Archive for November, 2012

China’s imbalances threaten plans for global domination

November 28 2012 Leave a comment

Charles Dumas of Lombard Street Research reckons China will suffer for not tackling its imbalances.

That’s probably true, of course, but like so many other analysts he seems to be comparing China’s problems to those of Japan in the early 1970s.

Domestically, China continues to build up its own bubble of debt that will probably never be repaid in full. And its refusal to reverse the policies that underlie this build-up is why its growth may halve to 5 per cent in the next few years. Without a sharp shift of policy, that 5 per cent may be the upper limit of Chinese growth for the long term, with a plague of banking crises threatening a worse result. This would be a disastrous result for a country whose per capita GDP (at comparable prices) is just 17 per cent of the US level, versus 67 per cent in 1973 in Japan, when its growth likewise halved to 5 per cent.

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Domestically, China continues to build up its own bubble of debt that will probably never be repaid in full. And its refusal to reverse the policies that underlie this build-up is why its growth may halve to 5 per cent in the next few years. Without a sharp shift of policy, that 5 per cent may be the upper limit of Chinese growth for the long term, with a plague of banking crises threatening a worse result. This would be a disastrous result for a country whose per capita GDP (at comparable prices) is just 17 per cent of the US level, versus 67 per cent in 1973 in Japan, when its growth likewise halved to 5 per cent.

The article doesn’t explain the logic of comparing Japan in 1973 to China in 2012. This is odd, because it’s the only real indication of what Dumas reckons is in store for Chinese economic growth — he’s saying that in the future, over an unspecified period of time, China will grow half as fast, compared to an unspecified period in the past.

Nate Silver he ain’t.

Even so, this looks like wishful thinking. Japan’s economy was not significantly imbalanced during the two decades running up to 1970, so there’s little reason to assume that the re-adjustment thereafter is a useful comparison for China today.

A far more sensible yardstick is Japan in the late 1980s, as Michael Pettis wrote a month ago.

The most popular reason for comparing China with Japan of the 1960-70s is that China today is much poorer than Japan in the late 1980s. Japan in the late 1980s was rich, people will say, while China is terribly poor, so there can’t be any useful comparison between Japan in the 1990s and China in the next decade.

This, of course, is silly. If you are arguing about the consequences of imbalanced, investment-driven growth, it isn’t the nominal levels of wealth that need to be compared. After all there are rich as well as poor countries that suffered from this kind of unbalanced, investment-driven growth, and all of them ended up suffering subsequently from the same kinds of economic rebalancing.

What really matters is the extent of the underlying imbalances and the relationship between capital stock and worker productivity. In that light it is just as easy for a poor country to have excess capital stock as it is for a rich country – perhaps even more so.

Many big investors can’t accept this view. They have huge investments in China, they’ve opened offices there, they’ve lobbied the government for licences and quotas, and are committed to a growth rate that justifies this level of investment.

It’s the same with the investment banks. They’re not making any money in China these days, but they’re institutionally geared to being there. Bankers who earned their stripes doing mega Chinese IPOs for the past seven or eight years are now in senior positions, making it extremely difficult for those institutions to change course.

This is how Pettis describes the Japanese imbalances:

  • Japan in the late 1980s grew at extraordinary rates fueled by a credit-backed investment boom funded at artificially low interest rates.
  • Although for many decades much of the investment may have been viable and necessary, by the 1980s investment was increasingly misallocated into expanding unnecessary manufacturing capacity, as well as fueling surges in real estate development and excess spending on infrastructure.
  • Artificially low rates, set nominally by the central bank but in reality by the Ministry of Finance, and coming mainly at the expense of household savers also fueled a bubble in local assets.
  • An artificially low currency fueled very rapid growth in the tradable goods sector while also constraining household income growth.
  • Because the growth model constrained growth in household income and household consumption, it forced up the domestic savings rate to extraordinary levels.
  • The combination of low consumption and excessive manufacturing capacity required a high trade surplus in order to balance production with demand.
  • And finally, and most worryingly, debt levels across the economy began to soar as debt rose much faster than debt servicing capacity.

Remind you of anywhere?

Of course, I don’t know who is right or how things will turn out in China, but I don’t think the big financial institutions are working very hard to challenge their optimistic forecasts. They’re wedded to the dominant narrative of China rising rapidly to take over the world, and clearly feel they have to be there at all costs (which, in effect, means burying their heads in the sand and hoping everything works out).

Meanwhile, many investment banks made more money in Malaysia (population: 30 million) than in China this year. Watch this space.


Mooching from Krugman

November 26 2012 Leave a comment

Paul Krugman has some interesting data on the moochers debate.

So I’m doing prep work for classes next semester, and I thought I’d just graph government transfer payments other than Medicare/Medicaid as a share of GDP. Here’s what it looks like:


This neatly shows that the size of government responds to people’s needs. Just as it should.

Categories: economics Tags: ,

Black markets in entertainment

November 25 2012 Leave a comment

Trying to burn a couple of movies to DVD today took me back to the bad old days of physical media and set me to thinking about the inadequacies of the entertainment industry.

It’s extraordinary to think that the best tools for distributing media online are almost all illegal. I mostly want to watch British and US television and movies, but do not live in either country. There are few legal options available to me — beyond waiting for them to air on local TV or going to the cinema.

I pay for the full local cable package and do go to the cinema, but there are lots of shows and movies that never make it here — anything that’s not a reality show or Hollywood blockbuster, basically. I would happily pay to download or stream such stuff, but international rights issues mean there are no legal ways to do this.

For example, the BBC sells Top Gear to local TV stations around the world, which is presumably why it can’t give it away online by opening its iPlayer to international viewers. You can’t even pay a licence fee to access iPlayer, yet by the time Top Gear (or any other show) makes it to local TV it’s usually out of date. Watching international shows on local cable or TV is like living in the past.

But at least Top Gear’s kind of available. The Daily Show isn’t sold around the world, but you still can’t watch it online in most countries outside the US. I have no idea why. Perhaps they’re trying to sell it to the Nigerians.

At the same time, many Western TV stations make it incredibly simple to access their content from anywhere in the world. It costs about $5 a month for a VPN, which are very common in countries such as China due to the government’s online restrictions.

In other words, many Chinese people may not even know that they’re not supposed to watch The Daily Show. They have a US VPN running as a matter of course to evade Chinese censorship and surf the web without ever knowing which sites are arbitrarily restricted (either by their oppressive government or by international rights owners).

The reality seems to be that VPNs are tolerated — a huge chunk of Chinese web traffic would disappear without them — but it would be far more convenient if such sites could be accessed on a more reliable local connection. After all, it’s simply not true to say that the BBC iPlayer is not available outside the UK, so why the pretence?

Services such as Netflix and iTunes are also not available in many countries outside the US. Even where they’re available, they have many of the same restrictions as local stores — limited availability and late releases — as well as generally crappy service.

However, there’s a completely different world available outside the mainstream market, for those who are willing to skirt the law by downloading stuff from newsgroups or torrent sites. These services cost money, but are far quicker and more reliable than anything available commercially — even in the US.

A decent internet connection to a usenet server can download a good quality movie file in a couple of minutes. And software such as SickBeard and CouchPotato can automate downloading of any TV series or movie, while home theatre software like Plex can deliver this content to all the TVs in your house — adding all the artwork and programme info, making it a beautiful solution that offers far beyond what is available locally (and legally).

Some of this stuff costs money and some doesn’t, but the interesting thing is that it’s all built by end users. There are mobile apps that let you use your tablet or smartphone as a remote control, or even for accessing your media library. It can also extend your media server out into the real world, so you can watch the news while sitting on the bus.

Why isn’t this available legitimately?

To me, the black market in entertainment is an entrepreneurial response to an inept industry that has failed to provide a service that its customers want. Or, in other words, intellectual property restrictions seem to have forced innovation underground — which is surely the opposite of what’s supposed to happen.

The internet has made it incredibly cheap and easy to distribute media, but the mainstream industry has spent the past decade clinging to an ancient business model that offers dwindling profits and fails even to compete with the distribution model created by teenagers in their bedrooms. Fail!

Categories: tech Tags: ,

Apocalypse when?

November 21 2012 Leave a comment

Jim Rickards is still at it. The former LTCM general counsel is obsessed with gold and seems to think the rest of the world is too. Indeed, he reckons gold is so important that it could lead to a new world war:

Rickards envisages the Chinese getting pissed at US monetary easing and retaliating by using its gold reserves as a financial weapon of mass destruction.

Clearly, Rickards thinks a gold standard would solve all this, but in fact his war game describes precisely the problem with using commodities as currency. He argues that China could hoard a huge amount of gold (using derivatives) and then sell it all into the open market to destabilise the global economy.

What he doesn’t say is why this would be less of a problem under a gold standard. If the dollar was backed by gold, the US would hardly be better off if China (or anyone else) chose to dump (or hoard) huge amounts of the stuff — and I can easily invent a plausible geopolitical scenario in which that could end up happening.

After all, history is full of examples of precisely this kind of thing, all the way back to Sparta and the ancient Greeks. Ever wondered why no country on the planet uses gold to back its money supply today?

By using an arbitrary metal as your currency, you open yourself to attack by anyone who can control enough of that metal — and you devolve monetary policy to foreign miners.

None of what Rickards says makes any sense at all from a security point of view, yet the US military pays him to share this nonsense with them. (I’ll let them read this blog post for free. Though I wouldn’t be offended by an offer of payment…)

The lunacy of Rickards’s apocalyptic prediction is on full display when he describes Chinese “hackers” taking control of the Fed and the Treasury, as well as turning off the internet and the power grid. Scary!

So scary, in fact, that it makes you wonder why China would bother spending trillions of dollars buying gold?!?!

Cyber warfare is a genuine threat, and it also demonstrates why his entire theory is obsolete. China doesn’t need gold to cause economic havoc. It just needs an internet connection and a few people who know how to use a computer, which is why we should work on being China’s friend instead of trying to think of reasons for bombing it.

Economics is disappearing up its own differential equation

November 21 2012 1 comment

Once upon a time, economists spoke English and wrote books that provided real-world advice for business owners. Nowadays, they speak gobbledigook to one another while everyone else ignores them.

That, at least, is one person’s lament. Writing in the Harvard Business Review, Ronald Coase argues that it is time for economists to come back in from the cold.

It is time to reengage the severely impoverished field of economics with the economy. Market economies springing up in China, India, Africa, and elsewhere herald a new era of entrepreneurship, and with it unprecedented opportunities for economists to study how the market economy gains its resilience in societies with cultural, institutional, and organizational diversities. But knowledge will come only if economics can be reoriented to the study of man as he is and the economic system as it actually exists.

Coase claims that Adam Smith was widely read by “businessmen” of the day, by which he presumably means that today’s businessmen cannot understand today’s economists.

I’m not sure I buy any of that. It seems to me that economics is more accessible than ever before. From books like Freakonomics through to blogs and podcasts and award-winning documentaries… there’s no shortage of material offering real-world insights to entrepreneurs and businessmen.

However, this is clearly not the mainstream of economics. Most of the jobs available to professional economists require a theoretical approach — they sit in an office and look at numbers.

Today, production is marginalized in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.

Anyway, it’s worth a read…

Categories: economics Tags:

Russian driving

November 20 2012 Leave a comment

How does anyone survive on Russia’s roads?

No wonder everyone seems to have dashboard cameras — the insurance company would never believe it if you told them that an HGV reversed at high speed across the central reservation and into oncoming traffic! But that’s not the least of it.

Some fairly bad crashes in here, but it isn’t a snuff movie. There are doubtless some bruised and battered folk, but no fatalities.

(I just realised this was linked to the wrong video, now corrected. Watching it again I was reminded of the amazing low-flying aircraft, of which there are several, and the many other bizarre incidents. Not just crashes…)

Categories: odd Tags: , ,

Oil, water and the law of unintended consequences

November 16 2012 Leave a comment

If there really is a god who intervenes in human affairs, I’d love to hear his explanation for the peculiar connection between the Exxon Valdez oil spill and the global financial crisis.

In 1989, the supertanker ran aground in Prince William Sound in Alaska and spewed 750,000 barrels of crude oil along 2,000km of remote, pristine coastline. The captain was sleeping off a vodka binge at the time of the accident and the officer on the bridge was navigating between rocks and icebergs without the help of collision-avoidance radar, which Exxon had refused to fix for a year to save a few bucks.

A jury in Anchorage decided that Exxon should pay punitive damages of $5 billion, equivalent to a year’s profit. Needless to say, the company appealed the decision. By way of insurance, Exxon set up a $4.8 billion line of credit with JPMorgan in case it ended up having to pay, which the bank hedged by creating a new financial instrument, known as… a credit default swap.

So the worst ever oil spill in US waters led to the creation of a financial product that, in turn, led to the worst recession in recent US history. How’s that for an unintended consequence?

But it gets worse. Exxon’s legal challenges eventually dragged the case before the Supreme Court in 2008, which resulted in the fine being reduced to around $500 million. So the full credit line was never needed and nor was the CDS.

Then, in 2010, BP’s Deepwater Horizon oil rig exploded, killing 11 people and releasing as much as 5 million barrels of oil into the Gulf of Mexico, affecting 500km of Louisiana coastline. Yesterday, the oil company was ordered to pay $4.5 billion in damages.

The circumstances that led to the explosion bore the same hallmarks as the Valdez disaster — namely, safety took second place to costs. Or, in other words, the industry didn’t learn the lesson of what happened in Alaska 20 years before.

It’s hard to imagine a worse outcome.

Big fines may seem a good idea, but are they? Perhaps it would be better to devise a punishment that better fits the crime. It’s reasonable to force polluters to pay for the cleanup and to provide reasonable compensation to the victims, but perhaps a kind of corporate probation would do more good than huge punitive damages, as well as a hard-headed review of safety standards across the whole industry.

BP is still on the hook for tens of billions in other legal actions. Who knows what unintended consequences that will create…

By the way, the Valdez is still sailing. It’s now known as the Oriental Nicety and is owned by Hong Kong Bloom Shipping.

Categories: environment Tags: , , ,

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