Sunday, May 31, 2009

Economic Stimulus

During the Clinton years much was said about "bridging the digital divide." On Charlie Rose recently Leo Apotheker, CEO of German software giant SAP referred to enterprise-wide computer networks as a "nervous system." In listening I drifted back to the time just before the event of 9-11. What if government computers (at C.I.A., F.B.I., etc.) had all been able to "talk" and share/ analyze/ intelligate aggretized data? What if there had been an interchangeability and exchangeability? Aren't these largely the kind of "hi-tech" public works projects we need in today's economy? (Many have warned of the negative impacts of excess efficiencies with respect to excessive automation, largely a result of internet and related technologies. But America is desperate.) Government bureaus and agencies are no different than subsidiaries of large corporate holding companies: getting systems to interact and share intelligence creates greater efficiencies. During the Bush years, a huge emphasis on guns, versus butter. A lot went into defense, but not necessarily aimed at the high-tech/DARPA/technology transfer side.

We need hi-tech projects--i.e. more government contracts--as part of the stimulus. More computer literacy and training, perhaps a coupon for a laptop for every family, bundled with varying levels of training. (Is there non-combat training the military could do more of with our young people?) We need more intra-agency network communications that are seamless. And we need policies that hire U.S. workers here in the U.S. to do this hi-tech retrofitting and implementation. We need most of the heavy lifting to come from U.S. plants. We can't borrow Chinese inflows simply to turn around and pay U.S. workers to then go to Best Buy for Chinese-made goods.

The much touted Resolution Trust (Aggregator) Bank may ultimately take all the toxic debt now on bank balance sheets and it may issue 30-50 year bonds. Similar to the Resolution Trust Corp. for the American S&L's back during the Reagan era. Or, nationalization may happen. The key is solvency, and having banks that are NOT too big to succeed. We'll see.

In light of California's deficit, Gov. Schwartzenegger has announced an initiative to consolidate redundant state agencies, in hopes of increasing efficiencies, thereby reducing costs. (At the Federal level, Obama is doing the same.)

The systemic contradiction is that greater efficiencies promote more layoffs. Our ultra-efficient tech age has translated into Chinese factories that at half-capacity can out-produce world consumption rates three-fold. One wonders: is war (or recession) the only means to diminish excess systemic capacity (and hence raise scarcities)? Fact: we have too many people...too many mouths to feed--homo sapiens has been too successful.;-) See:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

The Hidden Cost of Globalism


Despite what the Cato Clowns claim, the U.S. Trade Deficit tells the real tale. Housing is a symptom. It's not just about capital inflows to an attractive, stable U.S. market. It's about real value creation, which is what design and manufacturing are all about, and which today is mostly carried out in Asia. When a $15/hr. job in the U.S. is transferred to a lower cost $3/day zone--and its product later reimported back to the higher cost zone--a net liability is incurred. (The entire supply chain is also off-shored when a job is transferred.) Consider the differential in terms of buying power distortion. Someone making the product in the $3/day zone should be buying it there. (The imbalance occurs when there's inter-zonal trading. It's not a bad thing, but it does create imbalance.) The higher cost zone is effectively borrowing, not buying, the so-called "savings," booked as profit by the private enterprise. The public sector absorbs/realizes this net liability, and accordingly profit is posted in the private entity that transferred the higher production cost to the lower cost zone. Our public liabilities show up proportionate to China's surplus (and indeed, it's more complicated because we're dealing with a global system that includes trade with other nations and includes petro dollar transfers, too). But the fact remains that--for accounting reasons--goods should remain in the zones they are produced in to avoid imbalance. Is this practically feasible? For the most part, no it is not. Hence, a global trade adjustment factor (i.e. an algorithm, deflator or multiplier) is needed to offset imbalances as they occur--at the point when trade exchange crosses zones. Not so much resembling an actual tariff, but a data adjustor in terms of global accounting metrics. Not unlike--in theory--the way a graduated lock system in say, the Panama Canal Zone, works. It's designed to prevent major flooding and offset the sea level differentials. (The increasing trend toward outsourcing cannot be blamed on unions only--it has affected all industries, even non-union service industries. Adding a surcharge to all undocumented or outsourced labor is a similar strategy...but it is basically a tax.)At the very least, outsourcing due to cheaper labor costs off shore has served to reduce real wages here at home--and I submit this is key to understanding the housing problem.

(Indeed George Soros has discussed this surcharge mechanism rather extensively, and has been talking about it for years, primarily as a trade-only currency adjustment metric. See the Balassa-Samuelson Theory, wherein purchase power parity=exchange rate.) The fact is, China's trade surplus is in large part a result of various accounting. And, our excessive trade deficit is also largely the result of accounting inaccuracies, in the way trade (and inflows, outflows, currency differentials, etc.) is measured. (Also, see the Big Mac Index for reference.)

Again, the policy key is to avoid a liquidity trap. The aim is not just to reflate, but to create knowledge worker jobs (and long-term sustainable wealth) from the bottom-up. Tax cuts are great, sufficient taxable income is first needed for folks to be paying taxes. Wiping away consumer credit card balances would only mask the underlying problem. Simply driving new consumer purchases--by rebate checks--sends dollars back over to China, and really does not promote capital formation here in the form of new investment. The big box stores are a huge contributor to our problem right now. Even large capital projects benefit primarily union trade labor, and service workers only secondarily. Wealth creation originates with innovations financed at a ground base level, often through localized incubators. Much of the "top down" financial engineering innovation from Wall Street--aimed at automation and cost reductions--didn't work, and resulted in more debt and exported jobs. We need a new approach. M&A alone does not create value. And alas...we need an entirely new mortgage paradigm...with variabilities on each side of the ratio...more shared risk and fluidity all the way around. Perhaps loan balances that float with resale prices?

According to Harvard Professor, Niall Ferguson, "The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments currently propose to do." Hence, we--the collective 'we'--shall see what is in store.

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5 Comments:

Blogger MC Shalom said...

You Bail Them Out, We Opt Out.


Dear [May Be Too Much to my Taste, OK!, It will rather be:] Expensive Chairman Ben S. Bernanke,


All of Our Economic Problems Find They Root in the Existence of Credit.

Out of the $5,000,000,000,000 bail out money for the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?

If my bank doesn't pay back its credits, how come I still must pay mines?

If my bank gets 0% Loans, how come I don't?

At the same time, everyday, some of us are losing our home or even our jobs.

Credit discriminates against people of lower economic classes, as such it is unconstitutional, isn't it? It is an supra national stealth weapon of class struggle.

Credit is a predatory practice. When the predator finishes up the preys he starves to death. What did you expect?

Where are you exactly in that food chain?

Credit gets in the way of All the Principles of Equal Opportunity and Free Market.

Credit is a Stealth Weapon of Mass Destruction.

Credit is Mathematically Inept, Morally Unacceptable.

You Bail Them Out, We Opt Out

Opting Out Is Both Free and Strictly Anonymous.

My Solution: The Credit Free, Free Market Economy.

Is Both Dynamic on the Short Run & Stable on the Long Run, The Only Available Short Run Solution.

I Am, Hence, Leading an Exit Out of Credit:

Let me outline for you my proposed strategy:


My Prescription to Preserve Our Belongings.

Our Property Title: Our Free, Anonymous Right to Opt Out of Credit.

Our Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: - .

Asset Transfer - Our Right Grant Operation - Our Wealth Multiplier.

A Specific Application of Employment, Interest and Money.
[A Tract Intended For my Fellows Economists].


If Risk Free Interest Rates Are at 0.00% Doesn't That Mean That Credit is Worthless Already?

Since credit based currencies are managed by setting short-term interest rates, on which you have lost all control, can we still say that they are managed?

We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.

The only other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.

It will be either awfully deadly or dramatically long.

A price none of us can afford to pay.

“The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”

- Henry A. Kissinger


What Else?


You Bail Them Out, Let's Opt Out!

Check Out How Many of Us Are Already on Their Way to Opt Out of Credit.



Let me provide you with a link to my press release for my open letter to you:

Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can't Work!



I am, Mr Chairman, Yours Sincerely [Like do I have really the choice?],

Shalom P. Hamou AKA 'MC-Shalom'
Chief Economist - Master Conductor
1 7 7 6 - Annuit Cœptis
Tel: +972 54 441-7640

January 24, 2009 at 7:13 AM  
Blogger MC-Shalom said...

Dear Greg,

I believe that there is a strong misunderstanding among the people about:

✔ The link between economic development and technological advances:=.

✔ The difference between innovation an d technical improvement.

✔ What is the desirable technical improvement.

Economic Development and Technological Advances:

I was talking 12 years ago with a bright young man who was a trader on fixed income securities and my cousin and told him that there would be a Liquidity trap. And like you he argued with innovation.

What he didn't understand is that no matter how great your product is if people don't have the money they won't buy it.

The reason we are in a Liquidity Trap is because we have too much of productivity not the contrary. Japan fell first in something that is tangent to the Liquidity Trap because it was the most productive country in the world.

Suppose Bill Gate had a machine that would be able to produce whatever people needed without manpower: He would sell nothing and his machine would not be worth a dime.

The purpose of technological improvement is to make the choice between what people want to buy. It is macroeconomic. Imagine an economy without technological improvement people would still be buying whatever is available.

The link with macro economy is that technological improvements do change the income /wealth distribution hence the aggregate demand. Aggregate demand goes down with technological advances. It is the job of those who design an economic system to find a way to keep aggregate demand high without stiffling technological improvement.

Innovation and Technological Advances

A free market does reward technological advances that are congruent to the economic profit of participants. It never reward true innovation because, by definition, the market does not understand it. There is no way you ca get the market to reward a true innovation.

I think that what a painter believe to be his best picture is the last to find its way to the market.

Desirable Technical Improvements:

I believe that if you engineer a system that works for the people that is reward people for doing what is good for the society it will generate the right technological improvement:

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

Adam Smith
An Inquiry Into the Nature and Causes of the Wealth of Nations. IV.2.9
March 9th, 1776

Conclusion

We have learned the hard way what should be obvious to any mathematician and economist: the private interests are not by design the same as the common interest. Once we design a system that makes the private interest congruent with the common good economists and governments will become irrelevant.

January 24, 2009 at 11:19 PM  
Blogger Greg Hall said...

Thanks MC. Your point about excess productivity
is extremely dire.

January 25, 2009 at 1:05 PM  
Blogger TAYLOR said...

Gregman2,

When you say "we need," who is "we" and how do you figured out what is "needed" versus what is "wanted"?

Can you define "we" and "need"?

June 15, 2009 at 11:12 AM  
Anonymous Gregman2 said...

Thanks Taylor. I probably should have said, "We ought..." It's just a pejorative. I
wrote this quite a while back and I was referring to policy prescriptions.

June 15, 2009 at 11:34 AM  

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