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The Age of Inefficiency

07 Thursday Jun 2012

Posted by bwhite21 in Political Economy and International Affairs, Politics, Sustainability, U.S. Government, Uncategorized

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business, Capitalism, China, Economics, Employment, Labor, Professor Tim Jackson, U.S.

There was an opinion piece by Professor Tim Jackson in the May 27, 2012 Sunday Review section of the New York Times. Professor Jackson teaches sustainable development at the University of Surrey and believes that prosperity can and needs to be achieved without growth given the world’s finite resources. His May 27th editorial I believe takes another tack by asking, is employment reliant on economic growth and increased productivity? He does not seem to believe that they are necessarilty correlated and opts for a lower labor productivity through shorter work weeks. It not a new argument and ignores technological displacement of labor.

I have been thinking that we need to convert to an “inefficient” economy to have sustainable growth and stable governments. This idea borders on either lunacy or Marxism/Communism to many neither of which I subscribe to. Nonetheless, for consumption based mature economies such as the U.S., it will be a necessity. Unlike China and India the U.S. and other Western nations have populations that while aging, are not growing geometrically. The demographic of an aging population presents it own problems, which can be partially addressed by continuing to employ elder workers as expert advisor/employees, allowing younger workers to rise through the managerial ranks. The problem of an excessively large potential labor pool as exists in a number of emerging nations is another matter.

Labor is a double edge sword for China and India and other countries with large populations of low income citizens. It provides a source of cheap labor which attracts Western and emerging local industries, but the size of the population risks political instability should labor be displaced, technologically or otherwise. China and India each have economic policies that are labor, rather than capital centric. This is not to say that they don’t make use of their capital and will continue to exact intellectual property from Western countries that seek to access their markets. The corruption and bureaucracy that may seem to impede efficiency from a Western capital centric economic viewpoint enhances local wealth to workers on a trickle down basis at all levels. While historically the economic disparities of trickle down corruption and bureaucracy have led to the overthrow of earlier regimes, each country is cognizant of this risk and periodically tries to achieve a greater balance to avoid a tipping point. This parallels social welfare in the capital centric systems of Western economies. The current debate over austerity and debt relief in the Eurozone is a reflection of this tension.

Western businesses and governments have been promoting globalization as a catalyst for economic growth. On a global macro basis it is a valid thesis as the economic condition of emerging nations has improved. It also has increased consumerism in Western economies by shifting some labor and capital costs abroad, lowering tax costs and providing cheaper goods to the Western home market. For Western labor, with diminished union power, this shift has been compounded by technology permanently displacing workers, leaving new but reduced employment opportunities in high tech and service sectors. This will continue to advance and poses the greatest threat to world economic prosperity, as diminished labor wealth reduces Western consumer purchasing power. China and India are still derivative economies. While at some future time Western countries may regret wishing that China and others supplant domestic consumption for their export economies, at present China in particular will have a hard landing should both Europe and the U.S. go into a sustained recession. China and other successful emerging markets with large currency reserves want to increase their investment in Western countries to mitigate this exposure. For these potential investors and for these Western countries, it is essential to continue to encourage consumption and to do this they need to maintain higher employment, with sustainable wages and lower public debt. Western corporations and governments need to realize that their survival will be based on this. It is not a matter of “capital” growth, but of labor growth.

On a micro level business makes profits by becoming more efficient. Accordingly, technological replacement of more expensive and less efficient labor is a good thing. In the aggregate, however, this will deprive these companies of customers. Emerging nations will buy from their own companies, not in the long run from foreigners. They have and will progressively restrict foreign capital investment in their own productive industries leaving Western companies to focus on their own domestic Western markets. They need to develop this market for their own long term good, by adopting a more macro labor focus in their economic policies. To achieve economic growth to retire the U.S. and European debt, workers in these countries will need to slow down productivity and have the labor force expanded. This is in essence what I believe Professor Jackson is saying. It seems counter-intuitive, but its not.

It is not without risk. It will selectively lower wages and individual purchasing power, likely produce some near term inflation and will increase the economic impact on the fixed incomes of the aging Western population. It will allow more labor mobility, ultiimately grow purchasing power and reduce the risk of political stability. It is not a panacea. Concentrated capital needs to be addressed as well, but that presents a political and business challenge. Expanding labor is something business can do themselves if it looks at its problem beyond its immediate circumstance.

Rollover- Without Jane Fonda

03 Friday Feb 2012

Posted by bwhite21 in Political Economy and International Affairs, Regulation/Compliance

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banking, business, China, currency, economy, Euro, financial crisis, foreclosures, Jane Fonda, mass marketing, pareto principle, politics, reinsurance, Rollover, U.S.

In 1981 Jane Fonda, Kris Kristofferson and Hugh Cromyn were in a so-called financial thriller about the collapse of the world monetary system due to Arab oil monetary fears and self-preservation. Apart from the fact that I was younger and Jane Fonda was in it, the movie’s theme has haunted me for years. Looking on the web there are a few others like me, and if you do a search there is an interesting juxtaposition on youtube between the movie and the U.S. recent financial crisis. I don’t subscribe to the economic/political views of the producer’s of that video, although there is truth in everything. My prior post on contagion clauses reflects my view that in any crisis the most important element is time.

This brings me to the so-called pareto principle of 80/20; that which is important and worthy of attention is in the 20% cohort. In fact, the 20% group may be too large, as which is catastrophic, is often 1% or less, is most important, and is remote (or at least unpredictable). Life intervenes before the catastrophe, so other choices are made in lieu of catastrophic planning. When the catastrophe comes, there is little time to react; obligations in place often accelerate the catastrophe; those who have knowledge of the subject and are most capable of responding often have conflicts in doing so; rules must be broken; and the solution is generally to bide for time, by rolling things over long enough until normalcy returns.

I read in the papers each day about the financial crisis. In Europe apart from it being a political-fiscal crisis which needs time to resolve, sovereigns and the capital markets are in a dance of debt with no one who wants to cut in. Sovereign debt is Tier I capital for banks under Basel regardless of quality. There is no legal cap on country borrowing (although there is an economic cap), so the dance can continue.

In the U.S. the foreclosure problem is also a dance between the government (including Fannie/Freddie) and the banks and the secondary markets. They hope to run this out as long as possible to permit the capital base of the banks to improve and so continue the no effective interest borrowing from the Fed without corresponding macro usage of the funds (this would be Cat planning if they were not rewarding their internal and external stakeholders, even on a deferred basis). While there is some haircut due to unpaid interest, more often the obligations are being deferred through a balloon payment. In a low interest, volatile investment market the opportunity cost is relatively low, compared to a true haircut by the banks. When the interest rate/investment climate changes there will be a lot more foreclosures. The government is pushing State Attorney Generals to come on board, at the same time that the Obama administration’s low hanging fruit proposals don’t stand a chance in Congress. Look for 2013.

A number of years ago I spoke on a panel at a Reinsurance conference, where my topic was emerging issues in reinsurance. Reinsurance is insurance of insurance companies, and is one of the ways insurance companies finance themselves and protect their balance sheets. It impacts the premiums you pay. The issue I wanted to bring up was currency. In part because currency is hedged outside of reinsurance and in part because these were mostly property & casualty insurers, they did not understand why I wanted to talk about this. Since then the Euro crisis ensued, which has aggregated interest in the U.S. dollar in the short term. My talk was more long term, particularly for long tail risks. Given that China may become the dominant economic country, and that the Yuan could be the world’s currency in the future, long term commitments in dollars needed to be qualified. To get there there is likely to be a basket of currencies as in Singapore.

China’s domestic market will grow, making it the more dominant consumer economy on a mass marketing basis-  contrary to the pareto principle. As such, U.S. wages and its standard of living will decline, as the benefit of globalization is macro rather than micro. In order for China to sustain this they need to continue to follow their labor, rather than capital oriented economic policy unless that choose a more totalitarian political policy based on economic disparity. As U.S. companies have belatedly learned, every country supports their own and they will not share as much in China’s rise, unless they have know-how to share. Accordingly, the US will not be able to rollover debt to China.

The rollover period continues, but it is coming to an end.

 

 

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