Tuesday, September 30, 2008

Ideas, Anyone?

Today's post is an open invitation to readers. Please use the comment section to suggest ideas on implementing "The Alternative" (see previous post).

Some of my own...
  1. Require by law that by 2025 at least 30% of all energy consumed in the US be generated via bona fide renewable sources, e.g. hydro, solar and wind.
  2. Tax carbon-based energy on a scale increasing every year.
  3. Require all large food producers and processors/packagers to adopt broadly sustainable methods, also on a scale increasing every year.
  4. Demand that China allows the free float of its currency, oherwise remove favoured nation trading status and impose heavy import duties.
  5. Immediately cease all bailout operations and instead raise the FDIC insurance limit to $500,000.
OK, over to you now...

Monday, September 29, 2008

The Alternative

Some people who read and comment on this blog ask what is my "solution" to the most crucial problem of our economy: too much debt vs. low earned income. I thought I had provided a broad outline, but let me now present a more comprehensive one.

A few initial points:
  • First, let's agree that this is the problem. That's not as self-evident as you may think; for example, most denizens of Wall Street and Washington (and many other financial centers and capitals) strongly believe that the root cause of the current crisis is low asset values, e.g. low home prices. This is evident from their actions thus far, which are all directed at supporting asset prices. This knee-jerk reaction also saves their own bacon from being thrown onto the sizzling skillet. (How very convenient..)
  • Assuming you agree that this is the fundamental problem, the solution becomes obvious: we must reduce debt and/or raise earned income. Ideally we should do both concurrently in order to restore balance as quickly as possible.
  • In close parallel, let's also agree that we are reaching the limits of our current energy-intensive, growth-at-all-costs socio-economic model; indeed, I strongly believe we have already exceeded them. In some ways, the tremendous expansion of debt vs. earned income proves this point: debt has allowed us to keep consuming, borrowing from tomorrow that which we cannot earn today.
  • Therefore, the "solution" - what I term "The Alternative" in this post's title - must perforce involve a fundamental, structural shift in our socio-economic structure. There are already abundant hints around that many people "get it": several countries (e.g. Germany) are rapidly shifting to sustainable energy sources; organic/bio food and other consumer goods are gaining ground fast, not only because they are healthier, but also because they are economically more sustainable. Popular media are increasingly focusing on such issues.
If you agree to the above (and you certainly don't have to), let's move on.

We are presented with:
  1. A problem: too much debt vs. income and,
  2. A need: to transform our Permagrowth society into a more sustainable one.
Thus, we are presented with the opportunity to use the process of satisfying need (2) to also solve problem (1), i.e. (1) + (2) = (3)....=>

3. The process of socio-economic transformation can create millions of well-paid jobs in the technology and manufacturing sector, plus all the ancillary areas like education and servicing, and it will do so for decades. A crucial key is localization and distributed production of goods and services, i.e. a return of the "local" vs. the "global" economy.

Globalization may remain a factor in some sectors, but distributed and localized production of energy, commodities and manufactured goods means it will recede as a broad force shaping the new era.

The exact policy details need to be worked out as we go along, but it is significant to note that such mainstream popular policy shapers as Thomas Friedman are already jumping on this bandwagon. His new book is called Hot, Flat and Crowded and advocates exactly such a solution. I feel vindicated, to say the least...

Friday, September 26, 2008

Trillions With A "T" Not Billions With A "B"

Millions and Billions and Trillions, oh my!

The government's actions to forestall the debt crisis have gone from bad (shotgun marriage of Bear Stearns to Morgan), to worse (nationalization of Fannie and Freddie) and now dto ownright hilarious. Those Beltway Bozos are effectively planning to nationalize the entire US mortgage market (conservatively put at some $11 trillion) - hello!!? Pretty soon we'll all be saying "a trillion bucks just ain't what it used to be".

You said how much???

I can truly understand the visceral revulsion of all politicians, Americans and others, to even a whiff of deflation. The Great Depression has left an indelible mark on everyone, including its most ardent student, Mr. Ben Bernanke the current Fed Chairman. But is throwing more money at everything that is gridlocked the proper way to resolve the current problem?

In a word, no. Our fiat money is nothing but debt, so issuing even more of it obviously does not deal with the root cause of the crisis, i.e. too much debt vs. earned income. In promoting the $700 billion plan Messrs. Bernanke and Paulson are merely reacting in knee-jerk fashion, instead of engaging in more thoughtful analysis and proper action. They are just furiously dancing the old-time Wall Street fandango: all flash, little substance. Keep the money moving around as fast as possible and hope most good citizens get dizzy and confused and finally decide to go home to watch I Love Lucy.

Friday, September 19, 2008

Iodine Swabs

The world's central banks and the US government are trying to engage in closely coordinated financial salvage operations in order to create as much psychological market punch as possible. In effect, they (well,ultimately we) are assuming worthless debt to keep the lend-spend system going for a while longer. By doing so they are just swabbing iodine onto a gangrenous limb, instead of doing what is really necessary: massive doses of antibiotics and/or outright amputation.

The problem is quite simple, all over the West: there is too little earned income at the foundation of the economy to support massive debt and thus overinflated asset prices. Looking at American households alone, in 1978 their total debt came to 79% of total employee compensation (wages, salaries, pension contributions, etc.). Today, this figure has more than doubled to 174%.

By their current actions the authorities are attempting to prevent the inevitable, logical and even healthy process of debt elimination and asset price correction that would restore some semblance of balance between debt and income.

Let's say it once more: let the market take care of prices and instead concentrate policies on boosting earned income, i.e. create well-paying jobs. The rest is fluff.

Wednesday, September 17, 2008

Excuse Me, But...

The stiff upper lip evident in the willingness to let Lehman fail lasted exactly 24 hours. Yesterday the Bush administration panicked (yet again) and agreed to "rescue" AIG by providing it with a $85 billion Fed loan. As a result, the US taxpayer is now the majority owner of the insurance company - further adding to his/her portfolio of problematic (to put it very mildly) FIRE industry assets.

I won't go into the legality or other bureaucratic issues surrounding such bailouts/nationalizations (yet another falling knife caught at enormous cost...), but I do have a very simple question:

Excuse me, but who's going to ultimately salvage the salvager?

Saturday, September 13, 2008

"Lacks Sufficient Capital"

"Recent developments highlight the extent to which the banking system as a whole lacks sufficient capital to comfortably navigate this period of sharp deleveraging."

Mohamed El-Erian, co-CEO of Pacific Investment Management Co (Pimco).

El-Erian was referring to the urgent talks going on to prevent Lehman Bros. from going under.

I don't know about you, but when the chief of the largest fixed-income asset manager in the world ($812 billion) says things like that I tend to get really, really concerned. The amplitude and frequency of the waves in the financial pond are both increasing, causing the keepers of the public purse (Paulson, Bernanke & Co.) serious nausea. It is time to "get off the boat" and let some big names flat-out fail.

Yes, the prospect of a domino effect is very real but this can be a great benefit, a la Cold War MAD nuclear doctrine (Mutual Assured Destruction). The fear of a total wipeout should bring people to their senses, sharply reducing their demands and expectations for what they will be left with after the ongoing credit contraction.

Thursday, September 11, 2008

Waistline Indicator

Many thanks to everyone who welcomed me back. The reason for the absence was quite simple: I went into an intensive exercise program (bike/swim/squash) and dropped from a size 38 to 33. All the biking aggravated an old knee injury so I had to add two hours of daily physical therapy to the whole thing... Naturally, blogging went to the backburner.

And as the pounds melted away and the waist shrunk, so did Dow et al. Perhaps my waist size is a market indicator? I should warn all that I plan to "shrink" a bit further... :)

On markets: My view is that we are currently in the "But things can't really get any worse, can they?" phase. Another way to put it is that hope dies last - and there is still plenty of hope around. For economic indicators, I keep a close watch on employment, particularly the jobless claims numbers that come out every Thursday.

As I have often said before, it is earned income (or rather, the lack of it) that is key to what is happening to an economy that kept piling debt upon debt in order to keep the pigs flying. The failure of financial institutions is just the sound of some of them crashing to the ground.

How stupid is a "system" that:

a) Demands that working people keep their salary and wage demands low in the name of "competitiveness" and,
b) Then encourages them to substitute debt for income and,
c) Then asks them to keep consuming?

Darned stupid, if you ask me...

Tuesday, September 9, 2008

The 300 Pound Gorillas

There are a couple of huge gorillas loose in the current environment, threatening to do serious damage to global financial markets. (No, I don't think we have seen the worst yet...).
  1. US - Russia relationships are deteriorating fast. The Georgia flash point did not come as a surprise to anyone who has been following energy/geopolitical developments. Simply put, the West's reliance on imported oil and gas is exacting a heavy price, with a resurgent Russia demanding to reclaim its global player role.
  2. The Fannie and Freddie nationalization is the clearest sign yet that the global financial construct, based as it is upon huge piles of debt, is bankrupt and that we haven't yet figured out what to replace it with. Those who should know better are still beating a dead horse .