Looking again at World Gold Council stats, there's something odd: a heck of a lot of gold has disappeared.
In seven years, from the first quarter of 2000 to the last quarter of 2006, the total tonnage held by countries and the IMF and World Bank has declined from 33, 375.1 to 30,383.8. That's a total reduction of nearly 9%, 2,991.3 tonnes of gold to be exact. At today's price ($21,426.87 per kilo), that's $64.09 billion gone off the radar.
Or to put it another way, at this rate of attrition, there will be no officially-held gold in the world at all in about 71 years' time, less than the lifespan of an average American.
The people must be voting in the only way that makes much difference these days, squirreling away pieces of gold. Or does anyone have a better explanation?
Thursday, August 02, 2007
Bad news update; listen to Grandad
Peter Schiff has been quoted in various sources, e.g. the LA Times, as predicting oil at $100 a barrel.
Michael Panzner refers us to a site called Grandfather Economic Report, which like me is concerned about the impact of bad economics on families and the next generation.
Michael Panzner refers us to a site called Grandfather Economic Report, which like me is concerned about the impact of bad economics on families and the next generation.
Money and crime
The Mogambo Guru (Richard Daughty) posts a long one on The Daily Reckoning, including the text of his speech at the recent Agora Financial "Rim of Fire" conference in Vancouver. He writes and speaks like a Ranter from the English Civil War, or a Cassandra who has already dug her secret emergency escape tunnel out the back of Troy, away from the Greek lines.
But underneath the Vincent Price-like, self-parodying Gothic melodrama, I feel he's right. The answer to the question in my previous post is yes, because as money continues to be produced, of course everything will go up in nominal terms, for a time. The turning point will come when people realise that their money is going to be worth noticeably less every month, and trust in the currency will be in danger of collapse.
I also think he's right in saying that this systematic abuse suits the powerful, and their lesser friends and servants. Much of human misery is the result of people's unwillingness to do genuine work, so oarsmen will be replaced by coxes until the crew is entirely composed of steersmen and the boat stops. You do not have to be a member of the National Rifle Association to think that ever-increasing government is a problem.
Where I disagree, is the bit about looking forward to being a complacent gold bug while your neighbours suffer. Not for moral reasons, but from the practical point of view that in such a situation, your life and property would not be safe.
I remember that in the early nineties, when recession was chewing on us in the UK, one hard-working and decent small-businessman client was starting to talk, only half-jokingly, about turning to crime, just to survive. Until then, it had never occurred to me that some "stand-up guys" could be driven that way; I'd always assumed that criminals were simply a type. But I could tell he was getting serious - many a true word is spoken in jest. Fortunately for him and the rest of society, the economy improved, his house increased in value, and he sold up and emigrated to the Far East. I hope it's working out okay for him.
Back here, and in the US, I'd like to see economic reform now, not social breakdown later.
But underneath the Vincent Price-like, self-parodying Gothic melodrama, I feel he's right. The answer to the question in my previous post is yes, because as money continues to be produced, of course everything will go up in nominal terms, for a time. The turning point will come when people realise that their money is going to be worth noticeably less every month, and trust in the currency will be in danger of collapse.
I also think he's right in saying that this systematic abuse suits the powerful, and their lesser friends and servants. Much of human misery is the result of people's unwillingness to do genuine work, so oarsmen will be replaced by coxes until the crew is entirely composed of steersmen and the boat stops. You do not have to be a member of the National Rifle Association to think that ever-increasing government is a problem.
Where I disagree, is the bit about looking forward to being a complacent gold bug while your neighbours suffer. Not for moral reasons, but from the practical point of view that in such a situation, your life and property would not be safe.
I remember that in the early nineties, when recession was chewing on us in the UK, one hard-working and decent small-businessman client was starting to talk, only half-jokingly, about turning to crime, just to survive. Until then, it had never occurred to me that some "stand-up guys" could be driven that way; I'd always assumed that criminals were simply a type. But I could tell he was getting serious - many a true word is spoken in jest. Fortunately for him and the rest of society, the economy improved, his house increased in value, and he sold up and emigrated to the Far East. I hope it's working out okay for him.
Back here, and in the US, I'd like to see economic reform now, not social breakdown later.
Could the Dow AND gold BOTH go up?
In unusual circumstances, normal behaviour changes, as Richard Bookstaber recently observed. If the dollar's decline continues, and gold maintains its "real" value, a 17% dollar devaluation would mean a corresponding 20.48% increase in the price of gold, carrying the yellow metal over the $800 threshold.
A weaker dollar makes imports more expensive - both finished goods and raw materials - but is a stimulus to some exports. Maybe, if it didn't all happen too suddenly and scare everyone off the market, the Dow would rise.
It would also mean paying back foreigners with cheaper money, a trick played on the world by Britain's Harold Wilson in the devaluation of 19 November 1967, when the pound's foreign exchange value was cut abruptly by 14%.
The US Treasury's figures for May 2007 show there's a total of $2.18 trillion in foreign-held securities. A Brit-style 14% devaluation would lose Uncle Sam's partners about $305 billion. John Bull's share of that loss would be some $23 billion, or around £11.5 billion.
Maybe that would finally get the British news media to notice the recent huge UK support for US government debt. I can hardly wait. Be still, my beating wallet.
There's a political price to pay, but US Presidents can't serve more than two terms anyway, not since they changed the Constitution to stop another Roosevelt reign.
Harold Wilson resigned in 1974, citing ill health, but I did once hear a rumour that the IMF, which bailed us out in 1975, had made Wilson's resignation a precondition of the loan. In these document-shredding and email-deleting times, a paranoid would say you know it's the truth when it's officially denied.
Meanwhile, please place your bets in the two polls opposite!
A weaker dollar makes imports more expensive - both finished goods and raw materials - but is a stimulus to some exports. Maybe, if it didn't all happen too suddenly and scare everyone off the market, the Dow would rise.
It would also mean paying back foreigners with cheaper money, a trick played on the world by Britain's Harold Wilson in the devaluation of 19 November 1967, when the pound's foreign exchange value was cut abruptly by 14%.
The US Treasury's figures for May 2007 show there's a total of $2.18 trillion in foreign-held securities. A Brit-style 14% devaluation would lose Uncle Sam's partners about $305 billion. John Bull's share of that loss would be some $23 billion, or around £11.5 billion.
Maybe that would finally get the British news media to notice the recent huge UK support for US government debt. I can hardly wait. Be still, my beating wallet.
There's a political price to pay, but US Presidents can't serve more than two terms anyway, not since they changed the Constitution to stop another Roosevelt reign.
Harold Wilson resigned in 1974, citing ill health, but I did once hear a rumour that the IMF, which bailed us out in 1975, had made Wilson's resignation a precondition of the loan. In these document-shredding and email-deleting times, a paranoid would say you know it's the truth when it's officially denied.
Meanwhile, please place your bets in the two polls opposite!
Good advice
An amusing e-letter from Investment U today. Its strapline is "What no books, no schools, no brokers will teach you".
With good reason, if the content is anything to go by - it seems that all you have to do for a comfortable retirement is invest in stocks that go up like rockets. And it gets better: the best way (it seems) to choose those stocks is to look at how they've done in the past.
The figures are great, too. To create $100k per year in 10 years' time, they say you'll need a fund of $2 million. Apparently there's no such thing as inflation. Because if there is, and it rolls on at a sedate 2.5% compound per year, you'll need 28% more in 10 years' time.
In actuality, assuming you want your retirement income to be inflation-proofed, your fund will have to be not 20 times the planned income you want, but closer to 40. Partly it's because we're living longer (and retiring earlier), but mostly it's because the life insurance companies have cottoned on to the fact that our governments are (a) losing control of our finances and (b) lying heroically to us about it.
So maybe we're aiming at a fund of $5 million.
The rate of return shown is wild - a mere 29.6% per year. One would have to be "in denial" to postulate a steady 30% a year in America's train-wreck economy, when the great Warren Buffett has been sitting on billions in cash for years and has recently started to hedge against the dollar. Doug Casey has something that he says is "going to the moon", but that's gold - a speculation if ever there was one.
Here in the heavily-regulated UK, the maximum pension growth that can legally be illustrated is 9%, but that's including fund management charges. "Stakeholder" pensions have a maximum annual charge of 1%. So let's assume an (optimistic) annual growth rate of 8%.
Using our revised end-point, our legally-restricted growth rate and working backwards, as in the example provided, we need to start with a lump sum of $2,315,967. Not $194,400.
The article does make some serious points:
How did it do that? Much depends on the type of fund you're in - a fund whose name includes the word "recovery" or "opportunity" is usually one that concentrates on smaller companies, the shy, creeping things that are the first to emerge from the undergrowth after the storm. These are also damaged more easily than the big beasts by economic downturns. So the real lesson is, be in the right type of asset at the right time. Getting into a recovery fund in '02-'04 was a good choice, then.
And how about highlighted stocks? "Starbucks, Franklin Resources, General Dynamics, Amazon, Citigroup… These companies have posted average returns in excess of 30% a year, for more than a decade."
...I'm now reading Benjamin Graham, the man who taught Warren Buffett, and a note to the latest edition points out that in 2000 and 2001, Amazon. com lost 85.8%. If you'd been one of the victims and had to re-start with 14.2 cents for every dollar you had originally, you'd have to post a 704% gain just to get back where you started (and even then, you'd still be behind inflation, and interest earned safely on deposits). The first principle of investing is not to lose your money.
If you're going to risk a fortune on individual stocks, maybe you should blow your wad at the track instead - it'll be more fun. A nice day out, a bit of champagne, and you can sell your binoculars for the fare home.
There's an adage in law: "Free advice is worth what you pay for it". If you want advice, seek out a broker and pay for it. The poor sap is then liable for all your losses, while any gains are down to your wisdom in picking him.
Seriously, though, read financial newsletters with caution, and read the disclaimers first.
With good reason, if the content is anything to go by - it seems that all you have to do for a comfortable retirement is invest in stocks that go up like rockets. And it gets better: the best way (it seems) to choose those stocks is to look at how they've done in the past.
The figures are great, too. To create $100k per year in 10 years' time, they say you'll need a fund of $2 million. Apparently there's no such thing as inflation. Because if there is, and it rolls on at a sedate 2.5% compound per year, you'll need 28% more in 10 years' time.
In actuality, assuming you want your retirement income to be inflation-proofed, your fund will have to be not 20 times the planned income you want, but closer to 40. Partly it's because we're living longer (and retiring earlier), but mostly it's because the life insurance companies have cottoned on to the fact that our governments are (a) losing control of our finances and (b) lying heroically to us about it.
So maybe we're aiming at a fund of $5 million.
The rate of return shown is wild - a mere 29.6% per year. One would have to be "in denial" to postulate a steady 30% a year in America's train-wreck economy, when the great Warren Buffett has been sitting on billions in cash for years and has recently started to hedge against the dollar. Doug Casey has something that he says is "going to the moon", but that's gold - a speculation if ever there was one.
Here in the heavily-regulated UK, the maximum pension growth that can legally be illustrated is 9%, but that's including fund management charges. "Stakeholder" pensions have a maximum annual charge of 1%. So let's assume an (optimistic) annual growth rate of 8%.
Using our revised end-point, our legally-restricted growth rate and working backwards, as in the example provided, we need to start with a lump sum of $2,315,967. Not $194,400.
The article does make some serious points:
- baby boomers are facing a retirement crisis (Richard Bookstaber mentioned that in his interview with Jim Puplava, and thinks it'll be one of the drag factors on investments for many years to come)
- longer-term investments can afford to be riskier than short-term investments
- in the long run, we normally expect equities to outperform bonds
- investing earlier reduces the required rate of return to achieve your end-point target, so start early
How did it do that? Much depends on the type of fund you're in - a fund whose name includes the word "recovery" or "opportunity" is usually one that concentrates on smaller companies, the shy, creeping things that are the first to emerge from the undergrowth after the storm. These are also damaged more easily than the big beasts by economic downturns. So the real lesson is, be in the right type of asset at the right time. Getting into a recovery fund in '02-'04 was a good choice, then.
And how about highlighted stocks? "Starbucks, Franklin Resources, General Dynamics, Amazon, Citigroup… These companies have posted average returns in excess of 30% a year, for more than a decade."
...I'm now reading Benjamin Graham, the man who taught Warren Buffett, and a note to the latest edition points out that in 2000 and 2001, Amazon. com lost 85.8%. If you'd been one of the victims and had to re-start with 14.2 cents for every dollar you had originally, you'd have to post a 704% gain just to get back where you started (and even then, you'd still be behind inflation, and interest earned safely on deposits). The first principle of investing is not to lose your money.
If you're going to risk a fortune on individual stocks, maybe you should blow your wad at the track instead - it'll be more fun. A nice day out, a bit of champagne, and you can sell your binoculars for the fare home.
There's an adage in law: "Free advice is worth what you pay for it". If you want advice, seek out a broker and pay for it. The poor sap is then liable for all your losses, while any gains are down to your wisdom in picking him.
Seriously, though, read financial newsletters with caution, and read the disclaimers first.
Wednesday, August 01, 2007
Poll: how would you hedge against a dollar fall?
...and for extra marks (especially if you're putting your money on it!), let's see what currency or precious metal looks like the best store of the value of your dollars.
Warren Buffett recently revealed he's hedged against the greenback, and gold and silver bugs are contesting the merits of their respective hoards. If your preference is for currency but you wonder about the backing, remember that Germany has the world's second-largest stock of gold, whereas Switzerland and the UK have been persuaded to get rid of about half their gold holdings since 2000.
Meanwhile, Japan and China are both struggling to hold their currencies down, to protect their export markets. Russia seems keen on claiming half the Polar region and is already able to use its energy supplies as an economic weapon. India is developing fast, and may turn out to be an interesting rival for China.
Here's our starting point today, using the figures from the Currency Converter widget on the sidebar. $1,000 will currently buy:
729.74 Euros
1,427.25 German Marks (there's a glitch in the currency converter, so I've done this in two stages)
119,080 Japanese Yen
7,581.23 Chinese Yuan or Renminbi
492.40 British Pounds
40,383 Indian Rupees
25,548.20 Russian Roubles
1,203.70 Swiss Francs
An ounce of gold costs $665.03
An ounce of silver costs $12.92
Where would you hold your savings until the New Year?
Warren Buffett recently revealed he's hedged against the greenback, and gold and silver bugs are contesting the merits of their respective hoards. If your preference is for currency but you wonder about the backing, remember that Germany has the world's second-largest stock of gold, whereas Switzerland and the UK have been persuaded to get rid of about half their gold holdings since 2000.
Meanwhile, Japan and China are both struggling to hold their currencies down, to protect their export markets. Russia seems keen on claiming half the Polar region and is already able to use its energy supplies as an economic weapon. India is developing fast, and may turn out to be an interesting rival for China.
Here's our starting point today, using the figures from the Currency Converter widget on the sidebar. $1,000 will currently buy:
729.74 Euros
1,427.25 German Marks (there's a glitch in the currency converter, so I've done this in two stages)
119,080 Japanese Yen
7,581.23 Chinese Yuan or Renminbi
492.40 British Pounds
40,383 Indian Rupees
25,548.20 Russian Roubles
1,203.70 Swiss Francs
An ounce of gold costs $665.03
An ounce of silver costs $12.92
Where would you hold your savings until the New Year?
Tuesday, July 31, 2007
Jim Puplava's interview with Richard Bookstaber
Richard Bookstaber's interview on Financial Sense (21 July - audio file) was interesting. He discussed the derivatives market (which is the subject of his book, "A demon of our own design"), in which he has been intimately involved. It's a long interview and I'll just pick out one or two points.
Derivatives are financial bets. Portfolio managers use them as a kind of insurance, which then means that they can safely (they think!) increase their exposure to equities.
But derivatives are complex, and can have unexpected effects. For example, in October 1987 there was a sizeable drop in the stockmarket, and as the prices went down, automated trading programs noted the crossing of pre-set thresholds and this triggered more selling, which took the market below other programmed thresholds, and so on.
Also, to work properly, the derivatives market needs to be "liquid and efficient". Well, when the major turmoil was happening as just described, people held off buying back in - the scale had scared them. So they weren't doing what the system expected them to do, and this change in behaviour meant that there was less support at certain price levels than the system assumed.
Another way in which the system became inefficient at greatest need, was that certain classes of asset behaved in an untypical fashion. For example, normally bonds move together, and in the opposite direction to equities; but in 1987, when it looked like major disaster, poorer-quality bonds fell as though they were equities (because of fear of their defaulting), whereas Treasury bonds (backed by the government) rose.
I have heard that in times of stress, people make unusual mistakes, such as confusing left and right, and it seems that the derivatives market has similar potential in extreme situations. You can't tell how people will react under great pressure.
Then there's "black swan" events that haven't been factored-in, but can still happen, such as Russia's decision to default on its loans, which very nearly did for Long Term Credit Management and much more besides.
On top of that, there's the question of leverage, i.e. borrowing that greatly increases the risk and returns of an investment. The current debacle re mortgages packaged as interest-yielding investments stems from the fact that not only are the packages leveraged by a factor of 10 or 20 to 1, but the hedge funds that bought them might themselves be leveraged by a factor of 5, so magnifying the basic risk of sub-prime lending by a multiple of 50 or 100. So when things go wrong, they really go wrong. As we now see.
There is also the question of inadequate information about derivatives. The method of accounting was originally developed to track rolling stock for railways, not for super-fast, computer-based trading. The data available may not be what you need to assess the situation properly, and will almost certainly be out of date in the moment-to-moment market changes. Bookstaber thinks we need to use modern technologies to get the right data out of the system fast enough to make sensible decisions.
And in assessing risk, people's memories are too short. Fund managers may be too young to remember really bad times like 1989-91, so run the risk of complacency.
Speaking of age, there's a demographic risk, too: the baby-boomers are coming to the point where they'll want money out for retirement, and maybe the market hasn't fully realised this change in the financial climate. It could be a "slow burn" crisis like the one that hit Japan, lasting maybe 15 or 20 years.
Now, many of these periods of turbulence probably don't impact on the individual investor, says Bookstaber; the private investor should buy and hold, not panic.
However, a systemic risk that could have really serious consequences is the possibility of a major failure in the mortgage and credit markets, which could then roll on to the banking sector.
Yet again, we're back to the banks, credit and the money supply. How ever did we come to think of bankers as responsible people!
Anyhow, listen to the audio file and see if I've represented it fairly. And buy the book if you think it's relevant to your line of work or investment.
Derivatives are financial bets. Portfolio managers use them as a kind of insurance, which then means that they can safely (they think!) increase their exposure to equities.
But derivatives are complex, and can have unexpected effects. For example, in October 1987 there was a sizeable drop in the stockmarket, and as the prices went down, automated trading programs noted the crossing of pre-set thresholds and this triggered more selling, which took the market below other programmed thresholds, and so on.
Also, to work properly, the derivatives market needs to be "liquid and efficient". Well, when the major turmoil was happening as just described, people held off buying back in - the scale had scared them. So they weren't doing what the system expected them to do, and this change in behaviour meant that there was less support at certain price levels than the system assumed.
Another way in which the system became inefficient at greatest need, was that certain classes of asset behaved in an untypical fashion. For example, normally bonds move together, and in the opposite direction to equities; but in 1987, when it looked like major disaster, poorer-quality bonds fell as though they were equities (because of fear of their defaulting), whereas Treasury bonds (backed by the government) rose.
I have heard that in times of stress, people make unusual mistakes, such as confusing left and right, and it seems that the derivatives market has similar potential in extreme situations. You can't tell how people will react under great pressure.
Then there's "black swan" events that haven't been factored-in, but can still happen, such as Russia's decision to default on its loans, which very nearly did for Long Term Credit Management and much more besides.
On top of that, there's the question of leverage, i.e. borrowing that greatly increases the risk and returns of an investment. The current debacle re mortgages packaged as interest-yielding investments stems from the fact that not only are the packages leveraged by a factor of 10 or 20 to 1, but the hedge funds that bought them might themselves be leveraged by a factor of 5, so magnifying the basic risk of sub-prime lending by a multiple of 50 or 100. So when things go wrong, they really go wrong. As we now see.
There is also the question of inadequate information about derivatives. The method of accounting was originally developed to track rolling stock for railways, not for super-fast, computer-based trading. The data available may not be what you need to assess the situation properly, and will almost certainly be out of date in the moment-to-moment market changes. Bookstaber thinks we need to use modern technologies to get the right data out of the system fast enough to make sensible decisions.
And in assessing risk, people's memories are too short. Fund managers may be too young to remember really bad times like 1989-91, so run the risk of complacency.
Speaking of age, there's a demographic risk, too: the baby-boomers are coming to the point where they'll want money out for retirement, and maybe the market hasn't fully realised this change in the financial climate. It could be a "slow burn" crisis like the one that hit Japan, lasting maybe 15 or 20 years.
Now, many of these periods of turbulence probably don't impact on the individual investor, says Bookstaber; the private investor should buy and hold, not panic.
However, a systemic risk that could have really serious consequences is the possibility of a major failure in the mortgage and credit markets, which could then roll on to the banking sector.
Yet again, we're back to the banks, credit and the money supply. How ever did we come to think of bankers as responsible people!
Anyhow, listen to the audio file and see if I've represented it fairly. And buy the book if you think it's relevant to your line of work or investment.
Dow survey update
One more day and we'll stop - thanks for your responses. We've seen a little bit of a rally in the last 36 hours and so far (12.35 New York time) the Dow is down 2.55% from its 25 July close. Pessimism is also down a bit - less than two-thirds expect the Dow to be below 13,000 at year end.
Any more votes?
Any more votes?
Dow value afterthought
...and if we remember the heady close of December 1999, before tech stocks burst, the Dow was then at 11,497.12. We've had 7 years and 7 months elapse since, with an average growth of just under 2% compound per year. Adjusted for inflation (or available bank deposit interest rates), we've actually fallen behind; or, from a different point of view, we're not so wildly overvalued.
Actually, what I suspect has happened is that the balloon has a tear in it, and has been kept from falling to earth by massive amounts of extra monetary hot air; but "in real terms" we're still stuck somewhere in 1999. In short, we haven't yet faced up to the problems of our economy.
To use a different analogy, we're still drinking, in order to put off the hangover. But maybe there's lots more "booze" left (i.e. the Fed's printing press, aped by the Bank of England and others) and our "livers" (the real economy of production and jobs) will hold out a while longer.
It's not a strategy I'd recommend. I wonder what you think.
Actually, what I suspect has happened is that the balloon has a tear in it, and has been kept from falling to earth by massive amounts of extra monetary hot air; but "in real terms" we're still stuck somewhere in 1999. In short, we haven't yet faced up to the problems of our economy.
To use a different analogy, we're still drinking, in order to put off the hangover. But maybe there's lots more "booze" left (i.e. the Fed's printing press, aped by the Bank of England and others) and our "livers" (the real economy of production and jobs) will hold out a while longer.
It's not a strategy I'd recommend. I wonder what you think.
What should the Dow Jones be worth?
The Dow closed yesterday at 13,358.31; ten years before, it stood at 8,254.89. That's a compound annual growth rate of 4.93% (less, when you adjust for inflation).
Or if you take it from the big, big scare of Monday 19 October 1987 (close: 1,738.74, down 508 points from the previous Friday!), it's an average 10.88% compound per year. Does that seem too hot a pace? Unsustainable? But remember that we're starting that run from a real panic. If we took it from the happy close of the Friday before, the average becomes 9.53%.
Still too hot? If nearly 20 years isn't enough to establish a sensible long-term trend, let's look at an even longer period: 30 years from 30 July 1977. Then till now, the Dow's capital growth averages out at 9.45% compound per year. The market's folly can outlast your wisdom.
"Two views make a market", and that's it. Mr Market is making his wares available to you - will you buy at today's prices? (I wouldn't - but obviously others will, or the market would be lower.)
You can play with the figures yourself, on this fine page from Yahoo! Finance.
And please click on the poll opposite, to give your prediction for the year's end.
Or if you take it from the big, big scare of Monday 19 October 1987 (close: 1,738.74, down 508 points from the previous Friday!), it's an average 10.88% compound per year. Does that seem too hot a pace? Unsustainable? But remember that we're starting that run from a real panic. If we took it from the happy close of the Friday before, the average becomes 9.53%.
Still too hot? If nearly 20 years isn't enough to establish a sensible long-term trend, let's look at an even longer period: 30 years from 30 July 1977. Then till now, the Dow's capital growth averages out at 9.45% compound per year. The market's folly can outlast your wisdom.
"Two views make a market", and that's it. Mr Market is making his wares available to you - will you buy at today's prices? (I wouldn't - but obviously others will, or the market would be lower.)
You can play with the figures yourself, on this fine page from Yahoo! Finance.
And please click on the poll opposite, to give your prediction for the year's end.
Have I got my sums wrong - or right?
Bill Bonner, in The Daily Reckoning Australia yesterday, quotes Paul van Eeden as saying that gold has kept pace almost perfectly with inflation since the 1920s.
My post of 29 July did some figures with US gold stocks, the price of gold and the money supply, and came to an arresting conclusion. A kilo of gold costs x dollars, yet at that price, all US gold could be bought for 1/66th of all US dollars. There'd be a huge pile of spare paper money left over, completely unrelated to gold.
From one point of view, the current gold price is not surprising, if gold is merely one tiny part of the overall economy governed by the dollar system. Yet the ratio in the previous paragraph - 1:66, which is the same as 1.5 cents to 1 dollar - is almost exactly what The Mogambo Guru (Richard Daughty) said is the difference in purchasing power between one modern dollar and one 1913 dollar. According to him, the modern dollar is worth two 1913 cents.
Perhaps Doug Casey is right: if trust in the dollar collapses, gold could be "going to the moon".
My post of 29 July did some figures with US gold stocks, the price of gold and the money supply, and came to an arresting conclusion. A kilo of gold costs x dollars, yet at that price, all US gold could be bought for 1/66th of all US dollars. There'd be a huge pile of spare paper money left over, completely unrelated to gold.
From one point of view, the current gold price is not surprising, if gold is merely one tiny part of the overall economy governed by the dollar system. Yet the ratio in the previous paragraph - 1:66, which is the same as 1.5 cents to 1 dollar - is almost exactly what The Mogambo Guru (Richard Daughty) said is the difference in purchasing power between one modern dollar and one 1913 dollar. According to him, the modern dollar is worth two 1913 cents.
Perhaps Doug Casey is right: if trust in the dollar collapses, gold could be "going to the moon".
We need bad times
iTulip has just issued its latest email newsletter - I do suggest you subscribe, especially since it's free.
Their thesis this time is that the Dow will NOT continue to rise much, because the private investor isn't going to come in and be fleeced again. It's not just "once bitten, twice shy" but the fact that money's getting tighter (energy and food costs rising, etc) and the value of assets (especially houses) is in question. On the other hand, iTulip are not doomsters, either.
My view, for what it's worth, is that we have to wait for something unexpected to trigger a real correction, but the sooner it comes, the better. While our governments put off the evil day with borrowing and monetary inflation, our productive capacity is being exported. One firm I know is having an (atypical for here) bumper year; but whereas once their business used to be moving other people's machinery from one site to another, now they're shipping it abroad. How do you make a living if you sell your tools? Even administrators in bankruptcy can't force you to do that. But the economic folly of our rulers can.
In the British Midlands where I live, I've heard engineers complain (like Lewis Carroll's Oysters) about industrial decline ever since I attended a British Association for the Advancement of Science conference in 1977, but our leaders have plodded on, chatting comfortably to each other like the Walrus and the Carpenter, while the Oysters' numbers dwindled. I drive past new man-about-town city centre flats where only 17 years ago I was talking to a self-employed woman turning metal parts. The mighty Longbridge car plant is a broken shell, and the surrounding area is turning over to drugs, alcohol, crime, teenage gangs, domestic abuse and all the rest.
The system continues apparently unaffected, but I think it's a fool's paradise. Only last night, I watched a TV programme about India. The city of Bangalore (home to tech giant Infosys) is modernising and booming; its university aims to attract the world's best. When industry and learning have gone East, what exactly will the West have that anyone could want? We'd better start making it again now, and at a price that our trading partners are willing to pay. Or at least, make sure we have what we need to produce what we consume, as locally as possible.
Yes, currency devaluation means inflation and recession, but better that than a full-on, generation-long depression. We've got to take the nasty-tasting medicine while it can still make a difference. But who will force us to do it?
The US Presidential elections are still a year away, and the new President won't take over until January 2009. In the UK, we have a Prime Minister we didn't elect, who could choose to defer the next General Election right up to 2010. If we're going to get the right people to deal with the heavily-disguised crisis we're in today, the economic issues will have to break out into the open within the next 12 months.
In the meantime, investors must prepare for turbulence.
Their thesis this time is that the Dow will NOT continue to rise much, because the private investor isn't going to come in and be fleeced again. It's not just "once bitten, twice shy" but the fact that money's getting tighter (energy and food costs rising, etc) and the value of assets (especially houses) is in question. On the other hand, iTulip are not doomsters, either.
My view, for what it's worth, is that we have to wait for something unexpected to trigger a real correction, but the sooner it comes, the better. While our governments put off the evil day with borrowing and monetary inflation, our productive capacity is being exported. One firm I know is having an (atypical for here) bumper year; but whereas once their business used to be moving other people's machinery from one site to another, now they're shipping it abroad. How do you make a living if you sell your tools? Even administrators in bankruptcy can't force you to do that. But the economic folly of our rulers can.
In the British Midlands where I live, I've heard engineers complain (like Lewis Carroll's Oysters) about industrial decline ever since I attended a British Association for the Advancement of Science conference in 1977, but our leaders have plodded on, chatting comfortably to each other like the Walrus and the Carpenter, while the Oysters' numbers dwindled. I drive past new man-about-town city centre flats where only 17 years ago I was talking to a self-employed woman turning metal parts. The mighty Longbridge car plant is a broken shell, and the surrounding area is turning over to drugs, alcohol, crime, teenage gangs, domestic abuse and all the rest.
The system continues apparently unaffected, but I think it's a fool's paradise. Only last night, I watched a TV programme about India. The city of Bangalore (home to tech giant Infosys) is modernising and booming; its university aims to attract the world's best. When industry and learning have gone East, what exactly will the West have that anyone could want? We'd better start making it again now, and at a price that our trading partners are willing to pay. Or at least, make sure we have what we need to produce what we consume, as locally as possible.
Yes, currency devaluation means inflation and recession, but better that than a full-on, generation-long depression. We've got to take the nasty-tasting medicine while it can still make a difference. But who will force us to do it?
The US Presidential elections are still a year away, and the new President won't take over until January 2009. In the UK, we have a Prime Minister we didn't elect, who could choose to defer the next General Election right up to 2010. If we're going to get the right people to deal with the heavily-disguised crisis we're in today, the economic issues will have to break out into the open within the next 12 months.
In the meantime, investors must prepare for turbulence.
Sunday, July 29, 2007
Gold and M3 (US)
According to GoldPrice, gold today is going for $21,242.64 per kilo. The World Gold Council says that as of June 2007, the USA holds 8,133.5 tonnes of gold. So that means America's gold stock should be worth $172.777 billion.
This site says "as of early 2007, M3 is about $11.5 trillion", which is 66.56 times the value of US gold reserves. So if everybody insisted on having their money out in gold, which they can't do any more, they'd get about 1.5 cents-worth back for every dollar they were owed.
I suppose that's what inflation means.
UPDATE
Wikipedia says, "As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits."
If reserves and loans were all the money we had, then using a ratio of 1:10 for all of it (and it's worse than that!), the nominal value of bank reserves would be something like 6-7 times what they could buy in gold at current rates. Surely I've got this wrong?
This site says "as of early 2007, M3 is about $11.5 trillion", which is 66.56 times the value of US gold reserves. So if everybody insisted on having their money out in gold, which they can't do any more, they'd get about 1.5 cents-worth back for every dollar they were owed.
I suppose that's what inflation means.
UPDATE
Wikipedia says, "As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits."
If reserves and loans were all the money we had, then using a ratio of 1:10 for all of it (and it's worse than that!), the nominal value of bank reserves would be something like 6-7 times what they could buy in gold at current rates. Surely I've got this wrong?
Bargain hunting
I've been looking for something to illustrate how you can take advantage of pessimism.
Here is a blog about Consett, a small town in the North of England that was shattered by the closure of its main employer, a steelworks. The writer says (28 Dec 2006 entry), "I came across a copy of the Consett Guardian from 1983 - the year when you could buy a house for just £10,000..."
I looked on NetHousePrices for houses sold during 2006, to get an idea of the cheapest in a whole 12-month period. A terraced house is one joined to other houses left and right: the lowest individual sale price I could find for last year was £42,000. Yes, it's much lower than the national average for such properties (£186,316 according to the 9 March 2007 article on this site), but had this house in Consett sold for that £10,000 in 1993, the new owner would still be looking at a capital gain of 6% compound per annum. The article just mentioned gives an average Northern terraced property price as £125,058, and the Consett street that had most (27) sales of such properties last year showed an average price of £127,733.
So what happened to Consett? Their MP Hilary Armstrong explains:
...contrary to predictions the people of the district did not let the town die. After the closure, Project Genesis was launched to revive the local economy and regenerate the town. New industries have arrived, such as Derwent Valley Foods and aerospace company AS&T and unemployment is now down to the national average level. The site of the Steel Works has been reclaimed with new housing, a retail park and environmental landscaping. There is still a long way to go but Consett is still very much alive and is now seen as a successful case study in regeneration.
Financial experts like Bill Bonner and Marc Faber have revealed their purchases of cheap agricultural property in selected areas around the world; and sure enough, there's people out there now in the US who have spotted the opportunity in depressed housing areas like Detroit.
The worst hasn't happened yet, in any case - but think of bargains, when others can only see ultimate defeat. Remember Sir John Templeton.
Here is a blog about Consett, a small town in the North of England that was shattered by the closure of its main employer, a steelworks. The writer says (28 Dec 2006 entry), "I came across a copy of the Consett Guardian from 1983 - the year when you could buy a house for just £10,000..."
I looked on NetHousePrices for houses sold during 2006, to get an idea of the cheapest in a whole 12-month period. A terraced house is one joined to other houses left and right: the lowest individual sale price I could find for last year was £42,000. Yes, it's much lower than the national average for such properties (£186,316 according to the 9 March 2007 article on this site), but had this house in Consett sold for that £10,000 in 1993, the new owner would still be looking at a capital gain of 6% compound per annum. The article just mentioned gives an average Northern terraced property price as £125,058, and the Consett street that had most (27) sales of such properties last year showed an average price of £127,733.
So what happened to Consett? Their MP Hilary Armstrong explains:
...contrary to predictions the people of the district did not let the town die. After the closure, Project Genesis was launched to revive the local economy and regenerate the town. New industries have arrived, such as Derwent Valley Foods and aerospace company AS&T and unemployment is now down to the national average level. The site of the Steel Works has been reclaimed with new housing, a retail park and environmental landscaping. There is still a long way to go but Consett is still very much alive and is now seen as a successful case study in regeneration.
Financial experts like Bill Bonner and Marc Faber have revealed their purchases of cheap agricultural property in selected areas around the world; and sure enough, there's people out there now in the US who have spotted the opportunity in depressed housing areas like Detroit.
The worst hasn't happened yet, in any case - but think of bargains, when others can only see ultimate defeat. Remember Sir John Templeton.
And another thing...
Surely, people who can't afford their mortgages don't have big investments. So aside from default losses impacting on portfolios, I don't see a great need to sell one's holdings (or a wonderful opportunity to buy).
But when the market is worried, private investors tend to get rid of their stocks, which as they drop in price are snapped up by the patient, crocodile professionals. Watch for data on the changing proportion between private and institutional holdings - please let me know when you spot it.
But when the market is worried, private investors tend to get rid of their stocks, which as they drop in price are snapped up by the patient, crocodile professionals. Watch for data on the changing proportion between private and institutional holdings - please let me know when you spot it.
Pessimism overstated?
Seeking Alpha has a useful round-up of stats and news items on the US housing debacle.
I shall try out a contra-contrarian position here.
It's obvious that adjustable-rate mortgages (ARMs) will pose a problem for American borrowers as they emerge into a variable and now-higher interest rate environment. We are approaching a peak in this process around October/November and again, that's known about, so with all the belated hoo-ha in the media now it should be factored-in to the market.
The packaging of mortgages into collateralized debt obligations (CDOs) and their sale to perhaps naive institutional investors, is now better understood and has started a bout of worry that has spread to prime lending, too. So we have a reasonable dose of pessimism in the mixture, with Michael Panzner and Peter Schiff ensuring we're taking the medicine regularly.
One of Michael's posts last week included a detail of a "charming colonial" house in Detroit going for $7,000. Over here in the UK, somebody screwed a 0 to the side of our house prices over recent years, and if I was shown a residential property fund that would snap up streetsful of properties like the one in Detroit and wait for the turnaround, I'd be tempted.
When recession hit the UK in the early 80s, house prices plummeted in Consett, a Northern steelworking town where the local works - the main employer - closed and unemployment rose to 36%. Now the median price is £152,000. This was a working-class town, not a fashionable area, and at that time (1981) the national average house price was £24,188. So even if you'd bought a house in Consett at that price (and because of unemployment and deep pessimism, it would have been far less), you'd have made a 7.3% compound pa capital gain in the 26 years since - plus income from rent, less expenses.
I don't think the housing market runs the economy, it's the other way round. When we have a real economy, our wealth will be more secure. Perhaps the USA needs to wait for a fresh President who can take tough decisions early, in time for the fruits of his/her labours to show and be rewarded with a second term.
It's early days, but the pessimists in my Dow poll (see sidebar) have the upper hand. I still think there may be a small bounce by the end of the year, when we've digested all the bad news and are ready for a sweet. Please cast your vote!
I shall try out a contra-contrarian position here.
It's obvious that adjustable-rate mortgages (ARMs) will pose a problem for American borrowers as they emerge into a variable and now-higher interest rate environment. We are approaching a peak in this process around October/November and again, that's known about, so with all the belated hoo-ha in the media now it should be factored-in to the market.
The packaging of mortgages into collateralized debt obligations (CDOs) and their sale to perhaps naive institutional investors, is now better understood and has started a bout of worry that has spread to prime lending, too. So we have a reasonable dose of pessimism in the mixture, with Michael Panzner and Peter Schiff ensuring we're taking the medicine regularly.
One of Michael's posts last week included a detail of a "charming colonial" house in Detroit going for $7,000. Over here in the UK, somebody screwed a 0 to the side of our house prices over recent years, and if I was shown a residential property fund that would snap up streetsful of properties like the one in Detroit and wait for the turnaround, I'd be tempted.
When recession hit the UK in the early 80s, house prices plummeted in Consett, a Northern steelworking town where the local works - the main employer - closed and unemployment rose to 36%. Now the median price is £152,000. This was a working-class town, not a fashionable area, and at that time (1981) the national average house price was £24,188. So even if you'd bought a house in Consett at that price (and because of unemployment and deep pessimism, it would have been far less), you'd have made a 7.3% compound pa capital gain in the 26 years since - plus income from rent, less expenses.
I don't think the housing market runs the economy, it's the other way round. When we have a real economy, our wealth will be more secure. Perhaps the USA needs to wait for a fresh President who can take tough decisions early, in time for the fruits of his/her labours to show and be rewarded with a second term.
It's early days, but the pessimists in my Dow poll (see sidebar) have the upper hand. I still think there may be a small bounce by the end of the year, when we've digested all the bad news and are ready for a sweet. Please cast your vote!
Saturday, July 28, 2007
Who's got the gold?
According to latest World Gold Council figures (June), these are the biggest gold hoards held by individual nations and organisations, in descending order (countries not listed have less than 1% each):
United States, Germany, IMF, France, Italy, Switzerland, Japan, ECB, Netherlands, China, Taiwan, Russia, Portugal, India, Venezuela, Spain, United Kingdom, Austria, Lebanon.
The first 3 above account for nearly 49% of the world's stock, with the USA alone (since the dollar is the world's reserve currency) owning 26.77%.
The Central Bank Gold Agreement organises the buying and selling of gold by its member countries, to provide some price stability. Since the start of this year, the main change has been Spain's sale of 19.11% of its stock.
Figures are available from Q1 of 2000 onward. From then until now, here are the significant moves:
SALES (expressed as a percentage of each country's stock held as at Q1 2000):
Switzerland 50.19%
UK 47.25%
Portugal 36.94%
Spain 35.60%
Netherlands 29.71%
Austria 29.14%
ECB 14.14%
France 11.37%
Russia 4.95%
Germany 1.33%
On average, all gold-holding countries reduced their stock by an average of 9.89% over these 90 months; signatories to the Central Bank Gold Agreement reduced theirs by around 16 to 17%.
ACQUISITIONS (expressed as a percentage of each country's stock held as at Q1 2000)
China 51.89%
Venezuela 14.71%
Japan 1.55%
Venezuela has less than 360 tonnes; Japan hasn't added much percentage-wise. So the odd man out is China. China now has 600 tonnes and is in 10th place, rising from 395 tonnes (16th place) in 2000. It made major purchases of about 100 tonnes each at the end of 2001 and 2002.
United States, Germany, IMF, France, Italy, Switzerland, Japan, ECB, Netherlands, China, Taiwan, Russia, Portugal, India, Venezuela, Spain, United Kingdom, Austria, Lebanon.
The first 3 above account for nearly 49% of the world's stock, with the USA alone (since the dollar is the world's reserve currency) owning 26.77%.
The Central Bank Gold Agreement organises the buying and selling of gold by its member countries, to provide some price stability. Since the start of this year, the main change has been Spain's sale of 19.11% of its stock.
Figures are available from Q1 of 2000 onward. From then until now, here are the significant moves:
SALES (expressed as a percentage of each country's stock held as at Q1 2000):
Switzerland 50.19%
UK 47.25%
Portugal 36.94%
Spain 35.60%
Netherlands 29.71%
Austria 29.14%
ECB 14.14%
France 11.37%
Russia 4.95%
Germany 1.33%
On average, all gold-holding countries reduced their stock by an average of 9.89% over these 90 months; signatories to the Central Bank Gold Agreement reduced theirs by around 16 to 17%.
ACQUISITIONS (expressed as a percentage of each country's stock held as at Q1 2000)
China 51.89%
Venezuela 14.71%
Japan 1.55%
Venezuela has less than 360 tonnes; Japan hasn't added much percentage-wise. So the odd man out is China. China now has 600 tonnes and is in 10th place, rising from 395 tonnes (16th place) in 2000. It made major purchases of about 100 tonnes each at the end of 2001 and 2002.
Peter Schiff: US Treasury less creditworthy
Peter Schiff in FXStreet today mounts a vigorous defence of his record of warning us that subprime problems would spill over into other credit areas. The market appears to be waking up to this, but he says there's worse to come:
A much larger disaster looms for holders of U.S. dollar denominated assets in general. It will not be long before our foreign creditors realize that Uncle Sam is the biggest subprime borrower of them all and will similarly mark down the value of its debts as well.
Once again, why has Britain recently become the third-largest holder of American debt? Our exposure is now 3 times higher than about a year ago.
A much larger disaster looms for holders of U.S. dollar denominated assets in general. It will not be long before our foreign creditors realize that Uncle Sam is the biggest subprime borrower of them all and will similarly mark down the value of its debts as well.
Once again, why has Britain recently become the third-largest holder of American debt? Our exposure is now 3 times higher than about a year ago.
New Growth Theory and Friedman's "Flat Earth"
Here's an interview with Thomas Friedman in Yale Global Online (18 April 2005). Some quotes, with the issues I see in them italicised:
Lean thinking:
Wal-Mart doesn't make anything. But what they do is draw products from all over the world and get them into stores at incredibly low prices. How do they do that? Through a global supply chain that has been designed down to the last atom of efficiency. So as you take an item off the shelf in New Haven, Connecticut, another of that item will immediately be made of that item in Xianjin, China. So there's perfect knowledge and transparency throughout that supply chain.
International trade vs local social costs:
The consumer in me loves Wal-Mart... And not just me... Some lower-income people are stretching their dollars further because of Wal-Mart...The shareholder in me... loves Wal-Mart... The citizen in me... hates Wal-Mart, because they only cover some 40 percent of their employees with health care... [For the rest,] we tax-payers pay their health care. And the neighbor in me... is very disturbed about Wal-Mart. Disturbed about stories about how they've discriminated against women, disturbed about stories that they've locked employees into their stores overnight, disturbed about how they pay some of their employees. So... I've got multiple identity disorder, because the shareholder and the consumer in me feels one thing, and the citizen and the neighbor in me feel something quite different.
New Growth Theory issues:
What is the mix of assets you need to thrive in a flat world? Money, jobs, and opportunity in the flat world will go to the countries with the best infrastructure, the best education system that produces the most educated work force, the most investor-friendly laws, and the best environment. You put those four things together: quality of environment that attracts knowledgeable people, investment laws that encourage entrepreneurship, education, and infrastructure. So that's really where, in a flat world, the money is going to go.
And I don't really believe much in foreign aid because I think, at the end of the day, that's not how countries grow and get rich. But to the extent that you are going to give foreign aid, it should be to inspire, encourage, and help develop one of those four pillars for whatever developing country you're dealing with. But I do believe in trade, not aid. I think that axiom still applies, even more so in a flat world.
Security:
The flat world is a friend of Infosys and of Al-Qaeda. It's a friend of IBM and of Islamic jihad. Because these networks go both ways. And one thing we know about the bad guys: They're early adopters...
Trade, nationalism and peace:
...what I call the "Dell Theory" – you know, Dell Computers. The Dell Theory says that no two countries that are part of the same global supply chain will ever fight a war as long as they're each still part of that supply chain... here's what I predict: If you do go to war and you're part of one these supply-chains, whatever price you think you're going to pay, you're going to pay ten times more. Once you lose your spot in the supply chain because you've gone to war, the supply chain doesn't come back real soon. They're not going to. Fool me once, shame on you; fool me twice, shame on me. That's why you really risk a lot. And that's why these supply chains now really mean a lot. They're the new restraints.
Anti-globalization:
The anti-globalization movement ... is basically dead today – because China and India have embraced this process and this project... The anti-globalization movement... [are] all still talking about the IMF and the World Bank and conditionality – as if globalization is all about what the IMF and World Bank impose and force on the developing world. Well when the world is flat, there's a lot more globalization that's about pull. This is people in the developing world – in China, Russia, India, Brazil – wanting to pull down these opportunities.
Intellectual property rights:
Look at what happened in [India] with intellectual property law... there's no question that we did want India to have intellectual property protection to protect our products... But what it turned out was that a lot of Indians wanted it as well because they become innovators themselves. They are now plug-and-playing in this world and they want the intellectual property protections for their innovations.
Failure of Western technical education:
There is a crisis. We're not producing in this country, in America, enough young people going into science and technology and engineering – the fields that are going to be essential for entrepreneurship and innovation in the 21st Century. So we're at a crisis – it's a quiet crisis, as Shirley Ann Jackson from the Rensselaer Polytechnical Institute says. If we don't do something about it, then in 10 to 15 years from now this quiet crisis will be a very big crisis. And that's why my friend Paul Romer at Stanford says – and I totally agree with him – is a crisis is a terrible thing to waste. And right now we're wasting this crisis.
Lean thinking:
Wal-Mart doesn't make anything. But what they do is draw products from all over the world and get them into stores at incredibly low prices. How do they do that? Through a global supply chain that has been designed down to the last atom of efficiency. So as you take an item off the shelf in New Haven, Connecticut, another of that item will immediately be made of that item in Xianjin, China. So there's perfect knowledge and transparency throughout that supply chain.
International trade vs local social costs:
The consumer in me loves Wal-Mart... And not just me... Some lower-income people are stretching their dollars further because of Wal-Mart...The shareholder in me... loves Wal-Mart... The citizen in me... hates Wal-Mart, because they only cover some 40 percent of their employees with health care... [For the rest,] we tax-payers pay their health care. And the neighbor in me... is very disturbed about Wal-Mart. Disturbed about stories about how they've discriminated against women, disturbed about stories that they've locked employees into their stores overnight, disturbed about how they pay some of their employees. So... I've got multiple identity disorder, because the shareholder and the consumer in me feels one thing, and the citizen and the neighbor in me feel something quite different.
New Growth Theory issues:
What is the mix of assets you need to thrive in a flat world? Money, jobs, and opportunity in the flat world will go to the countries with the best infrastructure, the best education system that produces the most educated work force, the most investor-friendly laws, and the best environment. You put those four things together: quality of environment that attracts knowledgeable people, investment laws that encourage entrepreneurship, education, and infrastructure. So that's really where, in a flat world, the money is going to go.
And I don't really believe much in foreign aid because I think, at the end of the day, that's not how countries grow and get rich. But to the extent that you are going to give foreign aid, it should be to inspire, encourage, and help develop one of those four pillars for whatever developing country you're dealing with. But I do believe in trade, not aid. I think that axiom still applies, even more so in a flat world.
Security:
The flat world is a friend of Infosys and of Al-Qaeda. It's a friend of IBM and of Islamic jihad. Because these networks go both ways. And one thing we know about the bad guys: They're early adopters...
Trade, nationalism and peace:
...what I call the "Dell Theory" – you know, Dell Computers. The Dell Theory says that no two countries that are part of the same global supply chain will ever fight a war as long as they're each still part of that supply chain... here's what I predict: If you do go to war and you're part of one these supply-chains, whatever price you think you're going to pay, you're going to pay ten times more. Once you lose your spot in the supply chain because you've gone to war, the supply chain doesn't come back real soon. They're not going to. Fool me once, shame on you; fool me twice, shame on me. That's why you really risk a lot. And that's why these supply chains now really mean a lot. They're the new restraints.
Anti-globalization:
The anti-globalization movement ... is basically dead today – because China and India have embraced this process and this project... The anti-globalization movement... [are] all still talking about the IMF and the World Bank and conditionality – as if globalization is all about what the IMF and World Bank impose and force on the developing world. Well when the world is flat, there's a lot more globalization that's about pull. This is people in the developing world – in China, Russia, India, Brazil – wanting to pull down these opportunities.
Intellectual property rights:
Look at what happened in [India] with intellectual property law... there's no question that we did want India to have intellectual property protection to protect our products... But what it turned out was that a lot of Indians wanted it as well because they become innovators themselves. They are now plug-and-playing in this world and they want the intellectual property protections for their innovations.
Failure of Western technical education:
There is a crisis. We're not producing in this country, in America, enough young people going into science and technology and engineering – the fields that are going to be essential for entrepreneurship and innovation in the 21st Century. So we're at a crisis – it's a quiet crisis, as Shirley Ann Jackson from the Rensselaer Polytechnical Institute says. If we don't do something about it, then in 10 to 15 years from now this quiet crisis will be a very big crisis. And that's why my friend Paul Romer at Stanford says – and I totally agree with him – is a crisis is a terrible thing to waste. And right now we're wasting this crisis.
New Growth Theory: should we pay handsomely to make ideas free?
When Tony Blair became Prime Minister, his slogan was "education, education, education". We thought he was merely reflecting our discontent with schools, but now I'm not so sure.
In 1994, Gordon Brown was quoting a new economic theory by - google him up - PAUL ROMER. Here is a 2001 interview in Reason Online with Romer. It turns out this may be to New Labour what Sir Keith Joseph’s espousal of monetarism was to Margaret Thatcher’s premiership. “New growth theory” is by Paul Romer, and bears on:
A core debate in this theory is the ownership of knowledge. Romer says that price is both an incentive to the producer, and a means of deciding who gets the product (or what product they choose). An example he gives in his interview is the life-saving treatment for children with diarrhea in poor countries:
...the efficient thing for society is to offer really big rewards for some scientist who discovers an oral rehydration therapy. But then as soon as we discover it, we give the idea away for free to everybody throughout the world and explain "Just use this little mixture of basically sugar and salt, put it in water, and feed that to a kid who's got diarrhea because if you give them pure water you'll kill them."
So with ideas, you have this tension: You want high prices to motivate discovery, but you want low prices to achieve efficient widespread use. You can't with a single price achieve both, so if you push things into the market, you try to compromise between those two, and it's often an unhappy compromise.
Ideas can be duplicated easily and cheaply, but they often cost a lot of money to come up with. For example, pharmaceutical firms do hugely expensive R&D - could they recoup the cost of successful solutions, and all the unsuccessful ones, via a prize competition? What happens if they go bust a yard before the finishing line?
What about areas where the humanitarian argument may be weaker? What if some Far Eastern car factory comes up with a tweak on, say, the Wankel engine design and goes into very successful (and low-labour-cost) production, paying nothing to the people who came up with 99% of the ideas? Sir Tim Berners-Lee (may we never forget his name) gave away the Internet, but should all hard-won knowledge be free?
And what exactly are the implications of a "knowledge economy"? Does State-organised education, with its top-down management, encourage the development of the creativity we need? Do we need 50% of our young people to go to college? Should they choose their subjects, or be told what to learn? Should they be given incentives to study in areas that are thought to be important? How far should we be prepared to fund research that has no immediately foreseeable practical application?
Romer is certainly right in saying that a smart workforce is an asset (and a smart management - we could do with some de-Dilbertising), and that there's lots of potential in continuous, incremental improvement. "Lean thinking" may buy us time in the destabilizing conditions of a globalized market - if we use our brains to improve what's in front of us at work every day, we may not go bust quite as fast as the doomsters fear.
But as the economist himself admits, it's a can of worms.
In 1994, Gordon Brown was quoting a new economic theory by - google him up - PAUL ROMER. Here is a 2001 interview in Reason Online with Romer. It turns out this may be to New Labour what Sir Keith Joseph’s espousal of monetarism was to Margaret Thatcher’s premiership. “New growth theory” is by Paul Romer, and bears on:
- education (a key slogan in Tony Blair's election campaign)
- skills training for workforces (a UK government initiative currently advertised on TV)
- intellectual property rights (relevant to design and patent theft by foreign manufacturers)
- free trade/globalisation
A core debate in this theory is the ownership of knowledge. Romer says that price is both an incentive to the producer, and a means of deciding who gets the product (or what product they choose). An example he gives in his interview is the life-saving treatment for children with diarrhea in poor countries:
...the efficient thing for society is to offer really big rewards for some scientist who discovers an oral rehydration therapy. But then as soon as we discover it, we give the idea away for free to everybody throughout the world and explain "Just use this little mixture of basically sugar and salt, put it in water, and feed that to a kid who's got diarrhea because if you give them pure water you'll kill them."
So with ideas, you have this tension: You want high prices to motivate discovery, but you want low prices to achieve efficient widespread use. You can't with a single price achieve both, so if you push things into the market, you try to compromise between those two, and it's often an unhappy compromise.
Ideas can be duplicated easily and cheaply, but they often cost a lot of money to come up with. For example, pharmaceutical firms do hugely expensive R&D - could they recoup the cost of successful solutions, and all the unsuccessful ones, via a prize competition? What happens if they go bust a yard before the finishing line?
What about areas where the humanitarian argument may be weaker? What if some Far Eastern car factory comes up with a tweak on, say, the Wankel engine design and goes into very successful (and low-labour-cost) production, paying nothing to the people who came up with 99% of the ideas? Sir Tim Berners-Lee (may we never forget his name) gave away the Internet, but should all hard-won knowledge be free?
And what exactly are the implications of a "knowledge economy"? Does State-organised education, with its top-down management, encourage the development of the creativity we need? Do we need 50% of our young people to go to college? Should they choose their subjects, or be told what to learn? Should they be given incentives to study in areas that are thought to be important? How far should we be prepared to fund research that has no immediately foreseeable practical application?
Romer is certainly right in saying that a smart workforce is an asset (and a smart management - we could do with some de-Dilbertising), and that there's lots of potential in continuous, incremental improvement. "Lean thinking" may buy us time in the destabilizing conditions of a globalized market - if we use our brains to improve what's in front of us at work every day, we may not go bust quite as fast as the doomsters fear.
But as the economist himself admits, it's a can of worms.
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