25 November 2011 23:16

Mark Anderson:

Tim, how do you see Britain’s economic future?

26 November 2011 14:09:

Tim Coldwell:

Northern Rock sale raised £750m, “enough to finance the UK state spending machine for about 9 hours”

In a nutshell, the old French jibe that Britain is a nation of shopkeepers comes to mind. At last someone (Andy Haldane of B of E) has published a good paper to refute the bankers’ claim that the city is so important to the UK economy.

Hot topic this last week:

There is much talk of doing something about excessive executive pay. The government are “consulting”. I’ve yet to hear anyone suggest that outside directors who are involved in corporate remuneration committees should be both elected and paid solely and directly by shareholders (aka owners) rather than the corporation. FTSE 100 senior execs getting a 49% pay rise (aided and abetted by pay consultants) when the general population suffers falling real incomes is not smart.

Economic future

The UK’s economic future looks grim. If the usual technique of attracting inward investment (gateway to Europe concept like Ireland) with low corporate tax rates is used I suspect an EU backlash may result. Pushing down the £ FX rate a few years ago did not go unnoticed. And, if the Euro survives it’s hard to see it holding its current strength if, as most expect, printing a lot of new money will be needed to bail out weak EZ countries which assuming little is sanitized QE will restart UK QE to continue the “currency wars”.

2 years ago I told Jon Moulton when he was indicating support for the latest government plan to cut public expenditure to increase private investment etc., that I couldn’t see sufficient aggregate demand anywhere to support this plan.

Lo and behold, government borrowing is now forecast to be less than 1% different than would have been Labour’s plan. Growth is going to be flat for years at close to zero.

Meanwhile articles such as this cause much head scratching amongst the talking heads.

A little data that makes me smile:

England is twice as crowded as Germany, three and a half times France and has more people per square km than India.

Sorry this is short and rambling but there is not a lot, good or bad, to report

Tim

26 November 2011 14:28:

The euro zone

Is this really the end?

Unless Germany and the ECB move quickly, the single currency’s collapse is looming”

www.economist.com/node/21540255

Tim

26 November 2011 14:35

And:

How to stop the bogus bonus

Successful oversight is going to require more transparency about what trades are being made. But transparency is a scarce commodity

“It used to be so easy to “earn” a performance bonus in financial services. Step one: agree a contract whereby you are paid if you exceed a modest benchmark with the funds you are managing. Step two: borrow money and invest it in risky assets. Step three: profit! Step three does not follow automatically, of course, if the risky asset does not pay off. But from the point of view of the fund manager and his bonus, itā€™s a case of ā€ heads I win, tails the investor loses.

http://timharford.com/2011/11/how-to-stop-the-bogus-bonus/

26 November 2011 14:56

And a very good review of the current status, focussed mainly on Europe (UK is a side issue) from [John Mauldin, writing at Barry's "The Big Picture"].

Changing the Rules
When Even Germany Fails
European Inverted Yield Curves
Time to Review the Bang!Moment
The Risk of Contagion in the US
Time to Start Watching China
New York, China, and Some Links

27 November 2011 12:29:

Treasury subsidises small-business loans

Global Economy

What’s the matter with Spain?

What’s the matter with Italy?

Is the euro about to capsize?

How might Greece leave the euro?

Too-clever banking may have played a role in getting us into the economic and financial mess we’re in.

But the Treasury hopes that a bit of financial engineering of its own will help to get us out.

The Chancellor, George Osborne, is aiming to use limited quantities of taxpayers’ money to unlock private-sector cash and to stimulate activity by private-sector businesses, at a time when those businesses are scaling back investment and expansion ambitions.

The most eye-catching initiative, which goes by the name of credit easing, could reduce the interests costs on £20bn of loans for small and medium size businesses by around 1% over the next couple of years.

Then there’s a separate proposal to subsidise to the tune of £1bn the creation of new private sector funds that would lend to all but the very biggest businesses – in competition with the banks that currently dominate business lending.

Finally, the Treasury will be giving technical assistance to pension funds, to unlock around £20bn of British pension savers’ cash for investment in roads, rail, and other infrastructure projects – to get British pension funds providing capital to improve infrastructure in the way that Canadian and Australian pension funds already do.

http://www.bbc.co.uk/news/business-15908514

Pushing on a string?

Tim

27 November 2011 13:08:

ECB couldn’t inflate even if it wanted to: Warren Mosler http://t.co/0J7zWyKA

If true, is this good or bad news for UK (and US)? It seems to imply that ECB could print (without sterilisation), not weaken the Euro and EZ could take over from US as the the world’s consumer of last resort.

Somehow I doubt it The newly printed Euros would eventually get sold for $s, Yuan etc. to pay for increasing imports while EZ exports slump. Then the fake status of a kind of “reserve currency” would become obvious to investors in Euro denominated debt …. etc.

Or can everyone play the Japanese game now …. until no-one can?

Tim

27 November 2011 13:34:

Germany and the Eurozone: Clutching disaster from the jaws of victory?

John Muellbauer
25 November 2011

For months economists have been arguing that Germany holds the key to ending the Eurozone crisis. Should it relax its anti-inflation stance and allow the ECB to inflate away sovereign debt? Or should it write a cheque of its own to the EFSF? Neither, says this column. There is a simple solution, if only Eurozone leaders can see it. Eurobonds are the answer – but wiith conditions.

http://www.voxeu.org/index.php?q=node/7332

Mark,

This might be close to the real plan. But does it address demand? Not directly, but a halt to the EZ crisis might help sentiment, bearing in mind that the EU is the world’s largest economic zone. Therefore this would be good for UK (and US).

Tim

27 November 2011 13:44:

Reviving manufacturing
No land of giants
A lack of big companies hampers efforts to boost manufacturing

Nov 26th 2011 | from the print edition

Its effect on the economy is even mightier

THREE decades ago a Conservative government led by Margaret Thatcher removed many of the props that had supported manufacturing, revealing its weakness and causing factories to collapse. Now manufacturing is modish. The business secretary, Vince Cable, talks of polishing the image of an industry associated with dirt and decline, and of rebalancing the economy away from financial services toward more tangible stuff. On November 17th David Cameron attended the launch of a new engineering prize and opened a factory in Surrey that will make 4,000 expensive supercars a year.

In the early 1980s about 6m people worked in manufacturing; today the figure is barely 2.5m. Once-famous firms such as British Leyland, GEC and ICI have fallen apart or been taken over and dismembered. Stronger growth in other sectors means manufacturing has slumped from 25% of the economy to 11% today. Yet manufacturing output was rising before recession hit in 2008. Foreign firms like Nissan, Honda and Toyota opened car factories that became efficiency leaders in Europe, taking British car production back up to 1.5m vehicles a year. Some four-fifths of the output of such factories is exported.

www.economist.com/node/21540267

See also: www.wisegeek.com/what-are-the-top-manufacturing-countries.htm

China was once before the world’s leading manufacturer — way back in 1830, the country was responsible for 30% of the global industrial output.

Tim

27 November 2011 14:00:

Juergen Stark explains ECB opposition to monetisation is not about inflation

Conclusion: central bankers always prefer to force elected officials to make the tough political choices that are the essence of fiscal policy. The fiscal agent adds and subtracts net financial assets in the private sector by deficit spending, or cutting spending and raising taxes. Central bankers want the fiscal agent to use these tools as the driver of macroeconomic policy while the monetary agent is tasked with more narrow aims.

www.creditwritedowns.com/2011/11/juergen-stark-on-ecb-inflation-monetisation.html

Mark,

This is why the ECB is what I call a “fake” central bank, hence the Euro is, perhaps, a “fake” currency.

This is not to say I think CBs bailing out idiotic banks with taxpayer money is part of their role

Ed Harrison’s take:

In an interview with the Frankfurter Allgemeine Zeitung, a leading German broadsheet, the ECB chief economist explained his resignation and that of Bundesbank head Axel Weber in terms very similar to these. The argument is clear. Whether the ECB eventually is forced to take on this quasi-fiscal role by the escalating sovereign debt crisis is another matter. I have said the ECB will be forced into this role because of Italy, though I do have my doubts.

Below is my translation of the Stark interview. Note his commentary on commodity and asset-price inflation and the distortionary asset-based economic model based on cheap money that is practiced in the US. His is a framing of the problem with which I agree due to the altered private portfolio preferences this Greenspan/Bernanke put engenders.

However, I do not agree with Stark’s framing of deficits as the “root causes” of the crisis. Spain and Ireland had no deficits pre-crisis. The problem was the incomplete institutional arrangement of the euro zone currency union. Any solution that does not address this will fail.

Also notice his framing of the Eurobond/fiscal union issue. He doesn’t rule out Eurobonds. Rather, he says it must be fiscal/political union first and only then Eurobonds.

Political union is a dream, fiscal union may be possible but will still take years to achieve, meanwhile …

Tim

27 November 2011 14:07:

Sources: IMF to offer Italy a 600 billion euro bailout via ECB funding

According to Austrian daily Der Standard, Italy is to receive a 600 billion euro bailout courtesy of the IMF. Note: the article has what I assume to be a typo, referring to 600 million euros instead of 600 billion. I have fixed that in the translation below. Also note that the ultimate source of this information is La Stampa, an Italian daily newspaper.

www.creditwritedowns.com/2011/11/imf-ecb-italy-600-billion-euro-bailout.html

Mark,

So, indirectly the US taxpayer may now be on the hook to the ECB and Italy too. But, of course, the IMF never takes a haircut

Tim

27 November 2011 14:18:

Some related tweets:

RT @economistmeg: The EUR600bn IMF plan might look something like this (as I did the calculations 10 days ago) http://t.co/069tXbnW

edwardnh:
There’s a lotta lotta going on in Europe this weekend. throwing stuff on the wall to see what sticks. I anticipate a strong market reaction

RT @trumanfactor: “When a central bank has financed states in grand style, it has always led to disaster.” (Juergen Stark) http://t.co/ORCLQGKT - via @polit2k

RT @hblodget: IMF said to be bailing out Italy… which means US taxpayer is bailing out Italy http://t.co/plnfDWwp

Tim

27 Nov 2011 14:41:34:

John Rentoul: Labour wakes up, fuzzy and too late

As Osborne fiddles, Miliband, rather belatedly, is beginning to think about balancing the books

www.independent.co.uk/opinion/commentators/john-rentoul/john-rentoul-labour-wakes-up-fuzzy-and-too-late-6268529.html

Mark,

Alternative title: “2 men in a boat … up the creek … without a paddle between them”

Tim

PS: And more tweets from @economistmeg:

An IMF bailout for Italy would be followed immediately by IMF bailout for Spain. Hope they’re considering that in their calcs for It bailout

EZ crisis key dates ahead http://t.co/8W2CVayV

27 Nov 2011 21:15:32:

The Entire Sovereign Debt Crisis Can Be Understood By Looking At Sweden Vs. Finland
Read more: www.businessinsider.com/sweden-vs-finland-2011-11

and:

http://krugman.blogs.nytimes.com/2011/11/27/the-euro-curse

Mark,

Is the ECB now being seen as a fake CB because it denies LOLR role? In a crisis investors look much further than they normally do when doing risk analysis.

Tim

27 November 2011 22:05:

Mark Anderson:

Hi Tim,

1. yes.
2. we are thinking of posting this whole run on the abrightfire.com site, instead of in the letters section as last time. ca va?

mark

28 November 2011 01:17:

Mark Anderson:

Would you have any interest in writing a Special Issue for us?

Tim Coldwell:

OK with me. Bit of a mouthful?

Latest:

Roubini doubts the La Stamp article re IMF €600 billion for Italy. [ Me too ]

RT @Nouriel: Only way to get €600bn to italy is to combine IMF, NABB, ECB/SMP, new SDRs & bigger EFSF. To get there EFSF has to be turned into a €1tr ESM.

Should the Fed save Europe from disaster?

www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8918784/Should-the-Fed-save-Europe-from-disaster.html

ZekeJMiller‚
Obama and EU leaders will make statements at 1:40 tomorrow. Will discuss the global economy in the Roosevelt Room.

Hmm

28 November 2011 04:19

This time it’s Steve Keen on the hot seat on HARDtalk. Now, Steve is one of the few economists who actually predicted the global financial crisis. But what about the possibility of another Great Depression? That possibility and how to avoid it were the topics of conversation in this 25-minute interview. Great stuff.

www.creditwritedowns.com/2011/11/steve-keen-on-hardtalk-on-the-financial-crisis-and-the-economy.html

Tim

28 Nov 2011 04:23:41

The eurozone really has only days to avoid collapse
By Wolfgang Mȕnchau

“Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.”
RT @pkedrosky: .@zkiraly If you can’t access the Munchau piece in FT, try this: http://t.co/riBynPU2

In this programme Mark Anderson predicts the way the technology winds are blowing in 2011. Mark is the technology commentator who runs Strategic News Service. His trend spotting emails are subscribed to by some very influential people in the high tech industry. The magazine Fortune once described him as one of the “100 smartest people we know”.

At the end of every year, Mark Anderson takes a look ahead at 10 of the key things he thinks will prove to be significant over the coming 12 months. Here Global Business hears some of the future predictions and look back at some of the ones he made 12 months previously.

Listen now

Broadcast Times:

• Tue 4 Jan 2011 – 09:05 – BBC World Service
• Tue 4 Jan 2011 – 12:05 – BBC World Service
• Tue 4 Jan 2011 – 15:05 – BBC World Service
• Tue 4 Jan 2011 – 20:05 – BBC World Service
• Wed 5 Jan 2011 – 01:05 – BBC World Service
• Sat 8 Jan 2011 – 00:05 – BBC World Service
• Sun 9 Jan 2011 – 03:32 – BBC World Service

Marshall currently serves as the Director of Global Cyber Security Management, Department of Homeland Security.

He is a member of the Senior Cryptologic Executive Service (SES), and oversees the execution of the DHS Software Assurance, Standards and Best Practices, Supply Chain Risk Management, and Training and Education programs at the national level. He was previously the senior Information Assurance (IA) representative, Office of Legislative Affairs at the National Security Agency (NSA). He also represented NSA in the National Centers of Academic Excellence in Information Assurance Program in the Boston and Detroit areas, where he led the effort to establish an International Consortium on Information Assurance. Marshall was recently recognized by CS Magazine as the nation’s most influential cyber-security professional.

“We are delighted that Richard can join us for a fascinating evening of predictions. I very much look forward to hearing his ideas on economics and cyber security, a subject that becomes more relevant by the minute,” said Mark Anderson, Founder and CEO of SNS, and Chair of the Future in Review (FiRe) Conferences.

Each year Anderson announces his top 10 predictions for the coming year at the NY Predictions Dinner. This prediction set, graded publicly each year for six years, is currently proving to be 95.4% accurate. During the 2009 SNS Predictions Dinner, Anderson correctly predicted Microsoft’s impending consumer losses outside of the gaming industry, and the cloud catastrophe that befell Google servers just weeks later, raising security issues and restricting enterprise trust.

To register, go to www.tapsns.com/newyork/2010

Strategic News Service was founded in 1995 as the first paid online news service. Since its inception, SNS has proven the most accurate predictive newsletter covering the computer and telecom industries. Anderson was the first to predict the 2007-8 global economic collapse, having made the call on CNBC Europe in March of 2007. SNS subscribers include top managers at technology companies across the globe, including Microsoft, Dell, Apple, Hewlett-Packard, Oracle, Cisco, Intel, Google, Orange, Deutsche Telekom, Telstra and many other leading corporations.

Editor’s Note: This issue is based on the transcript of an interview of Mark Anderson, CEO of SNS, by Art Kleiner, editor-in-chief of strategy+business, which took place at the SNS Future in Review conference at the Terranea Resort in Palos Verdes, California, on May 13, 2010.

Restructured by strategy+business for publication as a front-page “Thought Leaders” column (www.strategy-business.com/article/00040; 7.26.10), this special edition is published with permission, with minimal edits and redesign for the SNS membership. Comments in brackets are by s+b unless otherwise noted.

We would like to thank strategy+business, and Art Kleiner, for permissions as well as for their appreciation of, and attention to, this work. – sla.

__

» The Finer Points of Global Economics:

A Return, Not to Normal, But to Reality

– A Conversation with Mark Anderson

Mark Anderson, the high-tech industry’s most accurate prognosticator, foresees an economic landscape still under the stress of too much liquidity – and decision makers still in denial.

Interview and Edits by Art Kleiner

In trying to make sense of economic uncertainty, it pays to look beyond conventional wisdom for an explanatory theory of the hidden fundamentals that can drive or hinder growth. Hence this interview.

Mark Anderson is the publisher and chief correspondent of the Strategic News Service newsletter, one of the most incisive publications in its field. Ostensibly about the future of the computer and communications industries, it covers a broad range of factors that affect and are affected by those businesses: everything from technological advances to capital flows to government policies to educational innovations to advances in physics.

Anderson argues that the root cause of the crisis of 2008–09 was excess liquidity: too much money seeking rapid returns, subsidizing too much production for too few customers. That bubble burst, no subsequent engine of economic growth has proved sustainable, and the excess liquidity remains, driving some prices up and others down, and splitting the world even more dramatically into economic haves and have-nots. Three critical measures, in Anderson’s view, need to be put into place before serious recovery can get under way. The first is better protection of intellectual property. The second is the specific type of financial reform that would prevent “jackals” (short-sellers) and “vampires” (sophisticated investors who take profits without contributing either market balance or information) from dominating the market as they do today. The third is a rebuilding of the manufacturing base of the industrialized world, including an accelerated transition to green energy and technologies.

This interview is adapted with permission from a conversation conducted on May 13, 2010, before the audience at Anderson’s annual Future in Review conference. Anderson, a former venture capitalist and founder of two software companies and a hedge fund, is known for his knowledgeable readers (who often contribute to the newsletter) and his prescience: He tracks his published predictions and claims a 90 percent success rate. In this interview, he goes out on a limb. He believes that human beings, flawed though their decisions may be, have the will and the ability to avoid further crisis – or at least to bounce back from crisis in the long run.

» The Lesson of Liquidity

Art Kleiner: How do you interpret the divergent points of view about where the global economy is going – the view that we’re heading for deflation and depression and need more government stimulus versus the view that our greatest dangers are inflation and deficit spending?

Mark Anderson: The largest problem facing our economy in 2010 was going to be hyperinflation. All the central bankers and policymakers understood this. But a funny thing happened: the damage was so great from the meltdown this time that the time frame changed. The threat of hyperinflation is real, but it’s a long-term threat. It may come in five or 10 years; no sooner than five.

In the meantime, we are all still dealing with the consequences of the meltdown. For example, in a very strange way, the low interest rates that still exist because of the meltdown are assisting in the economic return of some parts of the economy. The economic stimulus from 2009 could never have been enacted except for the knowledge that there would be no hyperinflation in the short term.

Keep in mind – and there are still very few people who get this – that the crisis did not start because of American banking practices or subprime loans. It started because of the doubling of global liquidity over a five-year period in the 2000s. The world’s annual investment capital – the amount of money seeking rapid returns – went from US$36 trillion in 2002 to $72 trillion in 2007, just five years later. That’s what led to all the inflation we saw in real estate prices, all around the world.

If you saw that pattern early enough – and I saw it in 2007 – then watching the financial system was like being inside a warehouse where someone has poured gasoline all over the floor, and there’s a guy smoking at the far end. You know something’s going to happen. It’s just a matter of when. There were 50 different problems that could have triggered the crisis.

The key to the crisis wasn’t in the balance sheets, which were lies. Even today, bank balance sheets are lies. Nor was it the usual GDP numbers, which are made up. It was in the fund flows. The big lesson is that for the future, we’d all better start watching fund flows.

Kleiner: What are the fund flows telling us now?

Anderson: I don’t know. The worst part of this story is that people don’t measure them. They’re very hard to track, and no one’s in charge of measuring them. The numbers I just cited for 2002 and 2007 came out a year after the collapse. Even in 2007, I didn’t have them. I saw symptoms of this money flow through the price rises in petroleum markets, and through the “carry trade,” where speculators borrow in one currency to invest in another. There were trillions of dollars of “hot money”: money seeking quick returns. Where would that get invested? In stocks, bonds, commodities? A lot of it went into real estate.

Kleiner: These billions in hot money were funding lots of efforts to provide quick returns…

Anderson: Yes.

Kleiner: …which were producing many goods and services that no one wanted or needed…

Anderson: Or that were bogus.

Kleiner: …and creating a kind of bubble of asset bubbles through the 2000s, in stocks, real estate, financial instruments?

Anderson: Absolutely. That’s right.

Kleiner: And did all of those bubbles fully burst, or is there more to come?

Anderson: Oh, no. All those asset bubbles burst. Real estate, stock, different countries, different markets: they all burst.

But the hot money is still with us. Today, instead of only one country – Japan – providing the near-zero interest rates that enable a carry trade, we have almost every nation except Australia competing for the interest-rate bottom. This has produced huge flows of hot money into the global liquidity pool. Although I haven’t seen any figures published, the amount of available capital, despite a slower economy, is likely to be equivalent to the totals of 2007. When the damaged parts of split economies begin to come back, this liquidity will likely create a whiplash effect, throwing countries into hyperinflation before they can respond effectively.

That is the fear of every central banker in the world, and the threat is more than plausible; it seems inevitable.

» Protecting Intellectual Property

Kleiner: What other important trends are shaping the economy right now?

Anderson: The first is the conversion of the world’s abject poor to consumers; that’s more important than the birthrate. Around the world, the next 1 billion consumers are coming online really fast – for the most part in India, China, and Southeast Asia, but also in South America. Even the poorest of these people will have cellphones and some access to technology. The “cloud” of cloud computing will be serving them, too.

Meanwhile, it’s becoming brutally clear that the economy is not going to be what it was. We’re going to return, not to normal, but to reality. There will be a war between two systems: that of the mercantilist countries, which seek to make money by obtaining foreign intellectual property [IP] and regulating trade for the sake of competitive advantage, and the free market, free trade countries – India, Australia, and those of North America, Europe, and most of South America. Most businesspeople in the West are not emotionally prepared for this war.

Kleiner: By “mercantilists,” do you mean only China?

Anderson: No. Japan was the original expert mercantilist, even before World War II. After World War II, the Japanese refined their model, the South Koreans refined it further, and the Chinese learned from both. Today, the Chinese model is probably more advanced than the other two. The Chinese didn’t want to wait 40 years. So whereas some Japanese and South Korean companies obtained IP in nefarious ways, only China made the acquisition of intellectual property a serious government program. It was required in the contracts of American companies doing business in China that they give away their patented designs, processes, and innovations as part of the right to trade.

The Chinese also allowed huge amounts of investment, even though they prevented outright ownership of companies by outsiders. This was clever. In effect, the Chinese said, “We will take your money and IP in exchange for access to our market – but it’s faux access. You’ll be able to sell cars and airplanes here until our companies are ready to compete, and then we’ll cut you off.” A lot of people got fooled into thinking that it was either an open or partially open market. In fact, it was just a very well-designed mercantilist program.

In the mercantilist model – which, by the way, is a very intelligent way to build a fast-growth economy – you bring together business and government leaders and set up a deliberate trade policy. You list the industries you’re most interested in and target them one by one. Cars are important because they use steel and involve a lot of employees. One test for the effectiveness of mercantilism is the number of outside products sold in that country; for example, only a handful of American cars are sold in South Korea and Japan.

The indicators so far are all in favor of the mercantilist countries winning over their free-market counterparts. And as the United States and Europe lose manufacturing and intellectual property, and as we find that the return on investment for IP starts to decline, how do technology companies fare in that environment? It’s tough to make a $2 billion investment in an operating system if it shows up on the street for a dollar 10 days later in Hong Kong. This is a big problem that hasn’t been fixed.

Kleiner: How will free-market countries try to fix it?

Anderson: There are only a couple of choices for the governments of the West. Choice A: Keep going as is. In that case, the value of IP will disappear. With limited returns, the whole world, essentially, will stop investing in innovation.

Choice B: The governments of the West focus on protecting IP – in trade agreements, other policies, and their public talk. There has to be almost a cultural shift, where people recognize that civilization – the discoveries, cures, drugs, chips, and advances that we’re most proud of – are all forms of intellectual property. We’ve already created geographical alliances for trade, such as the North American Free Trade Agreement. Having trade alliances based on intellectual property would make a lot more sense; countries should only trade with others that have similar protections in place. India saw this coming. After having a very loose environment for a long time, it passed one of the strictest sets of IP laws.

Kleiner: Could India’s approach become a model for other countries?

Anderson: I think it could. The idea of moving research and development to India looks better and better, to companies that have been burned a few times in other countries. India is now a healthy competitor. Its people are very smart. A lot of Indian Institute of Technology [IIT] graduates are brilliant programmers. The government leaders very much want to have their own industries. India will be a real player among global high-tech competitors.

» Jackals and Vampires

Kleiner: What kind of impact will financial regulation have?

Anderson: When you look at financial meltdowns, you have to consider the role played by financial jackals, as I call them: short-sellers, unrestrained by oversight of any kind, who pile on and make money when there’s a sign of impending shortages. That’s why Bear Stearns lost $33 billion in value in two days – over a weekend, mind you, when no one was even trading. George Soros did the same thing to Britain in 1992. This year, the breakdown in Greece is another form of the same story. The central bankers of Europe didn’t understand this in the same way that American financiers did, because the U.S. has more experience with jackals.

The shorts have such an effective technique and so much power that the truth, whatever it might be, about real economic value and prospects doesn’t matter. Maybe Greece only needed €25 billion [$34 billion] to avoid default, as was said in February, or €45 billion [$61 billion], as the European Union offered in April.

The amount is unimportant. What’s important is, Did you and I and 13 of our closest friends pile on and short this thing? If we did, it’s going down. Foreign exchange rates – the legitimate trading of currencies – is unimportant compared to the pressure brought by shorts.

We saw the great potential danger of this behavior in 1997 during the Asian financial crisis. Those collapses of currency didn’t occur because the countries had suddenly overreached. The jackals were simply picking off the weakest, one by one. We have to fix this problem somehow.

Kleiner: In other words, regulation of trading is more important than regulation of the banks.

Anderson: Yes. More precisely, regulation of traders would be a more effective way to regulate the big problems that exist right now in the markets. I hear Wall Street guys say with a straight face – and I think they mean it – that “shorts are a part of the natural order. There’s a long, and there’s a short. It’s that simple.” In other words, a short trade is just a deal where you buy an option on a falling price, and they should be allowed to continue.

But I don’t think that’s how the world works. In a short deal as it works in practice, you buy options against the share price, and then you call your friends, and they call all their friends, and then you call the press, and you tell everyone lies about how bad the company is. Then the stock goes down. And that’s not right. It’s an extremely damaging, destructive practice that has no real place in the economy.

The answer would be to either eliminate shorts altogether, which probably won’t happen, or to put back some serious restrictions, such as the uptick rule. [The uptick rule, established by the U.S. Securities and Exchange Commission in 1938, restricted the short selling of a stock when its price falls. This rule was removed in 2007.]

Kleiner: Realistically, though, how much regulation of short selling will happen? The SEC has been publicly considering a reinstatement of the uptick rule since April 2009.

Anderson: Sure: “Don’t push it. It takes time to do these things.” Seriously, it’s hard to believe that we’re having a debate about whether to regulate some forms of trading. After seeing the collapse of the global economy, and having come close to the edge of destruction of all that we know and hold dear, some legislators are still arguing with a straight face that we don’t need any fixes.

We do need fixes. I hope they bring back the uptick law and institute the Volcker Rule [a restatement of the Glass-Steagall Act barring commercial banks from proprietary speculation – Ed.]. Right now, the larger banks are lobbying against this. That’s one example of why we cannot rely on lobbyists to come up with the right policies, for either the health of the economy or the health of their own industries. I recently met someone who led the banking industry’s lobbying effort, during the Clinton administration, to have the Glass-Steagall Act revoked. They spent $1 billion in cash. They’ve spent easily that much fighting the current wave of proposals.

I don’t know if we will get regulatory assistance, but we definitely need it. There is a strong possibility that it won’t get passed, or that it won’t be tough enough, and then we would go right into another financial crisis, but 10 times worse and without any remedies for the government to provide this time. How much extra debt load can the U.S., the U.K., or the E.U. take on right now?

Kleiner: What prospects do you see for investors in the current financial system?

Anderson: I think that investors ought to be very careful. Stocks in this market can move in ways that most investors couldn’t possibly anticipate. A few companies, like Goldman Sachs, have become so good at what they do that the game they’re playing isn’t the same as the game an ordinary investor plays in the market.

A few months before the crash, I was watching Goldman, and I realized that these guys were doing something in that building that nobody else did. I’m not talking about anything illegal – it didn’t have to be. For example, Goldman locates its computer servers within a small distance from the trading servers because they need the extra microseconds of transmission time. I don’t play that kind of game; very few investors can. In May 2010, the Goldman Sachs quarterly reports came out, and said they had 35 days with profits over $100 million; 78 percent of their profits came from trading. And every day was better than the day before. That pattern of profitability had never happened before.

Kleiner: You’re saying that Goldman is the corporate equivalent of the mercantilist governments. They’re all such sophisticated financial players that they change the game for the rest of us.

Anderson: Yes. You can’t blame them, because they’re playing by the rules – I think, at least mostly. But the rules may have to change. If someone gets to be that good, then they become vampire investors: “I’m just going to take some blood, but I’m not going to give you anything back.” That kind of trading is destructive. It doesn’t help anybody; it doesn’t correct imbalances in the market. In fact, it ensures that markets won’t work.

An estimate by Vanguard Group founder John Bogle two years ago put the amount extracted at that time at about $600 billion per year, directly removed from the American economy. Well, what if it becomes $1.2 trillion? Or $5 trillion? At what point do we wake up? Or do we just lie there with the spigot in our veins and never wake up at all?

» Rebuilding the Manufacturing Base

Kleiner: What will happen in the general economy in the U.S. and Europe?

Anderson: Already, we’ve seen the economies of the U.S. and probably Western Europe split cleanly in half. Some people will be wealthy beyond their wildest dreams. They will be the people in global commerce of some kind, probably with most revenues coming from offshore.

At the same time, a lot of people will have lost their jobs forever. At the age of 35 or 45, they have lost jobs that they dreamed of retiring from, and they’re not going to get them back. For kids just out of school, the job market is so oversaturated that it could be 10 or 15 years before that gets fixed.

This kind of severe split between haves and have-nots has not happened any time before; not in the Great Depression, or in the crashes of 1987 and 2001. The time delay before a broad job market returns will be a big problem for the bottom half of the economy, and it will be difficult to see clearly because it will be clouded by averages in the statistics. The unemployment rate will be 10 percent overall, but that will mean 40 percent in some sectors and zero percent elsewhere.

Kleiner: Why would it take so long to fix this problem?

Anderson: It has two causes, and both took a long time to develop; they’ll take a long time to unravel. The first is the rise of offshoring over the past 40 years to cut costs – a strategy that is backfiring now. Companies in the West are bringing jobs back to their home countries, not for patriotic reasons but because they found out either that they needed their expertise in-house or that part of the offshoring machine didn’t work very well. Distinguishing what to offshore versus what to produce at home has become a major business question.

The second cause was the loss of the U.S. manufacturing base as companies elsewhere outperformed American companies. Automobiles are a pretty good example, and there are some great books written about this. See, for example, Eamonn Fingleton’s In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony [Thomas Dunne Books, 2008]. These manufacturing jobs went to Japan or South Korea, which occasionally then offshored them to China and Vietnam. The same happened with electronics. The U.S. has one DRAM [dynamic random access memory] semiconductor company left, but essentially all the others went away.

In the coming years, more Asian and Latin American companies will open plants in the U.S. and Europe, but mainly to avoid trade retribution. That, too, has been going on for 30 years. For instance, in the late 1980s, Japan was named an “unfair trading partner” under the “Super 301” U.S. tariff laws. This happened after Intel filed a complaint about semiconductor competitors from overseas, and Toyota’s top executives worried that cars would be the next product type in line. So they immediately put all their manufacturing plants for cars sold in America into the United States. It wasn’t because they loved America; it’s because they didn’t want Super 301 brought against them, too.

The U.S., in particular, is vulnerable to this problem. It should decide not to allow foreign nations to sell cars in its markets, if there is not equal access for U.S. cars overseas. The same ought to be true for steel, televisions, consumer electronics, and other categories that the U.S. has been frozen out of in trade with mercantilist nations. Why should my citizens be allowed to buy your cars, if you won’t let your citizens buy mine?

» Hope and Expectation

Kleiner: If you looked at these trends separately, none of them would strike you as a good thing. But given the way they fit together, where do you look for hope?

Anderson: There is some reason for hope here. Learning how to protect IP is our only path forward. Whether you’re making movies or chips, the sooner that happens, the better.

The emergence of all of the new consumers in the world is exciting. If we got some basic things right about trading, there would be lots of growth available for everybody: China, the U.S., Japan, India, and Europe could all grow. It would be a very exciting story.

Kleiner: How does the environmental imperative play into the growth? For example, we’re trying to boost economic growth, bring billions of people into the middle class, and stay within the carrying capacity of the planet at the same time.

Anderson: Like Larry Smarr [University of California computer science and engineering professor, and director of the Calit2 labs – Ed.], I call myself a long-term optimist. And I don’t see people as a threat. It seems to me that the largest businesses available – as the Chinese would tell you, and I think a lot of Americans understand – are in clean energy, alternative energy, and green technologies.

We need a big problem to solve right now. Climate change is like the next war – in fact, it could have all the economic impact of a war without being a war. It’s obvious what to do, the requirements are clear, and it couldn’t be more important. Let’s do it.

I miss Winston Churchill. I wish we had a Roosevelt. I would love it if Obama would stand up and make the kind of case those leaders might have made: “I’m very sorry, I’m going to hurt your feelings now. I’ve recognized the importance of this problem, and I’ve talked to [U.S. Energy Secretary] Steven Chu. As of today, we are not going to build another coal-fired plant ever again. All plans are on ice. Forget it. Moreover, for every existing coal plant, we’re going to put in either a natural gas or a nuclear plant. That’s a five-year program. In 2015, we’re turning off all the coal plants in America. Period.”

That would buy us 20 years of time in which to curb emissions more thoroughly. He might go on to say something like this: “Between now and 2030, we’re going to test all the other technologies: algae, solar, wind, whatever. Everybody gets a shot, and we’ll let the market figure it out. But we will invest and have tax policies that encourage this stuff to happen. At the end of that 20 years, we’re going to turn the switch again, and probably no more nukes. And guess what, by the way: Yucca Mountain is open for business [storing nuclear waste], and if the people of Nevada don’t like that, we’re going to send the troops down there and open it forcefully, because this isn’t an opt-out kind of situation. That’s the plan. And we’re not voting on it.”

That’s the kind of leadership we need right now in many countries. I think people would love it.

Kleiner: Your primary audience has been technologists. What do you say to them about doing well while doing good, in this environment?

Anderson: The generation that’s coming up right now is so cool. I recently heard David Gergen from Harvard’s Kennedy School of Government say, “The only way we can go wrong is to discourage these kids. They are set to go. They’re smart. They’re motivated. They understand the problems. They are engaged.”

I think that’s true. I believe the baby-boom generation has done a medium-to-poor job of recognizing the problems and dealing with them. But this generation is set. I’m totally encouraged about the idea of, “Here’s the baton, sorry about the mess, please do better,” and I think they will.

About Art Kleiner

Art Kleiner is the editor-in-chief of strategy+business, the quarterly management magazine published by Booz & Company. He is a writer, lecturer, and consultant with a background in business management, interactive media, corporate environmentalism, scenario planning, and organizational learning. He is the author of The Age of Heretics: A History of the Radical Thinkers Who Reinvented Corporate Management (2008, Jossey-Bass) and Who Really Matters: The Core Group Theory of Power, Privilege, and Success (2003, Doubleday/Currency).

Art is also a faculty member of New York University’s Interactive Telecommunications Program, where he teaches a course on scenario planning and the future of the infrastructure. As editorial director of the Fifth Discipline Fieldbook series (developed with Peter Senge), he has been a co-author of three bestsellers published by Doubleday: The Fifth Discipline Fieldbook (1994), The Dance of Change (1999), and Schools That Learn (2000). At the Center for Organizational Learning at Massachusetts Institute of Technology, he co-created (with George Roth) a pioneering form of organizational story-telling, the “Learning History.” Currently he lives with his family outside New York City. For more information about Art Kleiner, see the strategy+business website.

Watch the original interview session from FiRe 2010

[Windows Media Stream]

Last month, on my own blog, I shared my general view about the energy monopoly. Here, I want to write about another monopoly that affects our pocketbooks: the monopoly of money issuance.

The total amount of money circulating in a country has to correlate to the amount of goods and services produced by the economy. The production of these goods reflects the efforts of millions of workers, who, together with capital, add value to society. The least that can be expected in exchange for this effort is that it be recompensed by a means of exchange that retains its value over time.

For this to happen, by definition, inflation must be kept under control, which is achieved by respecting the relationship between the amount of cash in circulation and the value of total production. In my country of Mexico, the institution in charge of maintaining the value of money is the Banco de México (or central bank), whose website states that its “priority objective is to ensure the stability of the currency’s purchasing power.”

To achieve this goal, the Banco de México operates the constitutional monopoly of the printing of money and has several mechanisms for monetary regulation. That is, it must issue the bills and coins necessary to make transactions in the economy possible, and not a penny more. Monetary theory is very complex, but I’m sure the central bank has people who have been trained to understand it and are able to fulfill this function.

However, the reality is that at some point, something went wrong, because the value of our peso has dropped dramatically over the last three decades. Let’s look at the figures:

When I graduated from the Monterrey Technological Institute (the TEC) in 1976, a dollar was worth Mex$12.50. But we have to take into account that at that time, Mexico’s currency had three more zeros added on: that is, a dollar was worth Mex$0.0125 at today’s rate. Today, that same dollar costs Mex$14. To make it simple, we went from Mex$12.50 to Mex$14,000 (old pesos). This means that after 33 years, in dollar terms, the peso is worth 0.89 thousandths of what it was worth then. It’s hard to imagine such microscopic figures.

But that’s not the whole story.

If we look at the price of gold, the loss of our currency’s value is even worse. Today, an ounce of gold is worth US$925, compared to US$120 per ounce 33 years ago. That is, the dollar, the currency of the most powerful country on earth, the country where the gurus from the Chicago School of Economics are from, lost 87 percent of its value in gold over the last three decades.

While the dollar is worth only a little over one-eighth in terms of gold what it was in 1976, today’s peso is worth one-ten-thousandth of what it was worth in gold in 1976.

So, we Mexicans have been the victims of a huge fraud. But, in contrast to the Madoff case, this mass fraud affected millions, even if it took decades to pull off.
The loss of the value of currency creates, among other negative effects, the inflationary tax. This is the most unjust tax of all because it’s not decided by decree, it’s not published anywhere, and it’s not put to a democratic vote. It’s just levied. And to top it all off, it hits the purchasing power of the bottom of the pyramid (BOP) the hardest of all because this is the part of the population that keeps a large part of its savings in cash.

Put Not Your Trust in Money

With great insight, an American poet once said, “Put not your trust in money, but your money in trust.” If the bottom of the pyramid had had access to banking services in times of the highest inflation in modern Mexican history, it would have earned interest on its savings, compensating somewhat for the currency’s lost purchasing power. In fact, this is part of the vision behind Banco Azteca.

However, since most of the population has practically no access to banking services, the impoverishment of millions of families was proportional to price hikes, effected to finance disproportionate and inefficient public spending.

One definition of madness is to “do the same thing over and over and expect different results.” Today, many people propose using the same remedy that has been applied for decades. Isn’t this what’s happening right now in the U.S., where the Fed has nearly tripled its balance sheet with the stroke of a pen?
The world has gone mad, but that’s a matter for another entry.

Related Entries from Ricardo’s Blog:

Economic Freedom in Crisis
Following the Words of Buffet
What Should Be Done About the Billion People Trapped in Poverty?
What the Government Spends Affects You

Can research and development bring us out of the recession? That’s what Microsoft CEO Steve Ballmer is telling Congress. KPLU’s Dave Meyer looks at Ballmer’s economic view with Strategic News Service publisher Mark Anderson.

Listen now at KPLU Radio.

In this month’s conversation, Strategic News Service publisher Mark Anderson tells KPLU’s Dave Meyer about hot money and the oil bubble.”

Listen now: http://www.publicbroadcasting.net/kplu/news.newsmain?action=article&ARTICLE_ID=1373074