Sunday, July 08, 2007
Houses and mortgages - reality worse than the news?
Rachel Beck of AP has an article in The Arizona Republic (July 3), showing that dodgy housing data may be understating the scale of the problems.
Living off our inheritance: global wealth distribution, GDP and debt
The World Institute for Development Economics Research of the United Nations University (UNU-WIDER) launched a report last December, about household net worth around the world. Here's a nugget or two from their press release:
“The study finds wealth to be more unequally distributed than income across countries. High income countries tend to have a bigger share of world wealth than of world GDP.” (p. 3)
This suggests to me that the wealthy countries are to some extent living on their capital.
‘China … fails to feature strongly among the super-rich because average wealth is modest and wealth is evenly spread by international standards. However, China is already likely to have more wealthy residents than our data reveal for the year 2000, and membership of the super-rich seems set to rise fast in the next decade.’ (p.4)
Surprisingly, household debt is relatively unimportant in poor countries. As the authors of the study point out: ‘While many poor people in poor countries are in debt, their debts are relatively small in total. This is mainly due to the absence of financial institutions that allow households to incur large mortgage and consumer debts, as is increasingly the situation in rich countries….many people in high-income countries have negative net worth and—somewhat paradoxically—are among the poorest people in the world in terms of household wealth.’ (p. 5 - italics are mine.)
Figure 7, “Asset Composition in Selected Countries”, shows the proportion of real property, financial assets and debt in 7 countries, including the US, Canada and Japan. Looking at the ratio of debt to financial assets, China is clearly the least debt-burdened.
When a spendthrift heir meets a poor but hard-working and hard-saving entrepreneur, the result seems predictable. Look at page 16 of Warren Buffett's 28 Feb 2007 letter to shareholders, which I quoted at greater length on July 5:
"The world is ... willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over.... [but] foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card."
“The study finds wealth to be more unequally distributed than income across countries. High income countries tend to have a bigger share of world wealth than of world GDP.” (p. 3)
This suggests to me that the wealthy countries are to some extent living on their capital.
‘China … fails to feature strongly among the super-rich because average wealth is modest and wealth is evenly spread by international standards. However, China is already likely to have more wealthy residents than our data reveal for the year 2000, and membership of the super-rich seems set to rise fast in the next decade.’ (p.4)
Surprisingly, household debt is relatively unimportant in poor countries. As the authors of the study point out: ‘While many poor people in poor countries are in debt, their debts are relatively small in total. This is mainly due to the absence of financial institutions that allow households to incur large mortgage and consumer debts, as is increasingly the situation in rich countries….many people in high-income countries have negative net worth and—somewhat paradoxically—are among the poorest people in the world in terms of household wealth.’ (p. 5 - italics are mine.)
Figure 7, “Asset Composition in Selected Countries”, shows the proportion of real property, financial assets and debt in 7 countries, including the US, Canada and Japan. Looking at the ratio of debt to financial assets, China is clearly the least debt-burdened.
When a spendthrift heir meets a poor but hard-working and hard-saving entrepreneur, the result seems predictable. Look at page 16 of Warren Buffett's 28 Feb 2007 letter to shareholders, which I quoted at greater length on July 5:
"The world is ... willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over.... [but] foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card."
Saturday, July 07, 2007
The world is flat - or is it? Is Leamer right about Friedman?
Thomas Friedman's book, "The World Is Flat" is a best-seller - Wikipedia summary here. Friedman's related website is here - I think the photograph of the author is interesting, for those who like to read faces.
Last year, Edward Leamer reviewed Friedman somewhat snippily here. Gosh, I wish people could be more succinct. As Byron wrote of Coleridge, "I wish he would explain his explanation". Still, I guess Leamer has to fly the flag for critical scholarship.
The issue is important: does globalization threaten America's standard of living? Free traders say no. But have a look at Figure 6 on page 33 of Leamer, showing global income distribution in 1980, when US per capita GDP was 4 times the world average. That's quite some inequality, and if they were two very different levels of water in the same canal, opening the lock between them would see wealth gush from A to B.
So as barriers to trade are coming down, why hasn't this happened? Leamer says (p.34), "Much of the difference in GDP per capita among countries comes from the greater amounts of physical and human capital in the West, which advantages aren’t going to go away any time soon."
I'm not so sanguine. As regards human capital, I think the East is very keen indeed to increase its investment in education and training, and isn't hampered by notions of equality of outcome for its students. As to industrial capital, we are watching a vast sucking-in of resources, right down to our iron manhole covers, by China and other emerging economies; but also (particularly in China) we see a rapid and determined acquisition of slowly-accrued Western intellectual capital.
I think the catch-up process would be even faster in China if their industries observed patent and copyright more scrupulously, so they weren't almost wiping out each other's profit margins in their domestic market; and financial capital will accumulate far more rapidly when Chinese manufacturers get to keep more of the foreign buyer's price, instead of losing most of the profit to shippers, distributors, marketers and advertisers. If I were Chinese, I'd be looking at those areas for the training of my bright young people; and I bet they are.
Figure 7 on page 35 compares global income distribution in 1980 and 2000. The rich have done fine, the middle earners have made almost no progress, the poor are gradually rising. But when you think about it, maybe the middle is progressing: Western industrial workers are losing their jobs and looking for work in less well-paid service industries, while new industrial jobs are being created abroad. James Kynge ("China Shakes The World") says he sees heavy industry taking over on the Chinese coast, and labour-intensive light industry being forced inland. The move from low-skilled to higher-skilled labour in China is certainly a progression, matched by downward movement in the West. I wonder what the higher end of the graph will look like in another 20 years, when the Chinese have their own armies of industrial tycoons, company VPs, economics professors, investment analysts and marketing experts? I bet they're quite content to watch their coolie-work go to even poorer countries, as long as it doesn't happen too soon in the game.
Leamer admits (p.46): "The real bottom line: we do not know the breadth and intensity of global contestability of US jobs, and until we do, we will not have a real handle on the impact of global competition on the US workforce."
Why is he relaxed? See page 48:
"Finally, I want to comment on what I think is the big issue. It isn’t globalization or a flat world; it’s technology and the post- industrial labor markets.
The US is in the midst of a radical transformation from industrial to post-industrial society. Some of this transition is associated with the movement of mundane manufacturing jobs to low-wage foreign locations, but much of it comes from the dramatic changes in technology in the intellectual services sectors. The policy response to the globalization force is pretty straightforward: we need to make the educational and infrastructure investments that are needed to keep the high-paying non-contestable creative jobs here at home and let the rest of the world knock themselves silly competing for the footloose mundane contestable jobs."
Well, I don't think the rest of the world is quite as silly as that. I don't think Western education systems are geared to excellence, as once they were; so for that reason, as well as IPR enforcement issues, I don't think we can bank on using our intellectual property to sustain our global income differential. I don't think multinational businesses have, or feel they can afford, nationalistic sentiment. And whenever I read statements that start "we need to do x", I get the feeling that x isn't going to happen. Individuals will still make their stellar way, but I can't envision the West as a whole reclining in comfort in a "post-industrial" society.
But maybe I'm wrong.
Last year, Edward Leamer reviewed Friedman somewhat snippily here. Gosh, I wish people could be more succinct. As Byron wrote of Coleridge, "I wish he would explain his explanation". Still, I guess Leamer has to fly the flag for critical scholarship.
The issue is important: does globalization threaten America's standard of living? Free traders say no. But have a look at Figure 6 on page 33 of Leamer, showing global income distribution in 1980, when US per capita GDP was 4 times the world average. That's quite some inequality, and if they were two very different levels of water in the same canal, opening the lock between them would see wealth gush from A to B.
So as barriers to trade are coming down, why hasn't this happened? Leamer says (p.34), "Much of the difference in GDP per capita among countries comes from the greater amounts of physical and human capital in the West, which advantages aren’t going to go away any time soon."
I'm not so sanguine. As regards human capital, I think the East is very keen indeed to increase its investment in education and training, and isn't hampered by notions of equality of outcome for its students. As to industrial capital, we are watching a vast sucking-in of resources, right down to our iron manhole covers, by China and other emerging economies; but also (particularly in China) we see a rapid and determined acquisition of slowly-accrued Western intellectual capital.
I think the catch-up process would be even faster in China if their industries observed patent and copyright more scrupulously, so they weren't almost wiping out each other's profit margins in their domestic market; and financial capital will accumulate far more rapidly when Chinese manufacturers get to keep more of the foreign buyer's price, instead of losing most of the profit to shippers, distributors, marketers and advertisers. If I were Chinese, I'd be looking at those areas for the training of my bright young people; and I bet they are.
Figure 7 on page 35 compares global income distribution in 1980 and 2000. The rich have done fine, the middle earners have made almost no progress, the poor are gradually rising. But when you think about it, maybe the middle is progressing: Western industrial workers are losing their jobs and looking for work in less well-paid service industries, while new industrial jobs are being created abroad. James Kynge ("China Shakes The World") says he sees heavy industry taking over on the Chinese coast, and labour-intensive light industry being forced inland. The move from low-skilled to higher-skilled labour in China is certainly a progression, matched by downward movement in the West. I wonder what the higher end of the graph will look like in another 20 years, when the Chinese have their own armies of industrial tycoons, company VPs, economics professors, investment analysts and marketing experts? I bet they're quite content to watch their coolie-work go to even poorer countries, as long as it doesn't happen too soon in the game.
Leamer admits (p.46): "The real bottom line: we do not know the breadth and intensity of global contestability of US jobs, and until we do, we will not have a real handle on the impact of global competition on the US workforce."
Why is he relaxed? See page 48:
"Finally, I want to comment on what I think is the big issue. It isn’t globalization or a flat world; it’s technology and the post- industrial labor markets.
The US is in the midst of a radical transformation from industrial to post-industrial society. Some of this transition is associated with the movement of mundane manufacturing jobs to low-wage foreign locations, but much of it comes from the dramatic changes in technology in the intellectual services sectors. The policy response to the globalization force is pretty straightforward: we need to make the educational and infrastructure investments that are needed to keep the high-paying non-contestable creative jobs here at home and let the rest of the world knock themselves silly competing for the footloose mundane contestable jobs."
Well, I don't think the rest of the world is quite as silly as that. I don't think Western education systems are geared to excellence, as once they were; so for that reason, as well as IPR enforcement issues, I don't think we can bank on using our intellectual property to sustain our global income differential. I don't think multinational businesses have, or feel they can afford, nationalistic sentiment. And whenever I read statements that start "we need to do x", I get the feeling that x isn't going to happen. Individuals will still make their stellar way, but I can't envision the West as a whole reclining in comfort in a "post-industrial" society.
But maybe I'm wrong.
Soros increases his mining stocks
Coat-tail Investor reveals Soros' largest holding by far is Companhia Vale Do Rio Doce, the world's second-largest mining corporation. Soros has increased his holding by around 10% as of end March. He's obviously sold on the commodities/natural resources/industrial metals theme.
A useful feature of the Coat-tail site is that you can re-order the information by clicking on each column heading, which makes searches much easier.
A useful feature of the Coat-tail site is that you can re-order the information by clicking on each column heading, which makes searches much easier.
Portfolios of leading investment managers
Here's a site that claims to reveal the investment portfolios of top managers such as Warren Buffett and George Soros. I don't suppose it will be able to say when they got into a stock, and at what price, but it should be instructive.
Friday, July 06, 2007
Subprime debt as a form of gambling
Those who are concerned about Bear Stearns and the subprime mortgage fiasco should read Paul Tastain's article in today's Daily Reckoning. He explains in detail how junk lending has gone from risky investment, to default insurance and ultimately to a kind of gambling. Some of the worst of this product has been bought by institutional investors, such as pension funds who have been almost forced to buy it by legislative pressure to increase bond holdings. He guesstimates potential losses in the region of $72 billion, or 20 times what it cost to bail out LTCM
These are certainly large figures, but maybe we should look at them in context. Interpreting the Russell 3000 Index data on this site, total US equities were worth around $15 trillion in 2005, and obviously rather more now. The 2007 estimated Federal Budget outlay is $2.655 trillion. That would make the putative $72 billion junk mortgage loss only about 0.5% of US investments overall, or some 2.6% of US government expenditure.
But the article is a wonderfully clear example of how systemic risk is created and expanded.
These are certainly large figures, but maybe we should look at them in context. Interpreting the Russell 3000 Index data on this site, total US equities were worth around $15 trillion in 2005, and obviously rather more now. The 2007 estimated Federal Budget outlay is $2.655 trillion. That would make the putative $72 billion junk mortgage loss only about 0.5% of US investments overall, or some 2.6% of US government expenditure.
But the article is a wonderfully clear example of how systemic risk is created and expanded.
Thursday, July 05, 2007
Some highlights from the Levy Economics Institute
A few nuggets from the July 2007 Levy Economics Institute conference:
Dimitri Papadimitriou foresees an improving current account deficit over the next three years. Private sector debt should level off as a proportion of GDP. The Congressional Budget Office's forecast and targets for 2010 assume continuing home borrowing, but if this doesn't happen, the model suggests that budget deficit needs to increase to 4.6% of GDP. The alternative is a depreciation of the dollar, which is unlikely because (a) this would increase inflation and (b) China does not wish the renminbi to rise significantly against the dollar. A propos the last, Robert Barbera explained that a renminbi appreciation would raise the price of China's farm products and hit the living standard of its large rural population.
Robert Parenteau looked at US private borrowing: "the prospect of a hard landing should be taken seriously".
Wolfgang Muenchau of the Financial Times thinks that despite having stronger fundamentals than America, Europe is likely to be affected by a US downturn, because European stocks, property prices and interest rates tend to follow America's lead, and a strengthening of the Euro against the dollar would hit European exports and economic growth.
Torsten Slok considered longer-term inflationary pressures in the US: demands for pay raises, an increasing proportion of retirees overstraining the budget, and the possibility of an overheating Chinese economy that would up US import prices.
James Paulsen thought that the US could regain some of its consumer market share through "a long-term sustained contraction of its trade deficit to revive domestic manufacturing".
Frederic Mishkin of the Federal Reserve was relatively relaxed about subprime borrowing, saying that such loans represented less than 10% of all mortgages.
Dimitri Papadimitriou foresees an improving current account deficit over the next three years. Private sector debt should level off as a proportion of GDP. The Congressional Budget Office's forecast and targets for 2010 assume continuing home borrowing, but if this doesn't happen, the model suggests that budget deficit needs to increase to 4.6% of GDP. The alternative is a depreciation of the dollar, which is unlikely because (a) this would increase inflation and (b) China does not wish the renminbi to rise significantly against the dollar. A propos the last, Robert Barbera explained that a renminbi appreciation would raise the price of China's farm products and hit the living standard of its large rural population.
Robert Parenteau looked at US private borrowing: "the prospect of a hard landing should be taken seriously".
Wolfgang Muenchau of the Financial Times thinks that despite having stronger fundamentals than America, Europe is likely to be affected by a US downturn, because European stocks, property prices and interest rates tend to follow America's lead, and a strengthening of the Euro against the dollar would hit European exports and economic growth.
Torsten Slok considered longer-term inflationary pressures in the US: demands for pay raises, an increasing proportion of retirees overstraining the budget, and the possibility of an overheating Chinese economy that would up US import prices.
James Paulsen thought that the US could regain some of its consumer market share through "a long-term sustained contraction of its trade deficit to revive domestic manufacturing".
Frederic Mishkin of the Federal Reserve was relatively relaxed about subprime borrowing, saying that such loans represented less than 10% of all mortgages.
Buffett on trade imbalances
Warren Buffett's 28 February 2007 letter to shareholders is available online, and makes educational and entertaining reading. Here's a pithy extract:
As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high. I fervently believe in real trade – the more the better for both us and the world. We had about $1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had $.76 trillion of pseudo-trade last year – imports for which we exchanged no goods or services. (Ponder, for a moment, how commentators would describe the situation if our imports were $.76 trillion – a full 6% of GDP – and we had no exports.) Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.
The U.S. can do a lot of this because we are an extraordinarily rich country that has behaved responsibly in the past. The world is therefore willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over.
These transfers will have consequences, however. Already the prediction I made last year about one fall-out from our spending binge has come true: The “investment income” account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse compounding” as we pay ever-increasing amounts of interest on interest.
I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking.
It's reassuring that Buffett thinks per-capita wealth will increase; this is an antidote to the most extreme doomsters. But it begs the question of how equitably that wealth will be distributed. The transfer abroad of industrial jobs leaves most of their former holders in less well-paid employment, while boosting the profits of large multinational companies (such as Wal-Mart, in which Berkshire Hathaway has close to a billion-dollar stake). From James Kynge's China book, it seems that the gap between America's rich and poor is widening, and the middle class is shrinking. Save and invest while you can.
Buffett is also enlightening on the future of newspapers in the electronic age, and the occasional bargains to be had in insurance. His firm has made money out of carefully-considered reinsurance (including for Lloyds of London) and derivatives. Berkshire Hathaway has gradually moved from being a "growth" to a "value" business, delivering returns increasingly from income earned, and insurance business helps. BH has made a profit from "super-cat" insurance in the past year, but Buffett warns that Hurricane Katrina wasn't the last nor the worst possible.
Note also the warning in the extract about the dollar. Recent falls aren't the end of the necessary decline - see to the Levy report referred to in my previous post.
As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high. I fervently believe in real trade – the more the better for both us and the world. We had about $1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had $.76 trillion of pseudo-trade last year – imports for which we exchanged no goods or services. (Ponder, for a moment, how commentators would describe the situation if our imports were $.76 trillion – a full 6% of GDP – and we had no exports.) Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.
The U.S. can do a lot of this because we are an extraordinarily rich country that has behaved responsibly in the past. The world is therefore willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over.
These transfers will have consequences, however. Already the prediction I made last year about one fall-out from our spending binge has come true: The “investment income” account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse compounding” as we pay ever-increasing amounts of interest on interest.
I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking.
It's reassuring that Buffett thinks per-capita wealth will increase; this is an antidote to the most extreme doomsters. But it begs the question of how equitably that wealth will be distributed. The transfer abroad of industrial jobs leaves most of their former holders in less well-paid employment, while boosting the profits of large multinational companies (such as Wal-Mart, in which Berkshire Hathaway has close to a billion-dollar stake). From James Kynge's China book, it seems that the gap between America's rich and poor is widening, and the middle class is shrinking. Save and invest while you can.
Buffett is also enlightening on the future of newspapers in the electronic age, and the occasional bargains to be had in insurance. His firm has made money out of carefully-considered reinsurance (including for Lloyds of London) and derivatives. Berkshire Hathaway has gradually moved from being a "growth" to a "value" business, delivering returns increasingly from income earned, and insurance business helps. BH has made a profit from "super-cat" insurance in the past year, but Buffett warns that Hurricane Katrina wasn't the last nor the worst possible.
Note also the warning in the extract about the dollar. Recent falls aren't the end of the necessary decline - see to the Levy report referred to in my previous post.
Wednesday, July 04, 2007
Global imbalances: new report
Please click here for the July report from the Levy Economics Institute: "Global imbalances: prospects for the U.S. and world economies".
Railroads: further details
Chris Mayer writes about railroads in today's Daily Reckoning Australia. After describing Chinese technical feats, he looks at factors that make railways more attractive in today's America:
- Container transportation is booming as America imports more of its non-perishable goods. But fuel costs are rising. The energy-efficiency of rail is an advantage over trucking.
Looking at wider issues, maybe a highly concentrated population implies not only highly-capitalised amenities, but centralised power. How will America change as urbanisation continues? Will the internalised society (life governed by shared expectations of decent behaviour, liberty, egalitariansm) become a society of rule imposed from outside and above?
As it happens, I am reading Bill Bryson's childhood memoir of Des Moines, Iowa and the Fifties ("The life and times of the Thunderbolt Kid"), and he remembers when America had millions of small, family-owned farms and the Midwest was dotted with thriving little towns. When the farm went, what went with it?
And coming back to the resource-efficiency/sustainability arguments, I have an idea that although cities seem to be more efficient (because people are closer to each other), they are highly entropic - it takes a lot of work to stop them falling apart in all sorts of ways. Maybe the more distant future is back out on the prairies, with a return to localised production and self-government.
- Container transportation is booming as America imports more of its non-perishable goods. But fuel costs are rising. The energy-efficiency of rail is an advantage over trucking.
- The US population continues to move to the cities, where land is at a premium. Rail is more space-efficient, and less polluting than cars or planes.
So Buffett is doing his customary thing, of backing dull, dependable, comprehensible business that's going with the flow.Looking at wider issues, maybe a highly concentrated population implies not only highly-capitalised amenities, but centralised power. How will America change as urbanisation continues? Will the internalised society (life governed by shared expectations of decent behaviour, liberty, egalitariansm) become a society of rule imposed from outside and above?
As it happens, I am reading Bill Bryson's childhood memoir of Des Moines, Iowa and the Fifties ("The life and times of the Thunderbolt Kid"), and he remembers when America had millions of small, family-owned farms and the Midwest was dotted with thriving little towns. When the farm went, what went with it?
And coming back to the resource-efficiency/sustainability arguments, I have an idea that although cities seem to be more efficient (because people are closer to each other), they are highly entropic - it takes a lot of work to stop them falling apart in all sorts of ways. Maybe the more distant future is back out on the prairies, with a return to localised production and self-government.
Tuesday, July 03, 2007
A note of caution about the Gold Standard, and the Euro
Until I looked it up (isn't the internet wonderful?) I had thought that the "Geddes Axe" (which slashed UK public expenditure) was a response to the Depression. Far from it: some would say it was a major cause. It turns out that after the First World War, our politicians wanted Britain to be great again, and thought that meant getting the pound back up to its former exchange rate against the dollar - just as I dream about getting into my old teen jeans.
They managed to do it for a while, but the result was a deflation that failed to take into account Britain's postwar economic weakness, and the 1925 restoration of the gold standard at this fatally high level prolonged the suffering. Then the zip bust.
More recently, some felt that lacing the pound into the Euro would stiffen our backs. Or perhaps this idea owed more to fuzzy notions of European brotherhood, modernity etc - we in Britain have had ten years of being led by a fuzzy thinker.
But not all agreed that the time was right - see the 2002 Cairncross lecture by Ed Balls. This lecture, by the new Prime Minister's former economic adviser (see Wikipedia bio), sets the historical context for the "five tests" that he formulated with Gordon Brown in a New York taxi in 1997. The tests were designed to determine the timing of the UK's entry into the Euro - for details, see this Scotsman article of 2003, which also reviews progress. Perhaps the timing will never be right.
Some hope that's the case -because it's not just about economics. Can Europe ever be a country? What will happen to our mode of government, civil liberties and economic prosperity in this herd-rush towards an "ever-closer union" commanded by a remote, opaque elite?
Is currency stability generally desirable? Sure; but another return to fixed exchange rates would certainly need extremely careful management, especially in fundamentally unstable conditions. I don't think Western trade deficits are purely due to monetary inflation; China's rapid rise from poverty seems just as challenging to our budgets as the Great War that drove us off the gold standard.
They managed to do it for a while, but the result was a deflation that failed to take into account Britain's postwar economic weakness, and the 1925 restoration of the gold standard at this fatally high level prolonged the suffering. Then the zip bust.
More recently, some felt that lacing the pound into the Euro would stiffen our backs. Or perhaps this idea owed more to fuzzy notions of European brotherhood, modernity etc - we in Britain have had ten years of being led by a fuzzy thinker.
But not all agreed that the time was right - see the 2002 Cairncross lecture by Ed Balls. This lecture, by the new Prime Minister's former economic adviser (see Wikipedia bio), sets the historical context for the "five tests" that he formulated with Gordon Brown in a New York taxi in 1997. The tests were designed to determine the timing of the UK's entry into the Euro - for details, see this Scotsman article of 2003, which also reviews progress. Perhaps the timing will never be right.
Some hope that's the case -because it's not just about economics. Can Europe ever be a country? What will happen to our mode of government, civil liberties and economic prosperity in this herd-rush towards an "ever-closer union" commanded by a remote, opaque elite?
Is currency stability generally desirable? Sure; but another return to fixed exchange rates would certainly need extremely careful management, especially in fundamentally unstable conditions. I don't think Western trade deficits are purely due to monetary inflation; China's rapid rise from poverty seems just as challenging to our budgets as the Great War that drove us off the gold standard.
The Mogambo Guru on the lost days of rising real wages
Richard Daughty's latest piece, posted on GoldSeek, does the usual and then harks back to a time when employers were trying to cut wages because the workers were getting richer, thanks to a solid currency and steady economic improvement.
Faber in person, and "always long on gold"
While we're doing the visuals, let's have a look at Marc Faber. I find you can learn so much about people from their face, voice and physical posture. Faber comes across as frank, clear, careful to say it right, thought-out.
This interview is several months old, but has many nuggets of enduring value, such as a possible 30-40% drop in emerging markets, political prospects for Thailand, Japan as a buying opportunity, and gold as a store of value against the relentless decay of paper currency.
Note how he says at the end that Americans should not hold gold in America, for fear of expropriation in a crisis. Warnings like that made in his gentle and cautious way are all the more stark.
Part 1:
Part 2:
This interview is several months old, but has many nuggets of enduring value, such as a possible 30-40% drop in emerging markets, political prospects for Thailand, Japan as a buying opportunity, and gold as a store of value against the relentless decay of paper currency.
Note how he says at the end that Americans should not hold gold in America, for fear of expropriation in a crisis. Warnings like that made in his gentle and cautious way are all the more stark.
Part 1:
Part 2:
Inflation? We should be enjoying gentle, long-term deflation!
Richard Daughty, aka The Mogambo Guru, is on YouTube! In print, his rants are so funny that you can forget he's entirely serious. Here, he goes through the theory of money and the scam that is inflation, in two-and-a-half minutes. A gem, as they say.
Monday, July 02, 2007
Inflation: the evidence
If you want to see what monetarists would assert is the fountain of inflation in the UK, here are the M4 money supply figures from the Bank of England, going back to 1963.
The average rise over the whole series is 13.485% per annum; over the last, "prudent" 10 years, 9.99% p.a.
To put it another way, if £1 could have been invested in 1963 at an interest rate that kept pace with this monetary expansion, it would now be worth something like £261. And that's assuming you would have been allowed this interest tax-free, so as to preserve the value of your money.
Contrast that result with the inflation statistics as given by this paper in the House of Commons Library. The figures only go up to 1998, but let's assume purchase prices kept to their approximate target of 2.5% p.a. after that. According to this research, a "basket" of goods and services worth £1 in 1963 would now cost about £15.
Where has the rest of the inflation come out? Asset prices, presumably, or bank profits. Or have the monetarists got it wrong?
One thing's for sure: even after adding net interest at available rates, cash savers have seen an enormous, long-term dilution of their share of the country's circulating money. They would, I estimate, need to receive about 6.7% per annum ABOVE purchase price inflation, to match the money supply increases.
If I've got it wrong, do please show me where the error has occurred.
The average rise over the whole series is 13.485% per annum; over the last, "prudent" 10 years, 9.99% p.a.
To put it another way, if £1 could have been invested in 1963 at an interest rate that kept pace with this monetary expansion, it would now be worth something like £261. And that's assuming you would have been allowed this interest tax-free, so as to preserve the value of your money.
Contrast that result with the inflation statistics as given by this paper in the House of Commons Library. The figures only go up to 1998, but let's assume purchase prices kept to their approximate target of 2.5% p.a. after that. According to this research, a "basket" of goods and services worth £1 in 1963 would now cost about £15.
Where has the rest of the inflation come out? Asset prices, presumably, or bank profits. Or have the monetarists got it wrong?
One thing's for sure: even after adding net interest at available rates, cash savers have seen an enormous, long-term dilution of their share of the country's circulating money. They would, I estimate, need to receive about 6.7% per annum ABOVE purchase price inflation, to match the money supply increases.
If I've got it wrong, do please show me where the error has occurred.
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The Daily Reckoning blog started in April 2006 and also features some free reports. You may wish to link / contribute to it.
Sunday, July 01, 2007
What's wrong with money?
Many a truth is spoken in jest, and Douglas Adams' "The Hitchhiker's Guide To The Galaxy" is full of wry truths. Here's one about money on Planet Earth:
Most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small, green pieces of paper, which is odd, because on the whole, it wasn't the small, green pieces of paper which were unhappy.
It's odd how money seems more important than the here-and-now. Some would say that money changes real life for the worse, because it is a distorted representation of reality.
One solution is to try to amend the money system. This site reproduces the text of Richard Douthwaite's "The Ecology Of Money", a piece on money and community currency systems.
Another is to try to live without money, or nearly so, and instead have a more direct relationship with the land - for example, the Tinker's Bubble community in Somerset. I don't know whether the whole world can go that way - not everyone is so skilful, or can get hold of such lovely land and resources in such a relatively peaceful, prosperous and tolerant country; but to quote the poet Elizabeth Jennings, "sickness for Eden was so strong".
Meanwhile, the rest of us have to use some of our precious time, trying to prevent the value of our savings being stolen by inflation, and avoiding the worst consequences of an ill-managed economic system that, if it breaks down, could lead to a long period of hardship.
Most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small, green pieces of paper, which is odd, because on the whole, it wasn't the small, green pieces of paper which were unhappy.
It's odd how money seems more important than the here-and-now. Some would say that money changes real life for the worse, because it is a distorted representation of reality.
One solution is to try to amend the money system. This site reproduces the text of Richard Douthwaite's "The Ecology Of Money", a piece on money and community currency systems.
Another is to try to live without money, or nearly so, and instead have a more direct relationship with the land - for example, the Tinker's Bubble community in Somerset. I don't know whether the whole world can go that way - not everyone is so skilful, or can get hold of such lovely land and resources in such a relatively peaceful, prosperous and tolerant country; but to quote the poet Elizabeth Jennings, "sickness for Eden was so strong".
Meanwhile, the rest of us have to use some of our precious time, trying to prevent the value of our savings being stolen by inflation, and avoiding the worst consequences of an ill-managed economic system that, if it breaks down, could lead to a long period of hardship.
The Australian housing market suffers, too
It's not just the US and UK that suffer from home lending problems. The Contrarian Investors' Journal commented yesterday on housing-related debt and reduced property valuations in Australia.
Subprime lending in the US housing market rocking the boat
The Bloomberg financial site is following the subprime mortgage story, and quotes Peter Schiff (see my review of his book) as predicting that the majority of such loans will default.
In the US as in the UK, inflation has made house prices rise fast, and in turn this has encouraged lenders to offer mortgages almost recklessly: high loan to valuation (sometimes even more than 100%), borrowers with a less than perfect track record of honouring their commitments.
Also, and unlike in the UK, the US mortgage has traditionally been a long-term, fixed rate deal, but more recently, many homeowners have taken out loans with a short-term, very low initial interest rate, and now they are coming out of the initial period into higher, variable rates. This would be a challenge anyway, but the variable rates are rising as the government seeks to rein in inflation.
You would expect that the lenders have most to worry about, but there has been a trend towards putting blocks of these debts together and selling them on to third parties as income-yielding investments. Since this gets risky debt off the lenders' hands, the lenders don't mind doing more of the same, so there is a temptation to become careless about quality.
But that risk has been transferred to the investment market, so a wave of defaults will hit returns on investments. And the investor isn't always quite aware of the degree of risk involved. The worst-risk packages are known as "equity tranches" and some have been sold to pension funds - see Michael Panzner's submission to Seeking Alpha. Some would see this hawking of bad risk as looking for suckers, and even with knowledge of his fiduciary obligation, the buyer may sometimes be a bit more gullible if it's not his own money he's investing.
In the US as in the UK, inflation has made house prices rise fast, and in turn this has encouraged lenders to offer mortgages almost recklessly: high loan to valuation (sometimes even more than 100%), borrowers with a less than perfect track record of honouring their commitments.
Also, and unlike in the UK, the US mortgage has traditionally been a long-term, fixed rate deal, but more recently, many homeowners have taken out loans with a short-term, very low initial interest rate, and now they are coming out of the initial period into higher, variable rates. This would be a challenge anyway, but the variable rates are rising as the government seeks to rein in inflation.
You would expect that the lenders have most to worry about, but there has been a trend towards putting blocks of these debts together and selling them on to third parties as income-yielding investments. Since this gets risky debt off the lenders' hands, the lenders don't mind doing more of the same, so there is a temptation to become careless about quality.
But that risk has been transferred to the investment market, so a wave of defaults will hit returns on investments. And the investor isn't always quite aware of the degree of risk involved. The worst-risk packages are known as "equity tranches" and some have been sold to pension funds - see Michael Panzner's submission to Seeking Alpha. Some would see this hawking of bad risk as looking for suckers, and even with knowledge of his fiduciary obligation, the buyer may sometimes be a bit more gullible if it's not his own money he's investing.
Saturday, June 30, 2007
Panzner: data opacity - fear of the financial truth?
The Federal Reserve stopped publishing its M3 data (the widest definition of the money supply) from 23 March 2006, and this occasioned much suspicious comment.
Now, in two posts on his Financial Armageddon website (27 and 29 June), Michael Panzner writes about the lack of transparency in the Bear Stearns sub-prime mortgage debacle, and the failure of credit rating agencies to downgrade Bear Stearns bonds.
It always looks bad if the doctor won't tell you how you're doing.
Now, in two posts on his Financial Armageddon website (27 and 29 June), Michael Panzner writes about the lack of transparency in the Bear Stearns sub-prime mortgage debacle, and the failure of credit rating agencies to downgrade Bear Stearns bonds.
It always looks bad if the doctor won't tell you how you're doing.
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