germany on the eve of the start of the single currency in Europe provides a vantage point from which to reflect on the evolution of the German and European competitive position over recent decades and the outlook for the next few.

Many will agree that throughout most of the 1980s and 1990s Helmut Kohl displayed statesmanlike qualities in successfully managing for Germany primarily, and for Europe in the framework of the Atlantic Alliance, several major coincident and mutually influencing currents in economics and politics. The major currents included: the Western economic expansion in the 1980s; technological innovation, especially in the information technology and telecommunications sectors, leading to significant developments in national and international financial systems and global trade and investment; the end of the Cold War; German unification; European integration through the Maastricht process; the maintenance of the Welfare State in Europe.

Since last century and especially since the 1930s, Western countries have combined the industrial market economy and the Welfare State. Germany emerged from the post-WWII settlement as Europe’s industrial powerhouse and it challenged the United States for pre-eminence in several sectors and many markets as productivity improved at a greater pace and the D-mark appreciated in real terms. Meanwhile welfare spending, government budget deficits, and inflation began rising in the mid-to-late 1960s, though the Germans appeared to be more adept at managing their finances and economy than most of their European partners and the US. In any case, these were some of the major factors which led to the breakdown of the fixed exchange rate system under the Bretton Woods agreements. Then, in retrospect, the post-WWII boom period can be said to have come to a definitive end in the wake of the two oil shocks in the 1970s, a decade marked by stagflation, decolonization, and the Soviets’ gaining the upper hand in the Cold War. A new economic and political formula on a global scale was needed as Western countries faced the prospect of getting their stagnating economies moving again, financing welfare-induced deficits and debts spread over aging populations, and regaining the geo-strategic momentum. The answer, led by the United States and Great Britain, was supply-side economics, privatization, financial deregulation, free trade, the wide-spread application of new information systems and telecommunications technologies to finance, industry and commerce on a global scale, preparation for new markets in East Asia, Latin America and, later, central Europe, and, finally, the arms build-up. All these factors played a major role in exposing the inefficiencies of the Soviet system, leading to its unexpectedly premature collapse.

Germany thrived economically, along with its Western partners and Japan, though its success was less due to the application of neo-classical policies than to its universal banking system, the harmonious relationship between business and labor, on the one hand, and the education system and the job market, on the other, a more long-term approach emphasizing asset accumulation and market share, and careful monetary management. The high quality of German products overcame the high cost of labor and the inefficiencies of the country’s welfare and financial systems, certainly, at least, to a greater extent than was the case with Germany’s main European partners/competitors such as France and Italy. Indeed, the quest for greater financial, labor, and goods market efficiency to stimulate the European economies and better finance their Welfare States was one of the major driving factors on the path towards European integration in addition to the need for a more compact security arrangement. And indeed, again, in the geo-political sphere, Germany’s support was crucial to the peaceful and favorable outcome of the Cold War, and Chancellor Kohl’s efforts bore fruit as the two Germanys were united and the Maastricht Treaty was signed.

However, by 1992, the post-Cold War world of emerging markets, global capitalism, and the high costs of German unification exposed some of the weaknesses of the European competitive position. The Bundesbank maintained a tight monetary policy despite slow growth and/or recession, in order to stave off inflation and help pay for the costs of integrating the eastern Länder. The most vulnerable countries were those featuring high welfare-induced budget deficits and unsustainable debt, bloated bureaucracies, overly burdensome tax systems stifling innovative investment, rigid labor markets dominated by powerful unions with a significant influence on fiscal policy, and inefficient financial systems. The first victim was Italy which, along with Great Britain, was forced to leave the EMS in September 1992. In the summer of 1993, the EMS nearly collapsed under the pressure of high German interest rates. And in 1994 and early 1995, the Mexican crisis, the persistent budget problems in Canada, and the trade deficit in the US cast doubt over the stability of the North American financial system. In late winter/early spring 1995, the US dollar, Italian lira and Swedish crown, among others, reached all-time lows against the D-mark. The Bundesbank’s severe monetary policy management inspired investors’ confidence when they compared the alternatives and short-term capital seeking a safe haven, as well as reserves, poured into the D-mark (and into the Swiss franc and the Japanese yen). However, between March and August 1995, a series of coordinated policy measures and, from September, somewhat more responsible fiscal policies on the part of the several nation-States, helped to stabilize the international currency markets, halt, and later reverse, the rise of the D-mark, and get the European countries back on the integration track as envisioned by the Maastricht Treaty.

However, during this period, the D-mark’s brilliant performance on European and international currency markets obscured certain ongoing developments acting against the competitive position of Germany in particular and Europe as a whole. First, notwithstanding the Mexican crisis and the trade deficit, a new political balance in Washington set the United States down the path to serious welfare and budget reform. This was accompanied by a long period of economic expansion featuring a high level of investment in innovative technologies yielding good returns, high levels and high proportions of foreign direct investment into the United States and US FDI abroad, low unemployment and inflation rates, and now even a small budget surplus. Meanwhile, the newly industrialized countries and emerging markets of East Asia were experiencing almost double-digit annual growth rates. And though the current crisis has revealed that much of the investment there, funneled through shoddy banking systems, was overly speculative, real gains have been made and the basis for another round of dynamic growth, though probably at a lesser pace than in the boom years of the 1990s, is still intact. Analogous observations could be made concerning South America, though to a somewhat lesser extent.

These developments stand in contrast to the manner in which the integration process in Europe has been completed. For example, it is true that the 3% government budget deficit target has, by and large, been met, but this has been achieved with the benefit of accounting tricks in almost all the countries participating in the euro, though flagrant cases stand out, such as Italy. Meanwhile real welfare and labor market reforms, where at all, have been timid. For Germany, and other European countries, this has translated into high unemployment rates and slow export-led growth; the bulk of productive investment is directed to high-technology and export-oriented industries, reducing the need for unskilled industrial labor. And in those industries where a relatively high proportion of unskilled labor is still required, there have been sizable outflows of foreign direct investment from the West, led by Germany, to central Europe, and to East Asia and South American as well. The greatest benefit, then, of monetary integration to Germany and to Europe is a more efficient, continent-wide financial system, a financial system now integrated into the global economy; large-company exports and investment in emerging markets abroad will generate the bulk of the earnings growth necessary to finance the continuation of the Welfare State as European populations age.

Against this backdrop, the Asian crisis has had an ambiguous effect on the German and European economy. On the one hand, the cessation of high growth rates in East Asia and the exploitation of the soft spots of its financial systems mean that Europe must face a weakened, though still potentially formidable, competitor on the global market. The immediate benefits were seen in the run-up to the single currency as capital flowing into all European currencies totally eliminated any latent risks of last minute speculation against its realization. In the short/medium-term, it also means less pressure to reform Europe’s welfare systems and labor markets. On the other hand, the Asian crisis has meant a noticeable slowdown in Europe’s export-led growth. In addition, the Russian crisis has been a significant blow to Germany whose banking and industrial systems are more exposed than those of any other country. The overall effect has been the emergence of a risk of world-wide recession in 1999.

In this situation, the main priority in the economic program of the new Schroeder government is to provide a boost to consumer purchasing power as part of a Keynesian-style demand stimulus policy. Other countries such as Italy have attempted, or are attempting, a similar approach. In Germany, the impact of the proposals on the redistribution of income in favor of low/medium-income groups, with a high propensity to consume, is rather significant, as personal income taxes will be reduced and welfare payments to families will be increased. Business tax rates will also be reduced, but the tax base will be widened as the scope of allowable deductions and exemptions will be diminished. Nonetheless, according to the Schroeder government’s projections, both businesses and workers are expected to benefit from the tax rate reductions; the burden of welfare taxes in Germany is equally distributed between companies and employees. Meanwhile, the government proposes to finance the reduction in welfare taxes through a rise in taxation on energy products. Some studies simulating the effects of a 3% reduction in welfare taxes in Germany financed by an increase in indirect taxes suggest a 1% rise in consumer spending, boosting employment by 0.8% and GDP growth by 0.6%.

In addition, the new government will eliminate the modest labor market and pension system reforms introduced in the latter years of the Kohl government (reduction in sick pay, pension cuts, greater employment flexibility for small businesses, etc.). This intention confirms that supply-side policies do not seem to play a fundamental role in the new government’s framework. Such a step, in addition to the new tax measures, has strongly upset business which now appears rather skeptical about the main pillar of the new government’s jobs promotion policy, namely the Alliance for Jobs. The prospects for the tripartite negotiations between government, business, and labor for the moment seem obscure and the evident perception by the business community of a new government hostile to its demands is not a good starting point.

In conclusion, Europe is still one of the wealthiest and highest income-producing-potential regions in the world, and Germany is the leading economy in Europe. The real issue is what level of average growth Europe will be able to achieve over the coming years and decades, how it will be achieved, how it will be distributed, and how it will continue to finance the maintenance of the Welfare State. One answer has been export-led growth and income generated from foreign direct investment, especially, in the case of Germany, in low-labor-cost central European countries and Russia, in the context of the global economic system. Other European countries with somewhat different trade and investment patterns, such as Spain, Portugal, Great Britain and Sweden, may provide for some diversification (though the latter two are not, as of yet, participating in the single currency).

But there are risks to this strategy. The global economy and financial system are still prone to crises and income flows are far from being smoothed out. Furthermore, Germany, the largest European economy, has the greatest exposure to central Europe and Russia. The former may prove to be a slow-growth area, caught in the middle, as it is, between already slow-growth Europe and Russia itself where efforts to transform the country into a functioning and prosperous free market democracy may fail.

Internally, reform of Europe’s indebted welfare systems and rigid labor markets has been very gradual where any real progress has been made at all. Current governments, led by Schroeder’s Germany, are implementing policies designed to stimulate consumer demand through income redistribution in an effort to stave off a potential recession (in addition to other domestic political considerations). This strategy may work as a short-term expedient, but the risk is that Europe will remain a slow-growth region of the world, its rate of investment and productivity growth will lag behind that of the United States and possibly a revived Japan and East Asia in a few years, the population will continue to age, small and medium-sized business enterprises will be crowded out, and the investments in central Europe and Russia will not provide an adequate return. Such a scenario would mean a stagnant Europe, economically, politically, socially and culturally, and a people dependent on the fortunes and whims of big government and big business in the face of a fiercely competitive global environment.

Reform the International Monetary System or Reform the Nation-State System?

2006-02-23T05:26:00.000-05:00

_{This is the second in a series of two essays written} in 1995 (see below "The Finances of the Nation-State and the Global Foreign Exchange System" and the introduction for greater context). In the event, the solution to some of the problems outlined in this essay has been the use of ITC technology, coupled with international capital market and trade liberalization, to advance globalization (see "Musings On The Global Economy"). In effect, in the past ten years or so, the international monetary system has been reformed a lot less and with much less volatility than the nation-state system has been reformed, a process that is still ongoing.

_{Reform the International Monetary System or Reform the Nation-State System? (June 14, 1995)}

_{In spite of the foreign exchange regime change from fixed to floating rates since 1973, macroeconomic imbalance has persisted in many countries, and in the context of many discussions in the literature it is expressed most specifically as an external adjustment problem (current account deficit/surplus) but it is intimately related to internal fiscal imbalance. This lack of achievement of external and internal balance under the floating exchange rate regime, as many had in principle expected, coupled with the costs of trade perceived to be associated with foreign exchange rate volatility and exchange rate misalignment, has given rise to proposals of reform of the so-called international monetary system. In this essay we shall discuss and evaluate proposals for reform involving increased international economic policy coordination and other alternatives as well as the problems and feasibility of these proposals in a global setting.}

_{As we consider the merits and demerits of the floating rate regime and proposals for reform, it becomes evident that a crucial aspect in determining our conclusions is the point of view that is highlighted concerning the root cause of foreign exchange rate volatility and the concept that we hold of national autonomy with respect to fiscal policy.}

_{As John Williamson explains, the real exchange rate is linked to the real economy in that it is the main determinant of 'the division of domestic output between home and foreign markets and the distribution of domestic demand between home and foreign sources' of supply. Therefore the costs of exchange rate misalignment, as measured by a deviation from a fundamental equilibrium exchange rate, can be damaging to the real economy especially for those countries which have a relatively high proportion of economic output linked to international trade and financial flows. Williamson points out that 'a real exchange rate significantly out of line with that needed to sustain medium-run macro-equilibrium presents false signals to business that can misdirect investment or induce inappropriate closure of productive activity.' It is for these underlying reasons that economic policy makers around the globe are concerned with the level of foreign exchange rates and the intensity of exchange rate volatility. When considering proposals for reform, therefore, it is important to identify the fundamental causes of exchange rate misalignment and volatility. For as Feldstein points out, if we misidentify the causes of misalignment and volatility, a policy-directed target for foreign exchange rates may only exacerbate certain external and internal macroeconomic disequilibria and increase pressures which may lead to further volatility and misalignment. On the other hand, Williamson and, for example, proponents of the ERM sustain that a policy-directed target zone will provide a framework in which economic policy can be aimed at achieving external and internal adjustment towards equilibrium as measured by certain economic criteria.}

_{In light of these considerations, if it is believed that the adoption of the floating exchange rate regime has encouraged nation-states to pursue economic policies which have led to chronic imbalances, specifically fiscal imbalances and trade imbalances, and if it is believed that speculation is the main cause of exchange rate volatility and misalignment which decouple prices from fundamentals, then the question of how and to what extent to reform the international monetary system becomes of central importance. If, however it is believed that price distortion and speculation are the result of imbalanced economic policy of which foreign exchange rate misalignment and volatility are symptoms, then the pursuit of a more balance-oriented economic policy at the national level, with or without conscious international policy coordination, would naturally lead to more moderate and stable fluctuations in foreign exchange rates. Therefore, if the political leadership of the several nation-states continues to be incapable of pursuing more balance-oriented economic policies, then the question of how and to what extent to reform the nation-state system becomes more relevant than the question of reforming the international monetary system.}

_{The former point of view supports an affirmative evaluation of the case for international policy coordination as a means of reform, while the latter point of view suggests caution and skepticism but by no means rejects totally the case. Let us now take a closer look at the feasibility of and problems with the case for international coordination and other alternatives as proposals for reform in the global setting.}

_{When we speak of policy coordination in a strict sense as a matter recent historical practice, we refer to international forums such as the G-5, the G-7, or the IMF. The G-7 is essentially a semi-annual forum for the finance (or treasury) ministers of the major industrialized countries accompanied by the heads of government on an annual basis. The finance ministers' main influence is on national monetary policy in conjunction with the national central bankers. Their policy decisions and also public pronouncements can have significant effects on exchange rate movements. There have been examples of policy coordination which have moved the value of the USD to more desirable levels as the history has shown. The main policy instruments of the ministers and the central bankers are interest rates and foreign exchange market intervention. The developments of the 1980s led to a set of objective macroeconomic indicators - monitored by the IMF - including budget deficits, current account balances, and inflation which could trigger coordinated policy action in terms of interest rates and exchange market intervention aimed at correcting some of the national account imbalances. The tendency toward policy coordination in this context has receded in the 1990s as fiscal and current account imbalances have persisted and monetary policy makers have concentrated more of their attention on the domestic environment. As Frankel pointed out, the question of whether monetary policy improves or worsens the current account had not been resolved.}

_{In a broader sense, Williamson offered a blueprint for international economic policy coordination based on the idea of target zones. His plan includes targets for real exchange rates, interest rates, national fiscal policies, and debt to GDP ratios. This blueprint is more complete than the G-7 coordination framework because it explicitly considers national fiscal policy and provides for its internationally managed coordination to achieve a targeted path for the growth of domestic demand.}

_{The problems with these two frameworks for international policy coordination arise when the interconnections between monetary policy, national fiscal policy, national account imbalances and exchange rate fluctuations are considered. Let us accept the view that exchange rate volatility is caused by monetary and fiscal policies which lead to imbalances between saving and investment and between revenue and expenditure which become expressed as current account imbalances, government budget deficits, and accumulated debt. It is important to note that in constitutional democracies (which in the form of nation-state there are about 70 bodies politic recognized as such including the major trading nations) monetary and foreign exchange policy are made by the executive branch in some form of collaboration between the finance ministry and the central bank. The ultimate and legal responsibility for fiscal policy lies with the national legislative bodies (congresses and parliaments). Now, in this general framework we have three policy tools; monetary policy, fiscal policy, and exchange rate policy of which two can be controlled - in the floating exchange rate regime this means monetary and fiscal policy - and two targets; internal and external balance. Therefore in order to achieve balance and maintain exchange rate stability discipline must be exercised, in some combination, through monetary and fiscal policy. In the G-7 framework for international economic policy coordination, finance ministers, by virtue of the constitutional arrangements, focus on coordinating monetary policy as a discipline towards two-target balance across nation-states. In this context, and since balance requires discipline in both monetary and fiscal policy, a more relevant issue of the G-7 experience becomes the apparent failure, with the possible exception of Germany (where the central bank enjoys the utmost of independence and a single mission enshrined by statute) of monetary policy to discipline fiscal policy. Therefore it is correct to ask the question 'are finance ministers and central bankers the right groups on whose shoulders total responsibility for internal and external balance should lie?'. The Williamson blueprint rightfully takes into account that national fiscal policy and debt management are crucial aspects of discipline, balance, and stability, but it also underlines the realistic possibility (slim) of successful coordination of balanced fiscal policies across national legislative bodies.}

_{In a fixed or semi-fixed exchange rate regime, the two policy tools which can be controlled are indeed foreign exchange policy and fiscal policy while monetary policy becomes subordinate to maintaining the chosen exchange rate parities. In this regime, it is the fixity of the exchange rate which is supposed to act as the anchor of discipline on fiscal policy in order to maintain balance and stability. We can point to two historical experiences of fixed or semi-fixed regimes, the Bretton Woods system, and the European ERM, both of which exploded under pressures from imbalances.}

_{Problems and objections connected with the notion of internationally coordinated fiscal policy are often expressed as undue limits imposed on the independence of national economic policies and as a sacrifice of national autonomy and preferences in order to make the 'world features' of coordination proposals to work. Some argue that a certain loss of national independence is attributable to deregulated financial markets and the high degree of global short-term capital mobility, and furthermore that this is the cause of exchange rate volatility and impedes national governments from managing their economies. This line of argument has led to alternative proposals to international policy coordination aimed at " ... greater financial segmentation between nations ..." and "permitting their central banks and governments greater autonomy." These include Tobin's proposal of a small tax on foreign exchange operations which would be small enough to not affect commercial trade and long-term capital investments, but steep enough to render short-term trading less profitable, and that of dual exchange rates - a fixed rate for commercial transactions, and a floating rate for capital transactions. Both these proposals take the point of view that short-term volatility is caused by speculation which may have perverse effects on the real economy. There are several problems with these proposals. First, taxes and dual rates may only cause further distortion. It is difficult to always separate current account from capital account transactions, and to know how much of short-term capital movement has a stabilizing effect on financing current account deficits. Secondly, a tax regime would not only entail bureaucratic administrative costs, it would be feasibly difficult to enforce around the globe as enough foreign exchange centers would not adhere to the regime so that those centers which did would lose massive amounts of business. Finally, even if this perceived greater national government autonomy were achieved, why should it be expected that governments would behave any differently than they have in the past?}

_{If we consider again the view that price distortion and speculation are the result of imbalanced economic policy of which foreign exchange rate volatility is a symptom, then it is neither necessary nor helpful to interpret policy coordination as a sacrifice of autonomy imposed top-down through an international or supranational institutional pyramid. Through self-discipline we enhance autonomy and independence. Ideally, fiscal discipline should begin locally and from there be extended to the national legislative bodies, and then to the international, or better still, directly to the global level. If top-side institutions and systems can encourage and foster local discipline, so much the better. But it a waste of time and an empty wish to expect finance ministers, central bankers, and IMF technicians to tinker with institutional arrangements and systems in the hope that stability and equilibrium will follow automatically. We should not expect external and internal adjustment to come as a result of our choice of exchange rate regime. It is the ensemble of local realities which imply the world feature - as a result of several cases of self-discipline and sacrifice. Our views of sacrifice, then, depend on which end of the pyramid we choose to emphasize.}

_{The real conclusion is that we have twice depended upon fiscal policy as the main determinant of (dis-) equilibrium. It does not really matter what type of exchange rate regime is in place. Imbalanced fiscal policies will cause disequilibria, and these disequilibria will be manifest in one way or another sooner or later ... whether through the foreign exchange system, the financial system, the economic system, the political system, or the social system, or any combination of the above interconnected realities.}

_{Tinkering with the international monetary system or reforming it substantially may indeed have some effect on the management of foreign exchange rate volatility. But at the end of the day it is fiscal imbalance which is the root cause of chronic macroeconomic disequilibria. The daily shenanigans of the foreign exchange market are symptoms, not causes, of these disequilibria. In fact the global foreign exchange system has worked well in absorbing the recurrent shocks caused by this (nation-) state of affairs.}

_{On the eve of the most recent G-7 summit in these last days, John Chretien, PM of Canada, on the problem of currency market volatility, urged G-7 countries to stabilize markets by following sound monetary and fiscal policies.}

_{"Attempting to return to fixed or targeted exchange rates is no longer a realistic option in deregulated financial markets, and Canada's experience with floating exchange rates showed that they served a useful function by providing time for governments to make necessary economic adjustments."}

_SOURCES

_{Feldstein, M., "The Case against Trying to Stabilize the Dollar", American Economic Review, 79, No. 2, May, 1989.}

_{Frankel, J., "Obstacles to International Macroeconomic Policy Coordination", IMF Working Paper No. WP/87/29, April, 1987.}

_{Tobin, J., "A Proposal for International Monetary Reform", Eastern Economic Journal, 4, pp. 153-159, 1987.}

_{Williamson, J., The Case for Roughly Stabilizing the Real Value of the Dollar, American Economic Review, 79, No. 2, May, 1989.}

The Finances of the Nation-State and the Global Foreign Exchange System

2006-02-23T04:35:00.000-05:00

This essay was written on April 24, 1995, in the wake of the collapse of the European Monetary System in 1992 and the North American currency crisis of 1994/1995, during a period featuring high budget deficits among most of the early industrialized countries. In the ensuing years, fiscal balance was restored in the United States and improved in Europe in the run-up to the introduction of the single currency. Since then, however, nation-state finances have once again begun to erode in the face of war in the case of the United States and continued relative economic stagnation in Europe. A new element in the equation today is the impact of China and, eventually, the role of the Chinese yuan, both present and going forward.

What we are witnessing is the erosion of the financial solvency of the nation-state. This erosion is most clearly expressed by the current developments in the foreign exchange market. On the one hand it has hit North America, beginning with Canada about a year and a half ago, and most recently with the United States in the wake of the financial disaster in Mexico at the end of 1994. On the other hand the erosion has hit Europe, beginning in Italy, Spain, and the United Kingdom in 1992, followed by the debacle of the European Monetary System in August 1993, and until today as the meteoric rise of the DEM, CHF, and JPY has again exposed the financial weakness of nation-states like Italy, Spain, and Sweden, and the continuing decline of Great Britain as an industrial, political, and financial power on the global scale.

A currency is the standard bearer of a national financial system, the financial system of a nation-state and all the activities which fall under its legally recognized jurisdiction and its international linkages. And what we see now is the damage that uncontrolled debt can do. The cause of debt is the moral profligacy and lack of civil and human responsibility of the bands of men in power who occupy the institutions of legally recognized systems of social control. The consequences of debt, the consequences of the erosion of the financial solvency of the nation-state may be terrible, but not necessarily so. Some good may come of it. The current phase of this process may come to an end within a few months. But the long-term trend will continue, at different paces in different countries, and there will be more intense periods like the one we are living now. We should like to examine some aspects of the process as they apply to certain nation-states, examine some of the common problems which give the process an international character, and the relative strengths and weaknesses of the several nation-states as the process affects them, as it spirals down its unpredictable path. For now I shall limit myself to a summary of the fundamentals of the global foreign exchange system as it currently stands.

We can conceive of the global foreign exchange system as consisting of several overlapping layers the most broad of which is the very globality of the system itself. The sub-layers consist of what some consider regional blocs which reflect geographical proximities, commercial patterns, and cultural and historical ties. These blocs are mostly distinguished as the Yen bloc, the D-Mark bloc, and the dollar bloc, without forgetting the global interconnections. I conceive of the system as an ensemble of rhythms and pressures. The most broad rhythm runs across geography over time ... Tokyo, London, New York ... Tokyo, London, New York ... Tokyo, London, New York. You know they "pass the book". It never ends. Right now, wrestling at the pinnacle of the system is the Japanese Yen. It is the strongest currency on the planet owing to the hard work of the Japanese people, their propensity to save, their brilliant success in global commerce, and the tenacity with which they strive to protect and enhance their position. They have achieved these things together as a nation-state and the national accounts are in order. (Though some make a strong argument that the huge perennial trade surplus is a gross and distorted imbalance.) On top of that, they are located in the geographical region of the Earth that is presently enjoying the highest rate of economic growth as measured in national income accounting terms. So, for at least these reasons, the Japanese Yen is acting as the pivot in the global foreign exchange system. On the days when the Yen exerts pressure, the effects reverberate throughout the system. The most important currency relationships then, globally speaking, are USD/JPY and DEM/JPY. Of these two, which is the more important protagonist depends on the day and the dynamic within the D-Mark bloc or the dollar bloc during a particular phase of movement of global and regional rhythms and pressure points. What is fair to say is, that for the better part now, the USD/DEM relationship is more a function of USD/JPY and DEM/JPY than a direct function of itself. That is not to say that the direct USD/DEM relationship has no importance. It means that the influence of USD/JPY and DEM/JPY on USD/DEM has greater weight than it ever has had in the past. The coefficients are changing. This reflects changes in the foreign exchange composition of stocks of reserves, and it will affect how savings from new flows of global income will be held in reserve.

At the pinnacle of the European sub-system is the D-Mark. The reasons for this are similar to those for which the Yen is at the pinnacle globally. The Germans have achieved success cohesively as a nation-state. They have even managed to absorb their eastern half in a stable manner, so far it seems, in the face of enormous financial pressures. This impressive display of stability, on a complex and often chaotic continent, stands on the discipline employed by the men of the BUBA in pursuing a monetary policy successfully aimed at controlling inflation even under the pressures of the external shock of reunification. It also stands on the coolness with which their political leaders predictably and steadily handled the whole affair. Underneath this, the German social system entails huge costs, and the price of labor is high. It remains to be seen whether German industry can continue to adapt to the high D-Mark by cutting costs and improving productivity, quality, and technology, in the face of competition from American and some other countries' firms who are reputed to be more flexible and innovative in a fast-changing world. But this medium-term risk pales into insignificance when compared to the immediate financial risk confronted by savers and investors based in other currencies in Europe and elsewhere in the world. The financial systems of nation-states on the perimeters of Europe are either de facto insolvent (though not officially recognized as such for political reasons) or they are marching steadfastly down the path to insolvency. It is mainly for this reason that the D-Mark (and the Swiss Franc, the currency of a nation-state which is another island of stability and credibility whose national accounts are in order) enjoys safe-haven status whenever, and it happens often nowadays, the pressures of the burdens of these debts cause the European Monetary System to go again into extremis. The only thing that prevents the European sub-system from going into a coma is the operation of some of the safety valves working to relieve tensions in the global system of rhythms and pressure points on a phase to phase basis which reaches peaks and troughs based on technical, economic, and political cycles. We would intend to examine this in detail, but first let us take a look at the dollar bloc.

The dollar bloc includes not only of course the USD and the CAD, NZD, AUD, but also the GBP (especially considering the UK's political posture towards the EU), many Latin American currencies, and those Pacific Rim currencies somehow pegged to the dollar. The USD's long-term relative decline in global terms accelerated in 1985 and intensified in 1992 and has intensified more acutely in these last four to six months. The principal fundamental reason for this is that the USA was formerly the world's largest creditor nation and is now the world's largest debtor nation in absolute terms. The country's savings to investment gap is expressed by its twin budget and current account deficits. The global foreign exchange system is awash in USD debt. And the stock of debt is increased annually by a combined USD 500 billion+ or so. The USA's main trading partners are Canada and Mexico. These three nations have joined together commercially through NAFTA. This commercial link also implies however political and financial commitments and in this sense we can conceive of the North American financial system. This system has its own internal logic, a logic with respect to other currencies of the dollar bloc, and a logic with respect to the rest of the global foreign exchange system. Canada also sustains national account imbalances in the form of budget deficits, current account deficits, and a high national debt. In addition there is political risk connected with the constitutional and Quebec issues. In recent years, the risks in Canada have been perceived as quite high as against the USD and other major currencies around the world. The USD/CAD has declined from a period peak of around 1.12 in 1989 to as low as around 1.43 in the last weeks. The risks in Mexico have been known for decades, but hopes were high as the NAFTA process was successfully concluded. Mexico's close association with the United States was perceived as providing political guaranties for Mexican risk. When Mexico's most recent wave of macro-imbalances came crashing down in December 1994, it highlighted a new perception that the entire North American financial system is heading for insolvency. The collapse of the Mexican peso was the trigger event which set off the massive and volatile switching of global reserve assets from the USD and into the JPY, DEM, and CHF.

The above paragraphs have outlined the basic state of being of the global foreign exchange system with a view toward the financial systems of the major nation-states, of whose currencies it is comprised, in light of recent events. An analysis of the details, I believe, will show that it is not the foreign exchange system which is in crisis. In fact it has worked quite well globally, within the D-Mark bloc, and within the dollar bloc, as it was designed to do. Rather it is the financial systems of the nation-states themselves which are in crisis. The global foreign exchange system's ensemble of rhythms, pressures, and safety valves operating around technical, economic, and political cycles is indeed the mechanism which allows the nation-states periods of respite (lasting either days, weeks, months, or years depending on the rhythms and cycles) in order to address the fundamental problems of their financial systems. It is this ensemble mechanism which, so far, has prevented a "meltdown" or a drain of cash flow from the weaker financial systems which is so sudden, massive, and decisive that it would cause unavoidable and, above all, unhideable de jure sovereign default. I also believe that an analysis of the details will show that the primary cause of the weakness of the financial systems of certain nation-states is hardly monetary policy, but clearly fiscal policy. And it is these fiscal imbalances which have shaken the financial systems of the nation-states and damaged the credibility of the concept and the institutions of the nation-state in the minds of individuals.

Riflessioni sull'economia globale

2006-02-21T07:52:00.000-05:00

Caro Maurizio,

ricordo che un paio d'anni fa or sono, nel 2003, parlavamo sull'economia e che, in particolare, di aver detto che, dopo il boom tecnologico ITC degli anni '90, non c'è più dove investire nel senso reale del termine (e non nel senso speculativo).

Ovviamente tale dichiarazione richiede una spiegazione dei dettagli fattuali che le sta dietro.

Condizioni politiche permettendo, comunicazioni instantanei mondiali significano che i grandi gruppi di potere - governi nazionali e imprese multinazionali, soprattutto - possono organizzare una divisione di lavoro proprio mondiale. Sotto queste condizioni, possono optimizzare l'allocazione delle risorse nei diversi settori: per esempio, da una parte, la produzione industriale di manufatti in aree dove la manodopera costa meno (ora Asia - Cina e India in testa - rispetto ai centri di vecchia industrializzazione quale Europa, America anglofona e Giappone) e, dall'altra parte, nello sviluppo, disegno e pianificazione dell'applicazione delle tecnologie che le stanno dietro in aree dove l'istruzione universitaria e la conoscenza sono ad un più alto livello di qualità, cioè ancora, per ora, negli stessi vecchi centri di industrializzazione.

Intanto, questi stessi vecchi centri di industrializzazione - proprio vecchi anche nel senso demografico - importano persone di bassa istruzione per lavorare nel settore dei servizi di basso livello e della costruzione. In particolare, gli Stati Uniti importano non solo merci di basso costo dalla Cina, ma anche persone a basso costo da Messico ed il resto dell'America Latina. Pure l'Europa, sebbene a misura minore e con riluttanza, importa tali persone dall'Africa, dall'Asia occidentale, dall'Europa centrale, ed in alcuni casi (la Spagna e l'Italia) anche dall'America Latina, tutte aree dove la demografia è "giovane", però manca un'industrializzazione forte, come ora nell'India e nell'Asia orientale.

Fin'ora tutto molto bene: l'investimento nella tecnologia ITC significa merci e servizi ad un costo più basso e quindi, nell'aggregato più alta produttività per tutti e una più alta qualità di vita per tutti su una scala relativa mondiale, almeno in principio, inclusi anche, e forse in particolare, i lavoratori "intellettuali" nei paesi di vecchia industrializzazione. Forse gli unici veri perdenti in questo scenario sono i lavoratori di bassa istruzione impiegati nella produzione di manufatti basata negli stessi vecchi centri di industrializzazione, ma ci sono anche programmi di riqualificazione e comunque molti di questi sono vicini al pensionamento.

Però, in questo scenario ci sono diversi problemi di natura economica, politica, e di struttura sociale, problemi che si riflettono anche sullo scenario finanziario. Di seguito, riassumo solo alcuni aspetti dei problemi più importanti su questi quattro piani.

Sul piano economico, mi concentro sull'offerta ed il costo dell energia, settore che riafferma la sua centralità negli affari umani dal momento che, da una parte, c'è bisogno di alimentare il crescente numero di fabbriche in paesi quale la Cina e, dall'altra, c'è bisogno di trasportare tutta questa mercanzia ai centri di consumo oltre mari e monti. Poi si può aggiungere il bisogno di riscaldare le case dei vecchi pensionati nei paesi di vecchia industralizzazione (pensionati non tanto vecchi in alcuni paesi, in particolare nell'Europa occidentale, Italia in testa) e alimentare il loro SUV, ecc.

Già allora sorge un problema politico: le fonti tuttora più efficienti dell'energia (petroleo e gas naturale) si trovano per la maggior parte dentro o all'intorno di paesi dove importanti gruppi aspiranti di potere, con altra ideologia - che certi gruppi di potere già stabiliti marchiano come "terroristi" - vogliono, appunto, aumentare e officializzare il proprio potere, e quindi per raggiungere questo scopo fanno guerra, la cui posta in gioco ed il prezzo dell'energia, a chi venderla, e come ridistribuire il reditto così generato.

Ovviamente mi riferisco ai paesi arabi, e a quelli che si estendono dall'Africa nordorientale fino all'Asia centrale e persino Indonesia, ed agli Islamisti. C'è qualcosa di simile in atto anche nell'America Latina, anche se non al livello di una guerra calda e con ideologie più miti, in particolare in Venezuela (il quinto produttore mondiale di petrolio) ed ora in Bolivia (recentemente scoperte enormi quantità di gas naturale) di cui più in seguito. Lotte in Paesi africani come Nigeria ed Angola possono altrettanto essere viste in questo contesto.

Rivolgendomi ora al problema della struttura sociale, vorrei sottolineare un fenomeno generale e uno particolare che ci riguarda anche personalmente. Il punto generale è che storicamente, parlando di grandi gruppi di potere, qualsiasi cambiamento nelle relazioni territoriali per motivi di cambiamenti tecnologici e/o economici e/o sociopolitici, comporta anche la sfida di come gestire i potenziali e reali cambiamenti sociali all'interno del territorio dei rispettivi grandi gruppi di potere che ne risultano.

In quanto al fenomeno particolare, ricordo, come accennato sopra, l'investimento nella tecnologia ITC significa merci e servizi ad un costo più basso e quindi, nell'aggregato più alta produttività per tutti e una più alta qualità di vita per tutti su una scala relativa mondiale, almeno in principio, inclusi anche, e forse in particolare, i lavoratori "intellettuali" nei paesi di vecchia industrializzazione.

Però in realtà non è tanto semplice, nè è tanto semplice capire la realtà e forse ancora meno descriverla in un'economia di parole. Comunque ci provo, come l'Iddio comanda.

Ovviamente le società di prima (vecchia) industrializzazione non possono portare avanti i modelli sociali sviluppati verso la fine del dicianovesimo secolo e durante il ventesimo secolo, soprattutto quello del dopo seconda guerra mondiale fino alla fine della guerra fredda. Allo stesso tempo, i gruppi di poteri stabiliti - nè nei paesi di prima industralizzazione, nè nei paesi emergenti, nè nei paesi cosìdetti sottosviluppati (mi riferesisco in particolare all'America Latina), nè nei paesi "tradizionali" (mi riferisco soprattutto ai paesi arabi) - non vogliono perdere controllo durante questa fase di trasformazione dell'economia globale.

Un metodo di controllo provato per tutta la storia da duemilacinquecento anni - e qui mi rivolgo allo scenario finanziario - è l'indebitamento sociofinanziario, assieme al suo socio, l'inflazione: cioè, in altre parole, il controllo dell'offerta di moneta, del mezzo di scambio, dell'unità di conto e della riserva di valore materiale. (C'è anche il metodo militare, tutt'ora impiegato, tra ancora altri metodi di controllo.)

In principio, merci e servizi ad un costo più basso e più alta produttività al livello aggregato dovrebbero significare un livello di prezzi stabile o anche una leggera deflazione. In tale scenario, ci potrebb'essere per tutti una vera più alta qualità di vita su una scala relativa mondiale, inclusi anche, e forse in particolare, i lavoratori "intellettuali" nei paesi di vecchia industrializzazione. Immaginati che cambiamenti sociopolitico-culturali ci potrebbero essere attraverso una vera liberazione di intelletto creativo, temperata da una sensibilità di mantenere quello che ha conservato vero valore morale e culturale attraverso i secoli.

Però la volontà degli attuali grandi gruppi di potere è che non ci siano cambiamenti fondamentali negli assi portanti degli attuali modelli sociopolitici, basati sull'ideologia culturale del materialismo consumistico - della variante capitalista, socialista, o comunista (cosìdette) che sia -, attraverso la mera estensione mondiale del modello economico dell'industrializzazione organizzazata da una combinazione di mercati liberi e intervenzione statale. L'unica alternativa offerta dall'attuale agenda politica mondiale sarebbe l'Islamismo radicale, che nella mia opinione significherebbe, in poche parole, il rovescio dei guadagni della rivoluzione industriale di questi ultimi duecento anni.

Invece, assumendo che i gruppi di potere stabiliti vincano la guerra contro l'Islamismo radicale, la struttura sociale continuerà a trasformarsi verso una struttura che combini i guadagni della rivoluzione industriale di questi ultimi duecento anni su una scala mondiale sul campo economico - analogamente si sono diffusi i guadagni della rivoluzione agricola da diecimila anni fa - con un crescente divario tra gruppi di ricchezza/reditto (pochi iperricchi e molti relativamente poveri) ed una classe media (inclusi i lavoratori intellettuali) sempre più piccola, proprio somigliante ad una struttura sociale agricola "tradizionale".

E gli strumenti chiavi nell'attuare tale trasformazione sono il controllo dell'offerta dell'energia (ad altre materie prime) e poi il controllo dell'offerta di moneta, l'indebitamento, e l'inflazione (e quindi anche controllo della manipolazione dei dati sull'inflazione resi pubblici, che implica anche il grande campo del controllo del mass media).

Così, le classi lavoratrici, intellettuali e non, saranno fissi e/o flessibili nei loro posti, fisici nonchè socioeconomici, a volontà dei dirigenti dei grandi gruppi di potere (rule by telecommand), sotto il dominio di un'ideologia materialista consumistica, al livello mondiale.

I dettagli, tra altri, di tale attuazione sono, nei paesi di prima industrializzazione, negli alti costi dei sistemi pensionistici, sanitari e universitari, nelle bolle speculative nei prezzi dei beni (asset price bubbles) - dieci anni fa nelle azioni, ora nel mercato immobiliare residenziale -, e nella diffusione attraverso il sistema bancario del credito al consumo e dell'indebitamento delle famiglie e la manipolazione soprattutto dei dati sull'inflazione, e, al livello mondiale, nei movimenti migratori, soprattutto verso i paesi di prima industrializzazione.

In poche parole, ci sarà, ad un certo punto, più equilibrio nella produzione di beni manufatti e servizi tra le diverse aree del mondo (ed anche, quindi, nella bilancia dei pagamenti): la presenza di fabbriche tornerà a crescere nell'Europa e negli Stati Uniti, ma i lavoratori non saranno necessariamente i discendenti degli pensionati attuali e di prossimo futuro, e i relativi costi sociali saranno di proporzioni minori rispetto a quelli dei modelli in vigore da diverse generazioni nei paesi di prima industrializzazione.

Riassemendo, dunque, il ricordo dell'apertura, vedo l'investimento e l'applicazione al livello e sulla scala mondiale della tecnologia ITC negli ultimi quindici o vent'anni e dalla fine della guerra fredda come una seconda onda della rivoluzione industriale, le cue implicazioni sociali, politiche e economiche sono ancora da determinare (vedi conflitti militari, speculazioni finanziarie, disequilibri nella bilancia dei pagamenti tra i vari paesi, indebitamento pubblico e privato, i tentativi di gestire cambiamenti climatici reali e immaginati, tra altri fenomeno che generano incertezze).

Però per il futuro prevedibile, forse i prossimi cinquanta-cent'anni, nella mia visione attuale almeno, avremo una struttura sociale che combina i guadagni dell'industrializzazione degli ultimi duecento anni con alcuni aspetti sociali che assomigliano a quella delle società agricole "tradizionali", basata, però, su una dominante ideologia materialista consumistica in mano ai grandi gruppi di potere attuali, lasciando la conservazione della cultura ed i valori morali agli sforzi di gruppi più piccole ed agli individui che hanno ancora il tempo, la volontà e la forza.

E questo spazio ci sarà: i grandi gruppi di potere attuali sono, appunto, grandi e potenti, però non sono totalitari (vedi il nazismo, il comunismo e l'Islamismo radicale), e una buona parte dei dirigenti di questi gruppi vedono anche loro un proprio beneficio nel lasciare libera una parte di questo campo della vita umana sulla terr

Ora di seguito alcune osservazioni, nel quadro dello scenario delineato, sulla situazione economicosociale nelle regioni ed in alcuni paesi dove mi sono goduto del privilegio - grazie anche all'investimento nella tecnologia ITC in questi ultimi quindici/vent'anni - di vivere, lavorare e studiare.

Come noto, nell'Europa c'è in atto da ormai diversi anni una lotta tra quelle forze sociali che vogliono conservare il più possibile il modello sociale di cui sopra, da una parte, e quelle che sono in una posizione di guadagnare dalla mondializzazione dell'economia, dall'altra (a volte forze sovraposte e contradittorie tra di loro, come spesso succede nella politica).

Il risultato finora in paesi come l'Italia, con sistemi sociali rigidi (compresi il sistema politico, la burocrazia ed il mercato di lavoro in particolare) è che la società sta consumando la ricchezza generata nel passato ad un tasso più rapido di quello al quale sta generando nuova ricchezza, ed i giovani trovano relativamente poco spazio per esprimere guadagnevolmente i propri talenti, e cioè in posti di lavoro che pagano bene e nella formazione di nuove imprese di successo (invece di essere soffocate dalla burocrazia prima di generare anche un euro di profitto), permettendogli di facilitare la formazione di nuove famiglie. Vedo che le imprese italiane che stanno prosperando sono proprio quelle che sono coinvolte nell'economia mondializzata, anche nei settori tradizionali dell'Italia moderna, come la moda e il settore tessile, ma altrettanto la costruzione di infrastutture in settore chiavi come energia e trasporto, tra alcuni altri.

Una possibile soluzione per l'Europa domestica rispetto ad una società più flessibile ed un aumento della produttività, mantendendo allo stesso tempo le medesime aspettative dello standard di vita, sarebbe un ritorno al protezionismo del passato, una fortress Europe, che dovrebbe, comunque, trovare una soluzione ai suoi bisogni energetici, forse integrandosi di più con la Russia, l'Asia centrale, e possibilmente anche con paesi come Iran, quotando il prezzo del petroleo in euro.

Per quanto riguarda gli Stati Uniti, sembra che ci sia un consensus politico quasi totale che la mondializzazione è l'unico sentiero avanti. Quindi l'aspetto che colpisce di più è il cambiamento della struttura sociale in atto. Mi sembra la chiave per evitare la servitù della gleba al livello di famiglia/individuale è quella di evitare l'indebitamento per un eccesso di consumo (con implicazioni anche morali).

La speculazione nel mercato immobiliare residenziale non è più sostenibile. Come risultato a lungo termine della sovraproduzione di case troppo grandi negli ultimi sette anni circa vedo la suddivisione di dette costruzione in case multifamiliari ed un cambiamento delle leggi sull'urbanistica (zoning laws), permettendo piccole attività industriali e commerciali in zone che finora sono strettamente residenziale - somigliante a quello che avevo visto nei villagi portoghesi solo sette o otti anni fa e quello che vedo come il modello dominante nell'America Latina - in parte per contrastare gli eccessivi costi di trasporto (commuting al posto di lavoro, in alcuni casi, oggi come oggi, fino a due ore solo andata) e di sostenere i costi (carry costs) di dette costruzioni in termini di debito ipotecario, spese di energia (luce, riscaldamento, condizionamento dell'aria), imposte locali sulla proprietà, assicurazioni, manutenzione fisica ed altri fattori, spese tutte che sono andate o stanno andando alle stelle negli Stati Uniti, per non parlare di spese sanitarie e di istruzione universitaria.

Una via di uscita per sia gli Stati Uniti che l'Europa, a parte una recrudescenza del protezionismo sia commerciale che immigratoria, sarebbe nuovo investimento in ed applicazione diffusa di una nuova(e) forma(e) di energia e di trasporto. Però nella struttura politica economica attuale nella quale domina il grande petroleo, non vedo tale cambiamento su un orizzonte visibile.

Per quanto riguarda l'America Latina invece, giudicando da quello che vedo finora in solo un paese, l'Ecuador, ho imparato quello che vuol dire un paese "sottosviluppato" (possiamo ormai scartare il termini "terzomondo" e per diversi motivi): c'è sviluppo industriale però ad un passo molto più lento, rispetto ai paesi di prima industrializzazione, nel mezzo di una classe dirigente con una mentalità "tradizionale agricola" che allo stesso tempo mantiene forti legami culturali e politici, nonchè economici e finanziari, con il "vecchio mondo" Europe e gli Stati Uniti.

Però, in contrasto, l'America Latina mantiene in un modo molto più diffuso alcuni aspetti della vecchia cultura "agricola tradizionale" che proprio valgono la pena di conservare, a mio modo di vedere, come la famiglia e l'arte di godersi la vita nonostante le condizioni materiali. Osservo questo riferendomi ad un concetto di ricchezza e povertà relative e con tutto rispetto per quelli che soffrono davvero una povertà assoluta. Ripeto, c'è sviluppo industriale nell'America Latina, anche se ad un ritmo molto lento, e soprattutto c'è mica una mancanza di cibo ed in molti ambienti il clima è favorevole alla dolce vita a gente che ci sa fare nel proprio modo; quello che manca, invece, in poche parole, sono istituzioni sociali (politiche ed economiche) che permetterebbero alla grande masse di persone di raggiungere un livello di vita materiale "goduto" da quelle dei paesi di prima industrializzazione.

Però, nella mia opinione, tale livello di vita materiale è sopravvalutato, non solo oggigiorno in termini di mercato, ma soprattutto in termini umani, e la gente nei paesi di prima industrializzazione continua a pagare un prezzo troppo alto in termini di rigidità sociale (la mancanza di libertà?) per conservare il sistema, anche dovuto a nozioni di propaganda nazionalista, snobbismo e addiritura puro razzismo: un poco di multilinguismo personale ed vera esperienza in situ vanno lontano nell'aiutare ad valorizzare i modi di vita altrui, allo stesso tempo augurandogli i frutti più dolci (e non quelli amari) dei sistemi dei paesi di prima industrializzazione, intanto che conservano le proprie tradizioni di vero valore.

In questo contesto, alcuni trend politici attuali in America Latina forse meritano un commento, anche se, a mio modo di vedere, il tema sottostante è quello di sempre: le classi dirigenti, di qualsiasi gusto in termini di propaganda politica, sono sinceri e hanno la capacità di trasformare il reditto generato da poche commodity in istituzioni sociali durevoli che siano in grado non solo di dare ad una quota sempre più alta delle rispettive popolazioni uno standard di vita materiale più alto, ma anche più opportunità di crescere, di esprimere i propri talenti, in un'economia più diversificata e competitiva nel contesto mondiale? O si tratta del solito populismo la cui forza economica si basa in un boom del prezzo di una singola commodity destinato a rientrare a secondo del trend internazionale, terminando con la defenestrazione del demagoga di turno? Oggi come oggi mi riferisco in particolare a Hugo Chavez di Venezuela ed ultimamente a Evo Morales di Bolivia.

Certamente più integrazione regionale renderebbe ciascuno di questi paesi più competitivo al livello mondiale, e forse Brasil è l'esempio guida in questo senso, essendo anche l'unico paese in grado di essere da solo una potenza economica mondiale, non solo per la sua dimensione territoriale ma anche per la qualità della sua industria e la sua capacità nella ricerca e sviluppo. Altri paesi stanno tentando di combinare l'integrazione regionale con apertura commericiale internazionale: mi referisco in particolare all'accordo di libero commercio tra i paesi dell'America centrale (più la Republica Dominicana) con gli Stati Uniti, il negoziato per un accordo analogo tra i paesi andini - Colombia, Ecuador e Perù - con gli Stati Uniti (le firme finali sono attesi quest'anno 2006), gli accordi di libero commercio con Chile ed il NAFTA di Messico, e poi, infine, ci sono accordi analoghi in fase di negoziato tra diversi paesi/regioni latinoamericani e l'Unione Europea.

Vale la pena menzionare che, almeno nell'Ecuador che vedo, fra quelli che prosperano di più sono quelli coinvolti in qualche maniera con l'economia mondiale, che sia attraverso emmigrazione e le rimesse che mandano nel paese d'origine, o attraverso il commercio.

Quindi, anche una combinazione di socialismo populista e mercato libero in regime di economia aperta sarebbe bene in principio. La questione rimane se le classi dirigenti latinoamericane siano in grado di dare alle rispettive società istituzioni sociali adeguate per lo scenario mondiale attuale e, perlomeno, frenare la corruzione che tanto punisce quella che è per la maggior parte buona gente.

Per quanto riguarda i paesi dell'Asia orientale ed India, ovviamente non posso fare osservazioni personali, limitandomi invece ad alcune di carattere generale. Prima, mi sembra che il divario nel livello della vita materiale tra un lavoratore asiatico ed un lavoratore di un paese di prima industrializzazione sia destinato a restringersi con il tempo. Intanto, questi paesi si stanno migliorando sia in termini militari che in termini di tecnologia propria (miglioramento riflettuto anche nello sfero della ricerca universitaria autonoma).

Tale sviluppo rafforza l'idea e la realtà che i sistemi dei paesi di prima industrializzazione siano ormai o comunque saranno, sovravvalutati e dovranno mantenere la propria egemonia attraverso una combinazione di propaganda, ulteriore sviluppo tecnologico e di tecnici gestionale, e forse soprattutto un riinvigorire sociale. Altrimenti il loro destino potrebb'essere quello di diventare giocatori di secondo piano in un sistema globale dominato dagli asiatici, lontanamente più numerosi, intanto che i cinesi ci ridono sopra della guerra tra "l'Occidente" e gli arabi per determinare chi vendrà al loro le materie prime, energia in testa, per lo sviluppo industriale attraverso il quale verrebbero a dominare su tutti.

In tutto questo contesto, al livello personale di uno che, in qualche maniera, fa parte di quella classe media che si sta diminuendo in numero ed in importanza, almeno rispetto alla società dei paesi di prima industrializzazione durante gli ultimi cent'anni più o meno, direi che i rischi e le opportunità – sia in termini di mera soppravivenza, sia in termini economici generali, sia in termini di scelte morali personali – non sono molto differenti rispetto a situazioni sociali analoghe del passato. Sto pensando in particolare dell'Impero Romano dei primi due secoli rispetto a terzo secolo, per esempio. Comunque spesso nella storia c'è la lamentela della sparizione di una sorte di classe media o altra. Apparentemente i destini dell'umanità non si giocano all'intorno su questo punto, ci sono cose più importanti, anche al livello individuale. Nonostante, mi ricordo sempre qualcosa che ho letto rispetto all storia egiziana, una lettera di un padre scritto ad un figlio, conservata nelle sabbie del deserto, proprio durante l'alba della storia scritta, in cui esorta al figlio che diventi una scriba, cioè che sappia leggere e scrivere, che conosca le lingue, perchè tale conoscenza gli darebbe le capacità e la flessibilità di sopravvivere nel mondo dei grandi gruppi di potere, dei faraoni, vecchi e nuovi.

Pace dell'anima a tutti.

Latin & Hellas ™

4-5 gennaio 2006