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Friday, February 07, 2003

Asian Deflation Looming?

Another of the under-commented problems facing the global economy is the fact that Asian deflation is not simply a Japanese problem. Deflationary pressures are evident in S Korea, Taiwan, Hong Kong, and even China (where the massive restructuring of the former state owned industries has produced a tremendous downward pressure on Chinese wages). In Taiwan they are certainly worried, as this editorial from Taiwan News clearly demonstrates. Even if I do not subscribe one hundred percent to the thesis offered, I think the two points they highlight - falling technology prices and the entry of China (and of course India) as major global players in the supply markets - form an important part of the picture, and the argument does at least give us a welcome break from all those one-sidedly monetary explanations.

Taiwan and Asia have just completed a year of stable though slow economic growth. In the year to come, although likely to enjoy ongoing stability, we will be confronted with a major new challenge -- how to cope with an oncoming long-term era of global deflation. In Asia, a marked deflationary trend has become apparent not only in Japan, but in South Korea, Taiwan, Singapore, Hong Kong and China's urban sector. This circumstance demands action by all nations aimed at facing up to the problems occasioned by sustained deflation. Government officials and commentators, however, commonly appear to ignore the roots of chronic deflation. Japanese officialdom, for example, has to date interpreted it purely as a product of monetary policy, thus believing that if only they could make appropriate adjustments in monetary policy, they can turn the tide of deflation. It would appear that such, also, is the mainstream line of thought in other Asian countries.

The true sources of deflationary pressure, however, lie not in monetary policy but in worldwide political and economic developments. Harking back to the period of global deflation during the last quarter of the 19th century, its prime political contributory factor was the Pax Britannica -- a sustained period of world peace and stability under the sway of British power. Economically, it was the outcome of the rapid development and spread of new technologies. These two circumstances combined to cause the world economy to enter into an unprecedented period of economic growth, creating a productive capacity outstripping market demand, thus depressing prices globally for a full two decades. The deflation now overtaking the world economy is similar in origin. Despite the fact the United States is currently pursuing a worldwide war against terrorism, the reality remains that, for the foreseeable future, there appears to be very little likelihood of large-scale war; and that America's unchallenged superpower military might will most probably secure long-term peace for the world's three paramount industrialized regions of North America, Northeast Asia and Western Europe -- a peace which may reasonably be anticipated to last for at least the coming two decades. In combination with such a Pax Americana, the ongoing high-speed development and dissemination of new technologies, together with the injection of former communist-block nations' vast labor pools into the world market (most notably that of China, whose economic system has, in reality, long since ceased being communistic), have caused productive capacity to expand in leaps and bounds, resulting in a surplus of supply over demand which will not soon change. Given this circumstance, a protracted era of global deflation is only to be expected.
Source: Taiwan News

Japan Pensions: The Unkindest Cut

One of the less palatable consequences of deflation is of course the reality that what goes up can also come down, that systems where wages and pensions are effectively indexed to prices mean, that when prices come down, wages and pensions come down too. Of course, what is less well studied is how such reductions will be received and understood by those on the receiving end. Among other important consequences of today's decision to reduce indexed pensions in Japan must be the implictation that, in the eyes of many with responsibility for decision making in Japan, deflation is now settling in for the long haul.

Japan's retired population will for the first time suffer the consequences of deflation when the government cuts the monthly pension by 0.9 per cent in line with the falling consumer price index. Until now, retired people in Japan have been largely shielded from the effects of deflation, since a political decision to decouple their benefits from the CPI when prices began to fall three years ago. Most retired people, few of whom are exposed directly to the stock market, have benefited from deflation, which has boosted their real spending power. The government's decision to make pensioners share some of the burden amid a stagnating economy and sharply worsening demographics is highly symbolic. It could well presage aggressive moves to renege substantially on promised pension benefits, analysts said.

On Friday, the cabinet re-established the link between prices and pensions, which were first indexed in 1973. As a result, the state pension for an average head of household will be cut by ¥2,140 ($18, €17, £11) to ¥235,980 a month. The move could change the psychology of deflation, Jeffrey Young, senior economist at Nikko Salomon Smith Barney, said. "The relinking of benefit back to the CPI may start to convince seniors that deflation is not the greatest thing in the world," he said. "This is the first time that, in a very direct and visible fashion, they can see: 'Oh, falling prices means my income is going to be cut as well'." Explaining the change of policy, a government official said it was necessary to prevent the deterioration of the social security system's finances. The system fell into deficit for the first time last year, a situation that will get significantly worse. The labour force is shrinking by 0.6 per cent each year as baby boomers retire, reducing the size of total premiums and raising the amount that must be paid out in pensions.
Source: Financial Times

Wednesday, February 05, 2003

Hell Hath No fury Like....

Stephen Roach is angry, and you can see why:apart from anything else the budget forecast goes blithely towards the future as if there had been no bubble, and there was going to be no bubble aftermath, no 'painful readjustment process', as if the global economy was going to go forever onwards and upwards , as if there were no Japan, and no European 'Japans' in prospect. Summing up: everything is just as fine as it could be (or as someone else once said all for the best in the best of all possible worlds). In fact, he's beginning to sound like........Paul Krugman. Are we allowed no room for doubt, and where in all of this is prudency. Shouldn't we at least allow ourselves the space to consider what might be the marginally worse case scenario? As Roach says: politics normally makes for bad economics.

Rosy’s back. Yes, Rosy Scenario, that once-voluptuous stepchild of the 1980s, is now in the process of making another stunning comeback. Dressed in a cloak of overly optimistic economic assumptions and spewing forth the timeworn supply-side mantra of dynamic budget scoring, the Bush administration has brought this aging temptress back on stage for yet another encore. The movie of the 1980s is starting to run in reverse.

Federal government budgets are likely any projections -- they are only as good as the assumptions on which they rest. On that basis, alone, there’s good reason for suspicion as to the veracity of the just-released White House budget. For starters, it portrays a US economy that is about to enter the perfect path of solid growth and nonexistent inflation. Cyclical recovery is presumed to be imminent, with real GDP growth expected to accelerate to 2.9% in 2003 before jumping to a 3.6% average annual rate in 2004-05. The economy is then projected to settle back to its productivity-enhanced cruising speed of 3.2% over the 2006-08 interval. Needless to say, for a post-bubble US economy, such an outstanding and uninterrupted six-year growth outcome would be a glorious accomplishment. The average six-year growth rate of 3.3% would be only 0.5 percentage point slower than the 3.8% gains realized during the bubble years of 1995 to 2000.......History tells us that multi-year Federal budget forecasts are usually not worth the paper they are printed on.

Actually, today’s budget deficits could matter a good deal more than they did in the 1980s. That’s because America is now contemplating another multi-year fiscal stimulus with its lowest national saving rate in recorded history. In the third quarter of 2002 (latest available data), the net national saving rate -- for consumers, businesses, and the government, combined -- fell to a record low of 1.6% of GDP. This is the domestically generated saving -- after allowing for the replacement of worn-out facilities -- that is available to fund expansion in the US capital stock, the sustenance of longer-term economic growth. Reflecting this shortfall, America must borrow saving from abroad -- and run a massive current account-deficit to attract it -- in order to keep the economy growing. By way of comparison, the net national saving rate stood at 9.0% in mid-1981 on the eve of the Reagan supply-side tax cuts, more than five times the rate prevailing today..........In retrospect, it was America’s cushion of national saving that financed the Reagan tax cuts some 20 years ago. The United States has no such cushion today. Moreover, for an aging US population lacking in assets to cover the looming liabilities of retirement -- the so-called asset-liability mismatch -- a shortfall in national saving is all the more troubling.
Source: Morgan Stanley Global Economic Forum

German Unemployment at Five Year High

As if to confirm my recent preoccupation about what is happening in Germany, these latest figures paint a pretty grim picture:

German unemployment rose significantly more than expected last month in a further sign of the gloom overshadowing the eurozone's biggest economy. Seasonally adjusted unemployment jumped by 62,000 month-on-month to reach 4.27m, or 10.3 per cent of the workforce. The unadjusted figure, which is more closely watched in Germany, soared by almost 400,000 compared with December to reach 4.62m - the highest level in five years. The figures showed a particularly steep climb in western Germany, normally seen as a more accurate barometer of the economy than the economically depressed east. The Federal Labour Agency said on Wednesday that seasonally adjusted unemployment in the west climbed by 46,000 to reach 8 per cent of the workforce. In the east, the jobless total rose by 16,000 to reach 1.6m, or 18.2 per cent of the total.

This week's electoral routs have pushed the SPD-led coalition government into intensifying calls for economic and social reforms to boost the labour market and reduce the financial pressures on the stretched welfare state. However, in the short term, the sharp rise in unemployment will most likely hit private consumption, while raising the funding pressures on the welfare state. In particular, the sharp increase could make the government's budgetary goal of eliminating subsidies for the state unemployment insurance scheme more difficult than ever this year. "The implications are straightforward", said Holger Fahrinkrug, eurozone economist at UBS Warburg in Frankfurt. "Today's data exert more downward pressure on German growth forecasts, especially for private consumption, and increase the pressure on the budget".
Source: Financial Times

Germany: Biting the Bullet?

So it seems reality-check time is approaching. All the major commentators agree that this time Germany is going to have to bite the bullet. The only remaining question is which one? According to a widely held theory the reason the German economy is in such bad shapeis because is has failed to implement a series of universally recommended structural reforms. High on the list of these proposed reforms are changes in the system of unemployment and pension benefits, and changes in employment law to enable greater contractual flexibility. This is the mantra that seems to serve for each and every occassion:

A day after Chancellor Gerhard Schröder suffered a humiliating rebuke in state elections, politicians and economists here said today that the defeat might liberate his government, at long last, to undertake a wholesale reform of Germany's hidebound economy. With little left to lose politically, several analysts predicted, Mr. Schröder may revive the reformist agenda that guided his first two years in power but fell by the wayside as he fought for re-election last fall.

The first order of business is likely to be a rollback of the taxes that Mr. Schröder imposed last fall. He said they were necessary to close a hole in the budget. Mr. Schröder stays in power because a majority in the lower house of Parliament supports him, but now the conservatives hold an even larger majority in the upper house, thanks to Sunday's victories, and have threatened to block him. The chancellor now acknowledges that he must retool his proposals. Some of the taxes, he said, were not "closely enough assessed for the economic consequences." Any effort to reform the economy, experts say, must begin with Germany's labor laws and its welfare system. Ms. Dückert said the government would seek to lower the burden of social security on taxpayers. The labor market, she said, must be made more flexible.The government would achieve those goals by cutting the benefits that allow some Germans to be comfortably unemployed for years, and stripping away the job security of those who do work.
Source: New York Times

Now important and inevitable as some of these changes are, it is worth first of all trying to understand why they may be important, and why it is that they are now seen as being so urgent. I would like to identify three factors which seem to be of some importance. Firstly the question of the current asset value of the accumulated experience of the German labour force. Secondly the problematic nature of the German welfare and pensions system at a time of rapid aging, and thirdly the problem of achieving optimum output and growth in the context of a currency union (ie the Euro).

Starting with the labour force: one of the factors which has received little comment, but which is clearly of great importance, is the role of accumulated experience during times of rapid change. During the late ninetees it became fashionable to wax lyrical about the enormous significance of the 'creative destruction' phenomenon (since the NASDAQ crash, strangely enough, we've heard relatively little about this, even though the gale seems to have been blowing through wall street more strongly than ever). One of the aspects of this Schumpeterian process which attracted relatively less attention was the effect of the creative destruction process on accumulated human capital. This takes on increasing importance in a services and knowledge-based-industry biased economy like that of the US, Germany, the UK etc. The shift to high value activity has meant that the proportion of the firm's value contained in its workforce has become more and more important, as has the devaluation of that workforce under the impact of technical change. Commenting on the continuing high levels of productivity increase achieved in the US during what he terms the 'jobless recovery', Brad Delong asks the following key question:

Rapid American productivity growth has continued through the recession. What conclusions should we draw from this? This question has two possible answers. The first answer is that changes in America's labor market have eliminated the old pattern by which firms tried to hold onto productive and experienced workers through the trough of the business cycle, because they knew they would be wanted soon and would be very expensive to replace. Such "labor hoarding" meant that measured productivity dropped in American recessions. Perhaps this institutional factor has now been erased from the American economy. However, if it has not been erased--if "labor hoarding" still exists--that means that the underlying productivity growth trend of the American economy has continued to accelerate, and that the future of American growth for the next ten years is very bright indeed.
Source: Semi-Daily Journal

Now what if......? What if the value of those workers which were previously 'hoarded' has now, suddenly, diminished. It is clear that in times of slow change learned behaviour has, in Darwinian terms, a 'fitness' premium: hence the importance we attach to grandparents, older workers, or collective "wisdom". But in times of rapid and accelerating change - like the present - the premium for learned behaviour drops, and the advantage goes to rapid reactions on the fly. It is this delicate process of value transformation, now proceeding more quickly, now more slowly, that underlies the devaluation of the existing workforce. The impact of this is especially important in countries like Germany and Japan where economic success was based on the accumulated experience of an entire workforce. It is the dramatical devaluation of the worth of that experience which is one of the factors which helps to explain the recent years of slow growth in Germany.

Secondly the German population is rapidly getting older. In fact, if you discount immigration, and children born to parents of non-naturalised immigrants, Geramn mortality is now higher than fertility. Put in plain English more people die every year than are born: the population is shrinking. Of course, the effect of immigration is to mask this reality, as when you add-in the net annual migrant inflow the population appears to be more-or-less stable. This aging process has two important effects in the current context. Firstly if we were to attempt to derive a function to indicate the capacity of a society to change (its flexibility to use the contemporary argot), then surely age would be one of the key parameters to look at. Bluntly put: as we get older the more we have invested in what we have already learnt, and the less we have to get from new learning. Our capacity to learn, as I've unfortunately been discovering myself, also tends to decline with age (although Brad Delong and I are among those who seem determined to try and resist the ravages of time). And what is true for the individual is true for the firm, and is true for the country. In addition the unfortunate system of PAYGO pensions, which is a legacy of an earlier demographic profile, has left the majority of European states, Germany among them, lamentably short of acquired resources to fund future anticipated liabilites (this phenomenon could in fact be worse than even the most pessimistic actuarial provisions estimate since many demographers argue that the calculations are based on a serious underestimation of the way life expectancy is likely to increase over the next fifty years). This then is the fiscal trap that lies behind the growth and stability pact (a pact which was in fact written at the specific insistence of Germany), a trap which means that the German government is now attempting to raise taxes and reduce spending whilst glaring recession in the face (what is that expression: tough love in a time of cholera?).

The third and most obvious problem is that Germany is trying to confront this highly complex situation with BOTH hands tied behind it's back (the hands in question here being those that can reach for the levers of monetary and fiscal policy). Now this may be a situation which is just fine for a would be Harry Houdini, but for most of us normal folks it is more than likely pretty scary. As an after dinner piece these days I tend to compare our present situation here in the Euro countries with one of those Hollywood Airplane movies, where you go into the cockpit only to find the flight crew have all left (and instead of Harrison Ford we only get to have Romano Prodi and Wim Duisenberg). As I have already indicated the fiscal position is not too brilliant in any event, but on the monetary front, if Germany had control of its own economic policy, it could clearly do far more.

Summing-up then, I'm not convinced that the much demanded reform process will be either as well-received or as effective as many seem to believe. Change, as I said at the start, is both necessary and inevitable, but it would be better to set out on this process with a more developed appreciation of the magnitude of the impending tragedy, and of the reality that without a change in population policy, there is little hope of a successful outcome.

Tuesday, February 04, 2003

The Productivity Connundrum

No, this piece is not about what happened to productivity after the 1970's, nor is it about computers and the Solow effect. It's far more mundane than that. How do you put a value on a computer virus? This comes up in connection with the recent slammer (saphire) worm, many estimates put the clean up figure in the 1 billion dollar bracket, but there is no real consensus, nor, it seems, do we have an agreed metric. About one point, however there is agreement, it was damn quick. According to a recent study, it was the fastest-spreading worm the Internet has yet seen. In the first minute of its release, Slammer's rate of infection doubled every 8.5 seconds and it reached its full speed in just three minutes. The result was that it had infected the majority of the 75,000 servers it eventually compromised within only 10 minutes. The small size of the worm - a tenth as large as 2001's Code Red -was, apparently, one reason it propagated so quickly.

On Thursday, London-based market intelligence firm Mi2g said that the worm caused between $950 million and $1.2 billion in lost productivity in its first five days worldwide. That puts the worm at No. 9 on the company's list of the most costly malicious code, behind the likes of the Code Red worm, with its average of $2.6 billion in productivity loss; the LoveLetter virus, with $8.8 billion; and the Klez virus, with $9.0 billion. The estimates are the first to try and measure the effects of the latest worm to hit systems. The SQL Slammer worm spread throughout the Internet late on Jan. 24, and the sheer quantity of data produced by infected servers clogged the electronic arteries of company networks, downed banks networks and ATMs and slowed some people's access to the Internet.

Many security experts argue, however, that while SQL Slammer is easier to clean up, the worm was worse overall than Code Red--which attacked more servers but didn't affect infrastructure, such as financial systems. "This worm did something that we have not seen before," said Peter Allor, director of operations for the Information Technology Information Sharing and Analysis Center (IT-ISAC). "In this case, the customer was affected," he said. "People weren't getting dial tones; airplanes couldn't fly; (and) ATMs weren't giving cash." Data on computer viruses has always been lean. Putting a dollar figure on the losses incurred by malicious code is difficult at best, said Michael Gartenberg, research director for Internet industry watcher Jupiter Research. "It is a billion soft dollars, and that is an important part of an equation," he said, stressing that the losses weren't actually coming out of companies' wallets. "Measuring productivity and translating it into dollars is a hard thing." In the past, analysts have tried to bill a variety of events to lost productivity. Last May, outplacement service Challenger Gray and Christmas estimated that the first day of "Star Wars: Episode II--Attack of the Clones" would cost firms $319 million in lost productivity from workers calling in sick and taking days off. In addition, Internet monitoring software maker Websense estimated in May 2000 that a Webcast by underwear retailer Victoria Secret would cost businesses $120 million in lost productivity. Mi2g's Matai said there is a big difference between those numbers and the losses incurred by malicious code. "I don't think we are looking at productivity loss like that at all," he said. "We are looking at how many servers went down, what was the utilization of those servers and what kind of traffic didn't get through," he said. "The administrators could do nothing until they sorted all that mess out. So it is a different measure of productivity loss."
Source: ZD Net

Technologies of the Future?

MIT's Technology Review tries to identify 10 major lines of investigation with the potential to dramatically affect the way we live and work, and profiles the leading innovators behind them. On the list are Wireless Sensor Networks, Injectable Tissue Engineering, Nano Solar Cells and much more. But my personal favourite: why Grid Computing. It's the connectivity, of course. 'Seamless and ubiquitous access to unfathomable computer power', talk about empowerment, I can't wait for it, beam me up now!

“We’re moving into a future in which the location of [computational] resources doesn’t really matter,” says Argonne National Laboratory’s Ian Foster. Foster and Carl Kesselman of the University of Southern California’s Information Sciences Institute pioneered this concept, which they call grid computing in analogy to the electric grid, and built a community to support it. Foster and Kesselman, along with Argonne’s Steven Tuecke, have led development of the Globus Toolkit, an open-source implementation of grid protocols that has become the de facto standard. Such protocols promise to give home and office machines the ability to reach into cyberspace, find resources wherever they may be, and assemble them on the fly into whatever applications are needed.
Imagine, says Kesselman, that you’re the head of an emergency response team that’s trying to deal with a major chemical spill. “You’ll probably want to know things like, What chemicals are involved? What’s the weather forecast, and how will that affect the pattern of dispersal? What’s the current traffic situation, and how will that affect the evacuation routes?” If you tried to find answers on today’s Internet, says Kesselman, you’d get bogged down in arcane log-in procedures and incompatible software. But with grid computing it would be easy: the grid protocols provide standard mechanisms for discovering, accessing, and invoking just about any online resource, simultaneously building in all the requisite safeguards for security and authentication.

Construction is under way on dozens of distributed grid computers around the world—virtually all of them employing Globus Toolkit. They’ll have unprecedented computing power and applications ranging from genetics to particle physics to earthquake engineering. The $88 million TeraGrid of the U.S. National Science Foundation will be one of the largest. When it’s completed later this year, the general-purpose, distributed supercomputer will be capable of some 21 trillion floating-point operations per second, making it one of the fastest computational systems on Earth. And grid computing is experiencing an upsurge of support from industry heavyweights such as IBM, Sun Microsystems, and Microsoft. IBM, which is a primary partner in the TeraGrid and several other grid projects, is beginning to market an enhanced commercial version of the Globus Toolkit.

Out of Foster and Kesselman’s work on protocols and standards, which began in 1995, “this entire grid movement emerged,” says Larry Smarr, director of the California Institute for Telecommunications and Information Technology. What’s more, Smarr and others say, Foster and Kesselman have been instrumental in building a community around grid computing and in advocating its integration with two related approaches: peer-to-peer computing, which brings to bear the power of idle desktop computers on big problems in the manner made famous by SETI@home, and Web services, in which access to far-flung computational resources is provided through enhancements to the Web’s hypertext protocol. By helping to merge these three powerful movements, Foster and Kesselman are bringing the grid revolution much closer to reality. And that could mean seamless and ubiquitous access to unfathomable computer power.
Source: MIT Technology Review

Monday, February 03, 2003

Seismic Shockwave in German Politics Continues

I post below just a few of the comments to surface today. This is clearly important, and talk of all this being good for a reform process are wide of the mark (no pun intended), as is interpreting this in terms of a traditional protest vote and pendulum swing politics. Remember even a change of government would not give Germany the interest rates and monetary conditions it needs, and even if the more radical reform packages could work medium term (which I clearly doubt they can without addressing the key problem of attitudes to immigration) things would get a lot worse before they got any better, which means the impact on EU politics will be the same either way. If the German economy continues its wander downwards this year as I think it's going to, problems are surely brewing. One of the key parameters that every economist knows deep down in their bones is important to any society is confidence. Schroeder's nerve is clearly rattled, the Iraq card is evidently useless to him, and has probably only served to damage his credibility even more. The problem now is if this loss of nerve spreads to the German populace at large. I'm worried (not in the big sense of really WORRIED), but genuinely concerned that this is going to end badly, and that it's consequences will be felt across the Euro zone.

Leading German dailies from across the political spectrum are unanimous in their view that the showing by Chancellor Gerhard Schroeder's Social Democrats in Sunday's state elections in Lower Saxony and Hesse constitutes a landmark defeat. There is consensus that voters delivered an unequivocal message on the need for economic and political reform, with warnings that Mr Schroeder may be forced to abandon social commitments long held dear by his party.

Uwe Vorkoetter, writing in the Berliner Zeitung, counsels that the SPD will need to review their whole political and social philosophy, including the role of the trade unions. "The state took on too much," he says. "It can no longer guarantee citizens what it had formerly promised. Gerhard Schroeder will have to join the side of the reformers in the SPD. He can no longer afford to grant the trade unions a de facto veto right against government policy." Mr Vorkoetter argues the party will need to review the generous social provisions, including pensions and health care, that many Germans take for granted. "He will need to compel his own party to take a political course which Social Democratic traditionalists consider unsocial, unbalanced and neo-liberal." He warns that if the SPD wants to stop its decline, "it must learn the country's problems cannot be solved in a Social Democratic way".

The right-leaning Die Welt agrees that the trade union issue is vital, calling the SPD defeat "devastating". Describing Mr Schroeder as "this humbled chancellor", the daily says: "Gerhard Schroeder has now been forced to give the country a general overhaul - even if that means doing it against resistance from the unions." "Whether in health reform, labour-market reform or immigration, the government can no longer work without the opposition. The only escape is to move forwards: radical reforms. Attack, not defence." Munich's centrist Sueddeutsche Zeitung sees the result as a protest vote against the governing coalition, pointing out that although such votes are nothing new, their vehemence is. "The situation of the Schroeder government is terrible. But reports of its imminent demise are exaggerated, " it concludes.
Source: BBC News

AOL's Times They Are A Changin - For the Worse

The bad news doesn't stop piling up for AOL. This morning the WSJ reported that it was now facing attrition even in its core dial-up market. Now its getting hit from both ends at once. What was it we used to hear about the need for a business model. What puzzles me with all the high-profile AOL stuff is why nobody's asking any awkward questions about the future of Spanish Telefonica's Terra Lycos, it was, after all, the other big provider-portal merger, and, if anything, it seems to have even less idea of what it is supposed to be doing than AOL Time Warner

AOL Faces New Threat From Cut-Rate Internet Services

America Online, fighting to stem plunging profits and management turmoil, is now facing a looming price war that threatens to undermine one of the most profitable segments of its Internet-access business, Monday's Wall Street Journal reported. Much attention has been focused on the AOL Time Warner Inc. unit's failure so far to make significant inroads in the growing market for high-speed Internet-access services known as broadband. But less noticed has been the rise of discount online services that are targeting the Internet behemoth's core base of "dial-up" Internet accounts with some success. Dial-up is a shorthand term for traditional Internet service, where a computer literally places a telephone call to an Internet-access point each time a user logs on. Broadband is always on -- eliminating the need to dial a connection each time a user logs on -- and can provide access to Web sites at speeds about 25 times faster than dial-up service. Broadband accounts are relatively pricey, at about $40 to $50 a month, compared with $23.90 a month charged by America Online for its dial-up service. Still, dial-up is the service that welcomed millions of consumers to the Internet in the 1990s and generates the vast majority of America Online's $9 billion in revenue. Now this core business is getting hit from above -- as more users graduate to the higher speed of broadband connections -- and from below as a host of discount rivals crop up offering dial-up Internet service for about half of America Online's price.
Source: Yahoo/Dow Jones Business News

What is so shocking in all this is the sheer scale of the folly. As this piece from the NYT points out, in the last two years they've lost more than the entire annual value of New Zealand's GDP! So how, we might ask, with all that money and talent, did they manage to get it so, so wrong.

A well-known company makes one of the most disastrous acquisitions in corporate history. Its senior management is split, divided by clashing egos and mutual loathing. Profits plunge, the stock price tanks, famous executives are shown the door. How could things possibly get worse? AOL Time Warner answered that question on Wednesday, announcing an unexpectedly large fourth-quarter loss of almost $45 billion — the biggest quarterly loss in American corporate history — and a write-down of assets totaling $45 billion. Add that write-down to a $54 billion charge announced earlier last year, and the company lays claim to nearly $100 billion in write-offs in a single year. In other words, all of AOL Time Warner's high-flying initiatives of the last two years have amounted to a $100 billion mistake — a figure larger than New Zealand's annual gross domestic product. And Wall Street analysts are wondering how managers who have survived the infighting and blunders thus far are going to turn around the company.

"The real issue is, where is the growth going to come from?" said John Tinker, a media analyst with Blaylock & Partners in New York. "It's like: `What's happening, guys?' " Investors certainly seemed unsure today. Shares of AOL Time Warner fell $1.96, or 14 percent, to close at $12 in heavy trading on the New York Stock Exchange. AOL Time Warner, still reeling from America Online's ill-fated acquisition of Time Warner two years ago, said on Wednesday that it would write down the value of the company's AOL division by about $35 billion and its cable division by about $10 billion.It also said that Ted Turner, a maverick entrepreneur who founded the Cable New Network before selling it to Time Warner, was planning to resign as the company's vice chairman. The company said it was still undetermined whether Mr. Turner, one of AOL Time Warner's largest shareholders, would retain his seat on its board. While the timing of Mr. Turner's departure added to the gloom surrounding Wednesday's announcement of the huge loss, he has been uninvolved in the company's daily management for some time.

Moreover, there is a host of much more severe operational issues facing AOL Time Warner: Whether its vaunted cable assets are even more seriously overvalued and how that might affect a planned initial public offering of stock in the cable unit. A huge and burdensome debt of $26.4 billion. A continuing Securities and Exchange Commission investigation of the struggling America Online's accounting practices.Slow earnings growth in the company's publishing, media and film divisions. Wall Street's uncertainty about whether Richard D. Parsons, the company's chief executive, will be able to wrestle all of these problems to the ground.
Source: New York Times

Sunday, February 02, 2003

Balloon Goes Up on Euro in German Election Results

This is not a good night for German Chancellor Gerhard Schroeder, it is not a good night for Germany, and it is not a good night for the Euro. I say this without any partisan feeling over the outcome of the elections in Hesse and Lower Saxony. What seems to me to be evident above all else in these results - which are in one case the worst for the SPD in local elections since 1945 - is that Germany politics is paying the price for carrying the Euro load. At a time when the dictates of national economic policy would lead to an entirely different monetary and fiscal policy, the weight of the (German imposed) stability pact and the need to contain collective inflation is sending the German economy roaring towards its second recssion in as many years, destination who knows where. This must logically alarm German voters of whatever persuasion, voters who are not exactly renowned for their willingness to take daring risks where the chances of success are slim. Many observers try to look on the bright side and stress that the reform agenda will now be broadened. I fear the contrary. I fear that this could all bode exceedingly badly for the mid-term outlook on the Euro. Remember the Euro is largely a political initiative, and if the initiative breaks down, then the unthinkable is no longer so unthinkable.

German Chancellor Gerhard Schroeder's Social Democrats suffered crushing defeats in two state elections Sunday as voters vented their anger at high unemployment, tax hikes and near-recession, polls showed. Not even Schroeder's opposition to a possible Iraq war, which has left him isolated abroad but popular in war-weary Germany, was enough to offset public disgruntlement over the economy four months after he was re-elected.The SPD suffered its worst results since 1945 in Schroeder's home state of Lower Saxony and in Hesse, television projections showed after polling booths closed. Losing Lower Saxony makes it impossible for the SPD to circumvent the opposition conservatives Christian Democrats' majority in the Bundesrat upper house of parliament, and will force Schroeder to cooperate with them to get laws passed.

Ten million people were eligible to vote in the two states, the first test of sentiment since the September ballot. One projection by the Infratest polling institute on ARD television showed the Christian Democrats (CDU) surged to 48.3 percent in Lower Saxony from 35.9 percent in the last election in 1998, with the SPD crashing 15 points to 33.0 percent. In the central state of Hesse, the CDU held on to power with an increased majority, scoring an absolute majority of 50.1 percent, up from 43.4 percent in the last election in 1999. The SPD plunged to 27.7 percent from 39.4 percent, the poll showed. Schroeder's popularity has plummeted since he was re-elected on a wave of support for his anti-war stance on Iraq and his strong handling of devastating summer floods.

Influential news magazine Der Spiegel ran a picture of a grim-looking Schroeder headlined "The Lonely Chancellor," speculating that defeat will weaken his standing in the SPD. He has tried again to tap anti-war sentiment, ruling out a German "Yes" to war in any U.N. Security Council vote. Germany currently sits on the Security Council. But polls show his Iraq policy has not eclipsed concern about economic woes. Businesses and financial markets hope defeats in the two states will speed reform by strengthening the conservative opposition and persuading Berlin to become more aggressive in cutting welfare costs choking the economy. "I'm optimistic. When the election campaigns are over, the government will put its foot on the accelerator and the opposition will cooperate," the head of the Federation of German Industry, Michael Rogowski, told Welt am Sonntag newspaper. The stock market could also benefit. "New political impetus would definitely help share prices," Hans-Joachim Koenig, fund manager at Union Investment, told Die Welt newspaper.Schroeder has ruled out resigning but poor results are certain to hurt him and make it harder to get laws passed without backing from the Christian Democrats. Political analysts say defeat could silence the SPD's left wing, which has opposed moves by Economy Minister Wolfgang Clement to deregulate the labor market. Losses could also underline the perception that, without radical cuts to the cost-laden social system which has made jobs too expensive for many companies, the government would fail to cut unemployment and lose power in the next general election.January unemployment data due Wednesday are expected to show a rise to 4.55 million on an unadjusted basis, the highest level for that month in five years.
Source: Reuters News

European Citizenship and Discrimination

Some thought provoking - if somewhat controversial - suggestions from Jonathan Stevenson in a NYT OP-Ed. Some of the ideas are definately runners and worth exploring much more: first and foremost among these the situation with Europe-wide immigration. Things at present are little short of chaotic, with Brussels and the various national governments on the one hand in a continuing state of denial about the absolute necessity for substantial long term immigration into Europe, and on the other effectively turning a blind eye policy to the large numbers of irregular immigrants entering by the back door. Obviously if the vast majority of your immigrants are entering illegally then it's difficult to know who they are.

So we need a much clearer and more welcoming front door policy, one which recognises that the majority of immigrants come to work, and that while there is work they will inevitably keep coming. At the same time attitudes and policy towards the immigrant communities that are created in the process then becomes of the utmost importance. The disaffection of sections of the British-Asian community which has attracted so much attention recently certainly needs addressing, in particular by emphasising the positive virtues of a multicultural and open society among newcomers, whilst at the same time ensuring some minimal level of understanding of the common language and of the beneits and responsibilities of British citizenship. An early fast-track admission procedure for Turkey to enter the EU is also a winner, in my view. This would emphasise the implicit universalism of the Union, and not its particularist ethnic nationalism.

On the negative side of the balance sheet, the positive contrast between France and the UK has to be much more questionable. There is no evidence that Islamic terrorism is any less rooted in French society, in fact quite the contrary. The rigidly secular character of the French schools has also produced its own attendant problems, especially in areas of apparell. My own view is that the French attitude to their own 'exceptionalism', and the lack of comprehension for their 'national minorities' - the Bretons and the Catalans among others - makes France NOT an example to follow. The French identity seems unyielding to change. 'British', in contrast, is an identity which has become much more malleable of late, with the Black British and the Asian British sitting much more comfortably alongside their Welsh, Scottish and English 'British' counterparts.

It is no surprise that the 15 million Muslims in the European Union should be ripe for recruitment by Al Qaeda. They live on the margins of European society, socially, economically and politically. More than 100 British Muslims joined the Taliban in Afghanistan to try to repel American and allied forces, and up to 3,000 British Muslims have undergone military training at terrorist camps in Afghanistan since 1996. Radical clerics preach war against the West in Europe's mosques. European citizens like Richard C. Reid of Britain, who just received a life sentence for trying to ignite a bomb in his shoes on a trans-Atlantic flight, and Zacarias Moussaoui of France, described by prosecutors as the would-be 20th hijacker in the Sept. 11 attacks, were converts to militant Islam.

For the sake of the United States, Europe needs to tackle the root causes that make young Muslims resort to terrorism. But it needs to act to protect itself as well. So far, there have been no Al Qaeda attacks carried out in Europe, but officials say they have thwarted several plots. Over the last six weeks, the police in France, Spain and Britain, as well as Italy, have arrested more than 50 terrorism suspects, some in possession of the deadly poison ricin, disrupting what was apparently a Qaeda network.

The obvious first steps are tightened border security and a Europe-wide immigration policy that would allow for better monitoring of who is applying for visas where, and expanded intelligence and law-enforcement links. But in the long term they won't be enough. Europe also needs to resolve the economic and political problems that could make Al Qaeda attractive to a young Muslim. The tough question is how to do it.

Aggressive anti-discrimination policies in employment and education may help. The most rigorous fair employment laws in Europe, verging on affirmative action, are in effect in Northern Ireland. Workers there are entitled to damages even if they have been only indirectly and unintentionally discriminated against. Such provisions have probably kept young Catholics from joining the Irish Republican Army.

More focused government subsidies for Muslim schools that follow a moderate form of Islam would also be salutary. Britain has begun limited subsidies to Muslim schools, but has made no effort to encourage moderate Islam education as opposed to fundamentalism, whose support by wealthy Wahhabi Muslims gives it an advantage. Another possible remedy could be government benefits for businesses operated by Muslims. Such economic and education policies would be conducive to participation in politics, in which Muslims are seriously underrepresented.

More broadly, European nations like Britain need to end reflexive multiculturalism — for example, lax language and cultural education requirements for naturalization — that perversely discourages Muslims from learning the ways of their new countries, thus isolating them from the mainstream and fueling radicalization. Stricter requirements for citizenship may also dissolve racial or religious biases among majority populations.

In theory, France, which wants its five million Muslims to think of themselves as Frenchmen, provides a good model. It encourages a secular view of French citizenship by promoting a strict separation of church and state. It requires candidates for naturalization to speak serviceable French and know basic French history and culture. Though criticized by some orthodox French Muslims, the new government-endorsed Council for the Muslim Religion should help secure a position for Muslims in the civic mainstream and produce an indigenous, moderate version of Islam.

Politically, the European Union could soften Muslims' views of the West by moving ahead on Turkey's bid to join the union — for instance, by setting a definite date for talks on membership. That would send the message that secular Muslim countries are considered partners of Western nations. Further, the union could emphasize the economic links between Europe and the Persian Gulf nations and its financial support for the Palestinian Authority. It should also revitalize the 27-member European-Mediterranean Partnership, which was established in 1995 with high hopes of deepening ties among the countries of the Mediterranean but became enervated because of the second Palestinian intifada and Sept. 11.
Source: New York Times

Cashless in France?

No, this is not a piece about an impending crunch to be produced by the growth and stability pact, it's about something positive for a change. A new French initiative to introduce a smart card that does away with the need to carry cash. Funnily enough this seems to be one of the areas where Europeans may actually have the possibility to steal a march on the US, especially if the quantity of Americans who still seem to pay their monthly and quarterly bills using cheques is anything to go by.

France is leaping toward a cashless future with a nationwide launch this year of computerized ``smart cards,'' a concept that has so far failed to entice many American, British and German consumers. The chief idea behind this new breed of microchip-embedded plastic is simple -- to dispense with pocket change and speed smaller transactions.Dubbed ``Moneo,'' the French electronic purse cards were introduced two years ago in a handful of small regions. In November, the service expanded to include Paris. Some 850,000 consumers now regularly use Moneo cards at 80,000 grocery shops, parking lots or vending machines, says Pierre Fersztand, chief executive of BMS, the technology company that launched the project. Because the basic Moneo card is anonymous, there are no privacy or identity theft concerns. But if an owner loses his or her smart card the cash that's stored onboard can be used by whoever finds it -- which is why there's a 100-euro ($107) storage limit. Fersztand expects the cards to be available to merchants and customers nationwide by the end of the year. ``We're not worried about whether it will take off here,'' he said in an interview at the company's Paris headquarters. ``The question is how long will it take -- two or 10 years?''

Among the challenges: how to ensure the cards are widely accepted, quick to use, easy to refill and carry low transaction fees for merchants. Banks generally charge between 0.4 and 0.9 percent per transaction, and consumers have to pay an annual fee between $6 and $13. So far, reaction is predictably mixed. Gregory Clau, 30, said only one customer has used the service since he installed it three months ago at his locksmith shop near the Champs-Elysees ``I don't think anybody is interested in it,'' he said. The dozen people a day who use Moneo to buy their baguettes and cakes at Chantal Plousseau's Paris bakery might disagree. ``More and more people are using it,'' said the 50-year-old Plousseau. ``It's efficient and eventually I will make less trips to and from the bank carrying bags of coins.'' At many parking meters in the Paris suburb of Boulogne Moneo is de rigueur -- the only acceptable method of payment. Authorities got fed up with gangs of youths tampering with the machines to get at the coins. "We all know that the future of money is completely virtual,'' said Torris, the Forrester analyst. `"Moneo is a first step toward that.''Try telling that to Christine Berube. She is refusing to offer the service at her tobacco counter in a dimly lit bar that serves up endless glasses of cheap table wine and cups of coffee to mostly elderly regulars. ``I think it's useless,'' the 46-year-old tobacconist said to nods of agreements from clients who draw heavily on their cigarettes. ``I know how to count change quickly and don't want to enrich the banks.''
Source: Silicon Valley.Com