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Saturday, July 19, 2003

On the Merits of Blogging

There's so much in the papers about Ronald Reagan and it looks like he's on his way to become president, it does look scary. I voted once. In the fifties, I don't remember which election. I pulled the wrong lever because I was confused, I couldn't figure out how to work the thing. There was no practice model outside, it was a church on 35th Street between Park and Lex. This was when I was living at 242 Lexington. And then I got called for jury duty and I wrote back: 'Moved.' I have never voted again.

This piece from Andy warhol, which comes from Eamonn's Rainy Day sums up the way I feel about a lot of things I suppose. Some devices just defeat me, there's no point in denying it. Take the mobile phone: last week I took my wife's away with me, because for the work I was doing it just seemed so useful. People with mobile phones are always localizable (I guess that's why I don't have one). Many people worry about internet privacy. This topic doesn't bother me in the least. I post as much as I can about myself, just to make sure the authorities don't complain I try to make sure I don't leave anything out. Years ago I read a book by Franz Neumann, called Behemoth, about the concentration camps (where Neumann spent part of his life), and the Nazi bureaucracy which collected detailed information on every aspect of German life under Hitler, so much detail in fact that it was entirely useless. No-one new what was important. That's when I learned to come clean, as early and as often as possible. This is just a more intelligent strategy for protecting privacy by creating information overload. Just like the infamous American power grid, one extra piece of information too many in the right place, and all the snooping in the world comes to nought. The system collapses. Henry would put this in game-theoretic terms and call it the zigga-zagga move. So here I am, with e-mails everyday from all over the globe, but the phone never rings. This is the way I like it, the kind of privacy I need, where I can think what I want when I want, without fear of interruption.

So where was I? Yes, last week I had a mobile, only I didn't have it, if you get my meaning. After three days I dropped the damn thing on the floor, and like Humpty Dumpty it would never go back together again. Well that's not entirely right, I adjusted the card and put everything nicely back into place. But it seemed dead. Oh god, I thought, now I've done it. But what I didn't know was there was a button I needed to press to switch the thing on. So I spent three days trapesing down the road to a phone cabin, when I had a perfectly good phone lying on the table. Five minutes after returning home I gave the thing to our resident technology 'doctor', my daughter, and of course she pressed the button, and...............

But there is more to the Wharhol piece that I identify with. You see many would say that he was conservative and a-political. What a load of tripe. He revolutionised the way we see the world. I still think his Electric Chair images are among the most devastating and effective reflections on the barbarity of the death penalty (I'm also pretty sure they influenced Marc Foster in his excellent film critique Monster's Ball ). What I think then, is that there are many ways of changing how we see the world, and thus of changing the world. Of these ways the political process as we know it is about the least effective. To be outrageous, I guess long-term Sid Vicious may well be judged to have had more influnce on the course of history than George W Bush will be - barring of course, unforseen accidents. Our problems are so complex, and the political process so centred on the simplistic, I just cannot believe that this is where the real action is. So like Andy, I haven't voted since the time of Harold Wilson. On the other hand, Richard Dawkins and his idea of the meme, now this is something else. The idea that you can put a little idea in circulation, and that one day this idea can go orbiting the globe at faster than the speed of light, this really fascinates me.

And this brings me back to blogging. Now many there are who like to laugh or cry when the word blogging crops up in conversation. The polite outsiders just nod knowingly and maintain a discrete silence. Others, normally conventional journalists, tend to fulminate when they are not actually foaming at the mouth (as I keep admitting, we do make an awful number of spelling mistakes). But then, they may be considered to have the incumbent's problem, they have an investment to protect. Now one of the interesting things about blogging is that you get better as you go (learning by doing?). A very good example of this is Eamonn (you see I am getting back to where I started, and, finally, to the point), another also probably is Frans , although we can't really be too sure, since not speaking Dutch it's kinda hard to check out our hunches. But back to Eamonn. The point is there is no recipe to blogging. You just suck it and see. It is also an intensely personal and individaulistic activity. Maybe Brad and I have it easier, the economy trundles along, and in between wheeling in and out our favourite theory obsessions, we get driven along by the data.

In this sense Eamonn is being really inventive, doing a great job, and getting better by the week. This week there are four pieces I really like (and one of them I disagree with). Firstly on the death of photo-journalist Zahra Kazemi:

The "facts", as far as they can be established, are as follows: the Canadian-Iranian photojournalist Zahra Kazemi went to Tehran to take pictures of the recent student protests for the British agency Camera Press. Ms Kazemi was arrested on 23 June for taking pictures of the capital city's Evin prison. She was later pronounced dead in the Baghiatollah military hospital. The Iranian authorities initially said Ms Kazemi had died of a stroke after falling ill during a police interview, but Iranian Vice President Ali Abtahi now says that she died "of a brain haemorrhage resulting from beatings".............

I agree with Eamonn, it is important that we do not let these atrocities pass un-noticed and without comment. But now for a second, and trickier area, where I am not by any means on the same wavelength as Eamonn. The topic: Tony Blair:

"And the threat comes because in another part of our globe, there is shadow and darkness, where not all the world is free, where many millions suffer under brutal dictatorships, where a third of our planet lives in a poverty beyond anything even the poorest in our societies can imagine, and where a fanatical strain of religious extremism has arisen that is a mutation of the true and peaceful faith of Islam; and because in the combination of these afflictions, a new and deadly virus has emerged. The virus is terrorism, whose intent to inflict destruction is unconstrained by human feeling and whose capacity to inflict it is enlarged by technology."
Source: Blairs Speech to the Joint Session of Congress

Now what I feel we have here Eamonn is a horrible load of what I would call simplistic political rhetoric (actually it could almost be considered a fushion of Ronald Reagan and Margaret Thatcher: yes our blessed Margartet used to love this kind of thing. This is all a far cry from Macmillan and the 'winds of change', or Heath and 'the unacceptable face of capitalism'). Will all good men and true please stand up. But unfortunately, life is not so simple, as unfortunately 25 years of internicine warfare in the North of Ireland only serves to show. We could call the men and women of the IRA 'evil', we could call the men and women of the UVF 'evil' too, probably we did. But this didn't put a stop to the killing. I doubt one single life was saved by the combined speeches of this type from the totality of the politicians (in fact you can find something similar from a PP politician every day on Spanish TV about the 'evil' in the Basque country, but the problem continues with no end in sight). Does that mean there is nothing to do, clearly not. But the way to advance things is with less speeches and more constructive policies.

Or at least, if you are to make speeches then possibly, at least in the case of Tony Blair, you need to avail yourself of the opportunity of giving the British public an apology. You see, from my peculiar and convoluted standpoint three issues in the recent history of British politics stand out above all others: the Belgrano affair, the Lady Di affair, and the WMD affair. As regards the Belgrano I will write something in due course, on Lady Di I have no comment other than to note that the judicial investigations have proved to be less than satisfactory, scrupulous and convincing, and on the WMD, well what do you want me to say. The point is, all these three have one common thread: veracity.

Many British people like me would never take at face value any pronouncement from a Republican US President like George Bush (really I think he's not as 'original' as he's made out to be when you take a long hard look at Reagan and Nixon). But when someone like Blair puts their reputation on the line, and tells you this is like this, well at least you have to give him some benefit of the doubt (mind you, I had been warned, I had had some inkling that all was not well when I saw the way he climbed into the pulpit at the Lady Di funeral). So the problem is not that there are no WMD, the problem is not that there may have been a systematic attempt to mislead, the problem is the cavalier attitude to the truth that is demonstrated by the subsequent attitude that nothing important has happened. Now if Blair had said that the war was simply to remove Saddam, or that it was to make possible a peace process between Israel and Palestine, then maybe things would have been different. But that was not the explanation we were given, and now are in an increasingly difficult situation , and we're one step more backwards, because in the UK at least, many have lost what confidence they had in their leader.

Well, that's enough of the 'heavy' serious stuff, on a lighter note Eamon has a wonderful piece about
Power Genitalia

First, this hilarious URL is real. Check out powergenitalia.com. But, and here's the thing, despite what the writer says, it has absolutely nothing to do with Powergen, the diversified British utility company, which, by the way, is now a division of E.ON, the German energy services giant headquartered in Düsseldorf. Since the story began making the rounds, the unfortunate press people at Powergen have been forced to deal with dozens of queries asking how they could have picked such a double-meaning domain. All Powergen can do in self defence is say that it doesn't have an Italian division and, therefore, didn't have anything to do with choosing the "dirty" domain name. Fact is, powergenitalia.com is the domain of an Italian company that sells battery products.

And talking of titillating domain names, there's this company that gives information about the managers, agents and publicists representing actors, it's called "whoRepresents". And the domain name? Why, it's whorepresents.com. What's the betting that in the remake of "Pretty Woman", the Richard Gere character won't log on there and order that perfect gift? Ladies and gentlemen, for your pleasure, whorepresents.com. And while we're at it, one more. What about the IT info company, Experts Exchange? Its address used to be expertsexchange.com, but following a barrage of inquiries about gender alteration procedures, it inserted a surgical hyphen and is now experts-exchange.com.

and finally, a reflection from Franco Zeffirelli on ageing:

"Life is made of things that have to happen, but the moment they happen, they are already in the past. The anticipation, the expectation — that's what keeps you alive. I don't want to sound ungrateful to destiny, but to survive at my age, you need some purpose. Even if I was perfectly healthy, I couldn't continue jumping from one place to another, like I have these past six months. What keeps me going is not so much the joy of what I'm doing, it's thinking ahead to a new project."

So maybe between Warhol and Zeffirelli I find some harmony, tranquillity and symmetry. That's it. I'm off on holiday. My wife deserves a good rest from all this. See you sometime next week, from I don't know where.

Changes at the IMF

I guess you are all sick-and-tired by now with my obsessions about Bulgaria, so this post won't mention the matter further (this is a threat about the future though) other than to say that what my brother once referred to as my tendency towards the 'single minded and relentless pursuit of an idea to its logical end' has both pro's and con's. Among the con's is the fact that you tend to miss out on other details. Reading Damien's excellent blog this morning to catch up a bit on the real world, I find that Rogoff is leaving the IMF. The new Economic Counsellor will be Raghuram Rajan. This is an interesting choice, not only for the fact that he is Indian, but also since his background is in finance, which may tell us something about how people at the IMF may see the global problems and priorities. I can only say that I hope the vast improvement in level of the WEO and other material will continue, and that they will continue to improve. Meanwhile Damien has lots of interesting links on the topic:

The FT last week stressed that Rajan's background was in finance, not macroeconomics, while some Indian commentators have made much of the fact that he is the first Fund chief economist from a developing nation. The imporant thing, though, is that Rajan will be taking office in September in a difficult time for the world economy. How would he approach it? In an interview with the Indian news site Rediff.com Rajan chuckles at an ironic reversal:

I mean the richest country in the world is the biggest debtor while poor countries are lending tremendously to rich countries (laughs). I don't say it is wrong in some ethical way. I am saying it is just funny that this should be the situation in the world economy. The question is how much is enough? It's a sign of some success. If we carry it too far, it will reflect some failure also.

'Bottoming Out' in Denver?

Well I think in the last post I've made my own position clear. But of course it's possible that I'm wrong. Well-known recent data, as well as the consensus of 'informed opinion' would have things otherwise, and they may be right. Indeed, my demographic thesis has nothing especially riding on the US situation. The US did, after all, have record immigration in the 1990's and has a very different demographic profile to that of Europe and Japan. So on these grounds I feel I would have little to eat my hat for if things should be otherwise. But still the doubts remain.......

At the same time, not everyone will agree with me, and often the arguments are interesting, and worth listening to. John, for example, in Colorado, has written to me about the state budget process there. The numbers this year show the best 'fit' between projected and realised in years. This he feels may show that things have finally 'bottomed out'. It is an interesting argument, and, he may be right.

Attached is an excel spreadsheet of the gross revenue intake for the State of Colorado for June. Don't worry, it's very public information, although the 'public' doesn't seem much interested in receiving it. It's prepared by our internal econ types every month and shows the gross recepts and the previously projected.

This process is very interesting because 'projected' used to come from two sources: An economist at the legislature, and a second economist in the governor's office. Keep in mind the inherent separation of powers in the U.S. government (which extends to the state government level). Our internal economist used to teach econ and stats and had a competition going between the two offices as to who did the better projections. About the middle of last year the legislative economist dropped out because he was consistently worse than the governor's office. It really was no big deal because they were both so far off (as much as 10% in a month) that it didn't make much difference, but bragging rights were at stake and it was embarassing to the legislature to be consistently worse (by fractions of percentage points). Both the Governor's office and the Legislature are firmly in control of the conservative wing of the Republican party in Colorado, but they're still frequently at war with each other.

From the number, it looks like projections and revenue are getting close, This is actually the best match between the two since early 1999 (by our numbers the down turn started far earlier than the Federal government numbers indicate). I personally think this may indicate we've hit bottom. This is the first time in a long time that actual exceeded estimated.

On Which Business are we Bound?

Today some views on the US economy and the recovery. Firstly Stephen Roach. Stephen, like me, doesn't buy the rasmatazz, and is still extremely skeptical. His argument, business earning are rebounding, but they are rebounding from a very low base. In addition the globalisation of supply chains, and the rise of the outsourcing 'platforms', means that employment growth - like good lovin - is increasingly hard to come find. Does this mean that this gloablisation and outsourcing is bad? This is not the conclusion I draw. The problem is elswhere. Making manufacturing and a part of the serviecs sector more efficient, and at the same time stimulating growth and employment in the developing world, is not in itself a bad thing. The diificulat question is where the new growth and employment is going to come from in the OECD world? Remember that I was citing WW Rostow and the importance of sectors last week. Well here you have it: where are the new sectors? The ones which can support and sustain the living-standards-premium of the developed world. It won't be in care of the elderly, which is highly labour intensive, and fuelled by human capital from the third world. On some explanations, (Blanchard for one) much of the German, French and Japanese productivity spurt in the 1970's and 80's came from a shift out of a low productivity agricultural sector. So the problem for the US is not leaving a sector where it cannot compete in productivity terms, but into which sector will it more? The traditional answer has been technolgy and information. But it is here where a combination of rapidly falling prices and difficilties in establishing and protecting ownership rights, together with a level of uncertainty (and lack of visibility) itself associated with the very pace of change, continues to make things extremely difficult. Hence the question mark.

First of all, I don’t buy the notion that Corporate America is now riding the wave of a vigorous rebound in earnings. Yes, corporate profits are up -- but it’s a modest rebound from a very low base. As measured in the national income accounts, overall economic profits (adjusted for depreciation and inventory accounting distortions) were up 6.7% (y-o-y) in 1Q03; for the nonfinancial corporate subset -- a better gauge of the business earning power that tracks underlying economic activity -- the comparison was +7.5%. Given the earnings carnage that occurred in the most recent recession, these relatively modest gains hardly speak of a restoration of corporate vitality. Maybe that’s coming -- and that might explain why the stock market is so thrilled -- but rest assured it hasn’t happened yet.

But it’s the trends in profit margins that are even more revealing. For the nonfinancial corporate sector, pre-tax profits as a share of business product -- a proxy for profit margins that normalizes for the subpar recovery in output -- rose to 8.7% in 1Q03; while that’s well above the 7.2% low hit in 1Q01, it’s far short of the most recent peak of 12.8% hit in 3Q97 and nearly 1.5 percentage points below the post-1970 average of 10.1%. Moreover, it has taken fully eight quarters for this earnings share to climb only 1.5 percentage points from its low; by contrast, eight quarters after the earnings trough of the previous seven business cycles, this same pretax earnings share for nonfinancial corporations had risen by 2.9 percentage points -- essentially double the gain in the current cycle. In other words, while earnings are finally starting to beat expectations of now overly cautious Wall Street analysts, corporate profitability is lacking in its normal cyclical vigor and has not improved nearly enough to repair the damage that was done in the last recession. As I see it, despite all the talk about operating leverage, there is more hype than substance to the current rebound in earnings.

Moreover, I think the so-called earnings recovery is overblown altogether as a factor determining the business sector’s capex and hiring decisions. Nor can the answer be found in the aggressive corporate balance-sheet restructuring of the past few years. In my view, the real story lies in the persistent lack of pricing leverage and what that tells us about the lingering overhang of excess capacity. Lacking in pricing leverage, businesses would be foolish to exacerbate that problem by adding to supply. The anecdotal evidence remains supportive of this view. In my conversations with US corporate executives, two common themes emerge from the capital spending discussions -- domestic capex remains limited to replacement and capacity expansion is increasingly focused on China. While I’m oversimplifying a bit, this is not too far from the mark of what the aggregate data have shown. The counter to my argument is that this is yesterday’s story -- that since the ratio of capital spending to depreciation is now at a 50-year low, the capacity overhang has finally been worked off. Under those circumstances, and in the context of improved earnings and a reduced cost of capital, the consensus believes that capacity-short businesses are about to change their ways and begin adding to scale.

In today’s increasingly open global economy, it is ludicrous to consider capacity in the narrow domestic sense. The question of business scale -- whether its capital or labor -- now needs to be seen in a much broader context. With globalization come global supply chains and global supply curves. That’s long been true in tradable goods and is now increasingly true in once “non-tradable” services. The Chinas of the world are coming on stream rapidly as manufacturing outsourcing platforms. The same can be said for IT-enabled outsourcing of an increasingly wide range of services from India. As a result, the very concept of capacity is more amorphous than ever.

My advice is to take businesses seriously when they continue to complain about a lack of pricing leverage. The macro inflation data support that verdict all too well: America’s core CPI increased at only a 0.9% average annual rate in the first six months of 2003 -- less than half the 2.0% pace of the preceding six months. This dramatic deceleration was driven equally by goods and services; for “core goods,” deflation deepened to -2.4% in the first half of 2003 (from -1.4% in the second half of 2002), whereas for “core services” inflation slowed to 2.4% over the past six months (from 3.4% in the final six months of 2002). Like it or not, this is symptomatic of an unrelenting and increasingly widespread loss in pricing leverage -- a phenomenon that is consistent with a persistent overhang of excess capacity that will continue to constrain capital spending. And that’s exactly what companies are telling us. The latest CEO survey of the Business Roundtable reveals that only 14% of the nation’s largest 117 companies are planning an increase in capital spending over the next six months -- down from an 18% reading of three months ago.

Lacking in pricing leverage and demand visibility, it should hardly be surprising that Corporate America continues to grimace when asked the most important question of all -- “How’s business?” In today’s climate, cost cutting remains the credo, and capital spending and hiring will continue to be missing in action until that mind-set changes. Try telling that to the stock market, the Fed, or to a bullish forecasting consensus.
Source: Morgan Stanley Global Economic Forum

Friday, July 18, 2003

On the Problems of Population Meltdown

Brad has another interesting post about an economist article on zero population growth here . I posted a comment on Brads blog, but first the opinon of the economist:

Fertility rates across Europe are now so low that the continent's population is likely to drop markedly over the next 50 years. The UN, whose past population predictions have been fairly accurate, predicts that the world's population will increase from just over 6 billion in 2000 to 8.9 billion by 2050. During the same period, however, the population of the 27 countries that should be members of the EU by 2007 is predicted to fall by 6%, from 482m to 454m. For countries with particularly low fertility rates, the decline is dramatic. By 2050 the number of Italians may have fallen from 57.5m in 2000 to around 45m; Spain's population may droop from 40m to 37m. Germany, which currently has a population of around 80m, could find itself with just 25m inhabitants by the end of this century, according to recent projections by Deutsche Bank, which adds: “Even assuming (no doubt unrealistically high) annual immigration of 250,000, Germany's population would decline to about 50m by 2100.”

Combine a shrinking population with rising life expectancy, and the economic and political consequences are alarming. In Europe there are currently 35 people of pensionable age for every 100 people of working age. By 2050, on present demographic trends, there will be 75 pensioners for every 100 workers; in Spain and Italy the ratio of pensioners to workers is projected to be one-to-one.............

But while the EU has a rich, old and shrinking population, countries on the Mediterranean's other side have poor, young, growing ones. The tide of immigrants, legal and illegal, crossing the sea is an obvious reaction. So shouldn't Europe be more liberal about immigration, to redress its population imbalance? An appealing idea. But the OECD calculates that immigration might have to be between five and ten times its current level just to neutralise the economic effects of ageing populations. Even today's inflow is causing political strains, with anti-immigration politicians like France's Jean-Marie Le Pen, Italy's Umberto Bossi and the Netherlands' late Pim Fortuyn popping up all over Europe.

Persuading Europeans to have more children is the obvious alternative answer. Part of the problem may be what Italians call the “partial emancipation” of women, who are free to go out to work but are then still expected to bring up children, look after the grandparents and do the housework. Making family life easier or less expensive might help keep up the population. France, which has some of the most extensive state-funded child care in Europe, also has one of its highest birth rates. Sweden boosted its birth rate in the early 1990s by raising tax benefits for mothers. But the effect of that tailed off after a while. And as well as being costly and unpredictable, policies to encourage childbirth also make some Europeans uneasy, since they are associated with authoritarian government.

So Europe will probably try to muddle through its demographic problem. There will be some pension reform, a bit more immigration, more family-friendly policies, higher taxes, growing fiscal problems for many governments and slower economic growth. With luck the European Union will avoid or postpone a really huge economic crisis. But the political and economic renaissance of Europe that was predicted at the European convention is likely to be stillborn.
Source: The Economist

In the end is it Europe or the Economist which is 'muddling through'? If we are lucky we will 'avoid or postpone a really huge economic crisis'. And if we are not so lucky? What we have is the usual pot pourri of suggestions, but nothing which measures up to the scale of the problem. And all because of the problem of the Jean-Marie Le Pens, and the Umberto Bossi's of this world. Luck isn't in question, the problem is coming.

Now Brad, interestingly enough, raises two interesting points , on which I commented as follows:

Speaking of a paper from "Cutler, Sheiner, Elmendorf, Summers, perhaps a coauthor or two I've forgotten, and perhaps not all those I've named" he suggests that "they concluded that having lots of old non-workers around was about as much of a burden as having lots of young non-workers around (i.e., children)"

Then Brad, I'm afraid they reached a dubious conclusion. The liquidity constraints on the two groups are not the same. Society A, with lots of young non-workers can borrow on the anticipated future earnings of the young non-workers, and invest some of this in education. Society B can only effectively dis-save, or send the educated young out to work in more productive societies to send money back to employ less well educated migrants to care for their ageing parents. As Europe ages my guess is we will see growing out migration of young people towards certain favoured destinations, and probably something then resembling a generalised 'Ermoliev Urn Process' with positive feedback here and negative feedback there. Some winners and some losers, bigtime.

He also asks us:

"Is it correct to say that most people love and are willing to sacrifice more for their children than for their parents?"

I would say no. In fact my research into Bulgarian migrants here in Spain suggests that they are leaving adolescent kids behind to care for parents, and thus sacrificing the young to help the old. It depends on culture more than psychology I feel.

Incidentally my anecdotal observation here in Spain is also that people find it tremendously hard to sacrifice their parents for the interests of their children. I guess its all about kinship systems and family ties. The US, being a society based on long-distance migration, where effectively ties are cut, may well have priviledged the interests of the next generation over the previous one. Come to think of it, this may explain all that consumption and debt you have, and why in Asia people tend to save more. It may not just be about confidence in financial institutions.

Finally I would say that the point from Frans in the earlier post about young Dutch peple migrating to Norway could give us a glimmer of what may be about to happen.

Holiday Time Is Coming

Holiday time is coming, and tomorrow I'm off to the mountains, to sit in the shade and read. Frans is already somewhere down in Italy, but before he drove off into the sunset he found the time to send me this:

In a little more then 5 hours I will start a journey to Italy by car so I must type fast (a little less-considered) not to lose too much sleep.

First I owe you an answer to our question about Bull. The fact I once worked for them does not make a special impression. What struck me once again is the fact that a (huge) loan seem to have been accepted assuming that the (long) existing rules about state-support would not be applied strictly. A phenomenon I see all too often; in companies as well as in governments. (taking the risk that things go unnoticed).

The 8 o'clock tv-news today had an issue you surely would like to hear about: villages form the Norwegian countryside who lose their young to the cities succesfully try to get Dutch immigrants to fill in the gaps. In the Dutch media there are now numerous articles and letters referring to the (economic) meaning of the babyboom, the pension-funds and that kind of stuff. Also in this respect the Netherlands is an interesting country. Before the eurozone was effectuated there were discussions about how the economies and policies of other european countries (especially italy) would threaten "our pensions". Unlike other countries in the Netherlands the bigger part of the income of the aged people does not come from the younger generation but from their own savings.

The largest "owner" of the world was (and probably still is) the pension-fund I pay too: the "ABP". Unfortunately this "institutional fund" had its share of the popping internet-bubble and are cutting now in the pension. The way "my" ABP is doing this is to change to a so-called "middle-wage-system". Until now the payment of the pensions was based on the wage the old man or woman earned in his or her LAST year. Now they change that base to the average of the total career! The older system always has seemed very unfair to me vis-a-vis the people for whom the wages didn't grow very much during their careers. But: what about credits and expectations !!

In the meantime a professor has launched the idea of an active population-policy aiming at 2,1 child for the average woman. He is getting interesting comments. The one I liked most is the notion of reexamining the term "aged". 100 years ago a person of 65 years old was an aged person surely; now he or she is not! When you account for a more realistic view on the concept of aged the western societies are not ageing at all; on the contrary. With regard to the labor-related immigration I read about studies that show that the need for workers can easily be met with by raising the age people stop working with just 2 years.

Frans is right about the studies, this is what most are claiming, and he is right that on some measures we are not ageing at all, but on the first point I doubt the people who write these studies undestand the difference between maintaining the absolute labour force size, and maintaining the dependency ratio. And on the second point, well my views are already pretty well known, we have to examine how our capacities change as we age, and how the more rapid dynamic of techological changes relates to all this. Equally, again as I keep insisting, it is one thing declaring that people should work longer, and another getting the labour market (ie those who seek to employ) to agree to this. At the end of the day, it would be really interesting to see some serious research into all this, so we could discuss things on a more informed basis. Joerg, as ever is contrarian:

You severely underestimate old people. I already pointed out recently that there seems to be a tendency emerging among U.S. seniors to price younger workers out of the market. Let´s look at a historical example first: "Colbert created the first public pension system. In 1673, he put into place a system that would pay sailors to do nothing after they reached a certain age. The plan was intended to combat piracy, because the old sailors often took to that devilry after they could no longer get honest work; it was the only way they could feed their families." (Bill Bonner) I remember that you proposed using a creativity index in a comment on Brad´s website. Actually, entrepreneurial activity is increasingly in evidence among really old people. My father took a job directing work on a stretch of Autobahn when he was close on seventy - his first job with entrepreneurial responsibilities ever. He was not the only West German engineer returning to work in East Germany in his old age. The expected "jobs miracle" for young engineers never materialized. There is a even an organization of "senior experts" - pensioner-managers - who go to developing countries and help jumpstarting new projects there, not to mention their support for fledgling companies at home. Last month I even met a 96-year-old doctor on the tennis court. He wasn´t watching - he was playing.

My riposte, I suppose, would be, the envigourated old-age model should be indentifiable in the productivity numbers, Japan doesn't seem to be too encouraging in that regard, and Germany still remains an unknown entity.

Farewell to Charles Kindleberger

Picking up from Brad , it is sad to note the passing of a wonderful and illuminating economist: Charles Kindelberger. Actually sad may not quite be the right word, since making it through to 92, and remaining active till the end, I feel is an accomplishment in itself. He had a career which seemed to span everything from participating in the writing of the Marshall Plan, to commenting on the dot.com crash of 2000. Indeed Robert Shiller's work on informational cascades (with which my regular readers will know I am recently greatly enamoured) clearly owes an important debt to Kindleberger. So with this I say my farewell to someone who, through his work, will still accompany us for many years to come.

Where's the End-Game?

Unfortunately a lot of this now looks far too predictable. The 'hearts and minds of the people' always was a difficult and nebulous concept. Then there is Maynard's endless point about cultures and differences. The lesson of Vietnam was supposed to have been 'never go in, unless you know how you are going to get out'. Here it's hard to see an end game or an exit strategy. Two years become four, and four become eight. My feeling is that things move so much faster today, that this evolution is unlikely. The exit strategy may need to be on the table much sooner. For one thing there are elections. Next year is already too late to change, and Bush is now clearly a hostage to fortune: to the 'jobless recovery' and to the evolving situation in Iraq. It is hard, however, to see this conflict continuing into the 2008 campaign. At the same time, Iraq is not Somalia. The US cannot just walk away, at least not so easily. Again my feeling is that whether or not you want to see the US in Iraq, the international consequences of failure may be very significant: among other things any US 'failure' in Iraq would likely produce more wars not less, as every would-be dictator decided to try their hand (not to mention the economic consequences which this process is bound to have on what is already a 'difficult' global recovery). Even for the Iraquis the price of failure would be very high. Many of us in my generation protested Vietnam, but at the same time it's difficult not to let the thought pass through your mind: wouldn't Vietnam be better-off today if it were more like S Korea or Taiwan. And wouldn't the Iraquis be better off if Iraq was like Kuwait. But maybe this decision is not in our hands, and is not ours to make. Herein lies the real folly of the US approach. I've said it before and I'll say it again: the biggest internal problem the US has is it's 'natural attitude', the idea that it is everyone else who has a culture, but not the United States. The US is the natural terminus for the rest of the planet. What was it Fukiyama called it.......the end of history?

Comparisons with Vietnam are easy, but still to the point. Obviously the situation is different, both militarily and politically. But the parrallels are still clearly there. And then there is all this flashy social science stuff about non-linearities and path-dependent lock-in. Put more simply there is a point of no return. The day that just one Iraqi too many decides the US cannot win, this situation will have no solution. This change of view may happen because of internal intimidation, cultural nationalism, religious belief, or.......... because you have a friend, a cousin, a brother held unjustly in a US army round-up. In other words here we will see all the 'herding behaviour' that is so typical of financial markets: either towards one side or towards the other, that is what makes this gamble so risky. And the other lesson from Vietnam: that the US military machine is well able to win a conventional, high-tech war like no other in history, but a day to day battle, in the city streets or in the desert, where your enemy chooses the terrain, this is another country.

To some military analysts, the rebuke doled out to a lowly foot soldier by General John Abizaid, the new head of US central command, this week was telling. Centcom's commander felt the need to point out in front of a national audience that saying you would like Donald Rumsfeld, the defence secretary, to resign is not acceptable from a man in uniform. The public reprimand was a window into how concerned the Pentagon is about troop morale, particularly in the increasingly overstretched army. "He would not be disciplining a soldier like that if he didn't feel there was a major problem," said Michael O'Hanlon of the Brookings Institute. "It's remarkable that he felt a need to go after his own soldiers."

It is a problem that is going to get worse before it gets better. Pentagon officials now admit troops should expect to spend a year on deployment - rather than the usual six months - for the foreseeable future. And with nearly half of the US army's 33 active combat divisions deployed in Iraq - and with additional commitments in Afghanistan, Kosovo and Korea - the army has been forced to call up nearly 140,000 reservists, many of whom have been on duty for more than a year. The Pentagon is now considering activating even more troops from National Guard units. "Rumsfeld may have passed the point of no return," one senior administration official said of morale among reservists.

"We have not gone on what I would call a war footing, we are cutting taxes, we are not drafting, we are still relying on a volunteer military. There are going to be some real problems in the future recruiting and everybody knows that." It remains unclear where any relief will come from. Gen Abizaid hinted senior generals may rely on the marines to assist the army - in recent years Marines have been used only as expeditionary forces, doing little peacekeeping work - and said US brigades will gradually be replaced by international troops.

But the Pentagon appears to be having problems recruiting those non-US troops needed to make a dent in the US deployments. Military planners had anticipated three divisions worth of foreign troops, but with the announcement this week out of New Delhi that India will not send its hoped-for 15,000 troops without a new UN resolution, it appears the foreign troops arriving will work exclusively in the southern UK sector or northern operations run by the Poles. "To the extent we're replacing Brits with other Europeans, we're not getting any help for the US," Mr O'Hanlon said, predicting that between 150,000 and 175,000 US troops would have to remain in Iraq for approximately two years. This was the number once suggested by General Eric Shinseki, the recently departed army chief of staff, but dismissed by Pentagon civilians as "wildly off the mark". Mr Rumsfeld has vigorously resisted expanding the army, arguing it was not needed and would drive up costs, but without such relief an overtaxed army could find itself in crisis. Mr O'Hanlon says: "This has the potential to threaten the quality and the basic fabric of the US military more than anything since Vietnam."
Source: Financial Times

Thursday, July 17, 2003

US: Jobs Weakness and Housing Boom

Housing starts are up, and new jobless signings down, but not yet below the 400,000 level. The mystery continues: whither the US economy? One thing is clear housing construction is still playing an important role in the story. Meantime the NBER Business Cycle Dating Committee has finally decided: the recession ended in November 2001. Let's hope that after waiting all this time they actually got it right! Still, I imagine Brad won't be to happy, so much waiting for virtually nothing.

Government data released on Thursday showed housing starts in June jumped to the fastest pace since January, while new weekly claims for jobless benefits fell but were still at high levels. The Commerce Department said housing starts leaped 3.7 percent to a seasonally adjusted 1.803 million annual rate in June as home buyers scurried to take advantage of extremely low mortgage interest rates. The pace was the strongest since January's 1.828 million rate.

"The insistently strong spot in the economy remains bright. There's no weakening there. People are still buying homes and developers building them," said Mark Zandi, chief economist with Economy.com in West Chester, Pennsylvania. But even as the housing starts number boosted hopes the U.S. economy could shift into higher gear in the second half of the year, as many analysts expect, the jobless claims report underscored the lackluster nature of the economy and its 6.4 percent unemployment rate.

The Labor Department (news - web sites) said new claims for unemployment benefits fell more than had been expected, to 412,000 in the week ended July 12 from a revised 441,000 in the prior week. But the report marked the 22nd straight week claims have been above the key 400,000 level. While the decline in jobless claims was welcomed by analysts, they cautioned against taking the report too much to heart. Seasonal shutdowns of auto factories often skew the weekly data in July, making it more difficult to interpret.

"The claims number is from the early July blackout period when the data are not to be trusted," said Sherry Cooper, chief economist at BMO Nesbitt Burns. Although of little comfort to those filing for unemployment benefits, the panel considered the arbiter of U.S. business cycles declared the recession that started in March 2001 lasted only until November 2001. The National Bureau of Economic Research's Business Cycle Dating Committee said the eight-month length of the downturn made it shorter than average.
Source: Yahoo News

On the Perils of 'Repopulation'

Joerg is not happy with me today, yesterday I used an expression which in his country (Germany) is definitely not politically correct. The expression: repopulation.

I cannot even begin to tell you how detrimental the linguistic misstep evident in your latest post is. You even sort of underlined it by declaring you didn´t want "to mince words". Apart from the government, there are only two groups in German society that support expanding immigration: the churches and the trade unions. However, they certainly wouldn't stand for the language you used. That is due to the fact that you employed a phrase that was once very popular among German National Socialists. The Herrenmenschen were very much intent on practicing in the Slavic parts of Europe what you just suggested as a recipe for economic dynamism in Germany and, presumably, elsewhere in Europe: "systematic repopulation". That kind of terminology is probably only o.k. with the fascists in Germany. I don´t think you can count on their support, though. They are still hell-bent on racial purity and Aryan domination.

Now I am glad to have provoked a response, this obviously was my intention. The expression used by the UN is undoubtedly softer: replacement migration . However in the final analysis it boils down to the same thing. So, as I said, why mince words? The point is this: Europe's population is set to decline, and with this decline there will inevitably be a decline in the level of economic activity, and with this a decline in all those institutions and cultural values which Europeans hold dear. In addition we can witness an untold quantity of elderly people living out their last years on extraordinarly reduced pensions, with minimal health cover. We can accept this as a price, if we choose, to protect the integrity of our culture (whatever that might mean). Or we can go down another road, and try to find at least a temporary buffer, and by buffer I mean here immigration. What is not really well understood is that we are going to live the confluence of two phenomena: in the first place a reduction in the working age population, as we age, and in the second place a transition from PAYGO pension schemes to fully funded ones. This means we have to find a solution to the problem of the 'gift' generation, or rather to the problem of the generation which paid for the gift generation, namely the 68 baby boomers. This means we are going to hit a double whammy, and we need at least some makeshift solutions. Here I feel the UN prosal is entirely legitimate and more intelligent and forward looking than the majority of other suggestions currently on the table. Now I go one further and talk of 'repopulation' to try to provoke a response so we can really see what is at issue. Europe's population is not in danger from any 'ethnic cleansing' style process, but from its own internal dynamic. The repopulation is necessary to maintain the economic system from which we all benefit. If we don't like this idea, I think it is at least worth taking the time to ask ourselves why. How much reduction in living standards are we prepared to accept as tolerable to try to maintain something which may always have been a convenient fiction: our national uniqueness? What exactly is it we are trying to preserve? Of course I am using the old language in reverse, for precisely what we are talking about is a de-Aryanisation process. It would be a hard stretch to call this racist, more a pragmatic accommodation to a changing reality. Take your choice.

Steven Roach Does Not agree With Sir Alan

As mentioned in the last post, not everybody shares Alan Greenspans view that a Chinese yuan revaluation is something that has got to happen, well, not yet, anyway.

A persistently weak global economy is now moving into a dangerous place -- the blame game. Temptations are rising to point the finger elsewhere rather than look in the mirror. Such sentiment is nearly unanimous in singling out a new scapegoat: a rapidly growing Chinese economy. I have picked this up in my recent travels to Japan, Europe, Australia, and around the United States. World opinion is becoming increasingly united in putting pressure on China to defuse this threat by revaluing its currency. In my view, that would be a serious mistake. The world has got the China story dead wrong.

The blaming of China goes something like this: With real GDP growth currently hovering near 1.5% in the industrial world, the ongoing vigor of the Chinese economy obviously sticks out -- industrial output up an astonishing 16.9% (y-o-y) in June with exports surging by 32.6%. China is certainly capturing market share in an otherwise sluggish world. The problem is China’s currency peg, goes the common complaint. Tied to the US dollar, it has been given a competitive boost by the greenback’s recent depreciation. And if I’m right and the dollar has a good deal further to go on the downside -- perhaps as much as 20% over the next couple of years -- then most believe that China’s current competitive advantage will become all the more powerful. In this context, the world is nearly unanimous in demanding that China revalue the renminbi in order to relieve a growing source of global tension.

............there is enormous confusion over the character of the so-called Chinese export threat. In my opinion, the world has formed an erroneous impression that newly emerging Chinese companies are capturing global market share with reckless abandon. In fact, nothing could be further from the truth. The real export dynamic in China comes far more from the conscious outsourcing strategies of Western multinationals than from the rapid growth of indigenous Chinese companies. In fact, China’s increasingly powerful export machine has the stamp of America, Europe, and Japan all over it. That’s been true over most of the past decade. Over the 1994 to mid-2003 interval, China’s exports basically tripled from US$121.0 billion to $365.4 billion. It turns out that “foreign-invested enterprises” (FIE) -- Chinese subsidiaries of global multinationals and joint ventures with industrial-world partners -- have accounted for fully 65% of the cumulative increase in total Chinese exports over that period. (Over the most recent 12-month interval, the FIE contribution to China’s 33% export surge was 62%). Not surprisingly, nearly two-thirds of China’s foreign-driven export dynamic since 1994 is traceable to the impact of multinationals alone.

This is hardly an example of China grabbing market share from the rest of the world. Instead, it is more a by-product of the struggle for competitive survival of high-cost producers in the industrial world. Last year, a record US$52.7 billion of foreign direct investment flowed into China, making the country the largest recipient of FDI in the world. This inflow did not occur under coercion -- it was entirely voluntary. A high-cost industrial world has made a conscious decision that it needs a Chinese-based outsourcing platform for its own competitive survival. A revaluation of the RMB would destabilize the very supply chain that has become so integral to new globalized production models. By putting pressure on the Chinese to change their currency regime, the industrial world is working at cross-purposes -- in effect, squandering the fruits of its own efforts. Fear of the so-called China threat completely misses this critical point. The power of the Chinese export machine is more traceable to “us” than it is to “them.”
Source: Morgan Stanley Global Economic Forum

Now Greenspan Joins the Act

Now it's Alan Greenspan's turn to try to put pressure on the Chinese authorities to revalue the yuan. While an upward adjustment is inevitable, and eventually will be desireable, my feeling is similar to that of Stephen Roach: this is not the time, and this is not the solution to the global growth problem. At the same time Andy Xie cogently argues that any such revaluation would only add to internal deflationary pressure, and would do little to change US and global prices.

Alan Greenspan, chairman of the US Federal Reserve, on Wednesday warned that the Chinese authorities could not continue to peg their currency without endangering their domestic economy. The comments, in front of a congressional committee, add to a chorus of concern among policymakers about China's insistence on fixing the renminbi against the dollar. Mr Greenspan suggested that the renminbi would have to be allowed to float, saying the current campaign of intervention to support it was unsustainable. "It has required them to. . . be very heavy purchasers of US dollar-denominated assets," Mr Greenspan said. "At some point they will no longer be able to do that, because it will create an inability of their monetary system to function well."

Asked directly if the authorities should let the renminbi float, Mr Greenspan said: "I think that from an economic point of view, it's going to be increasingly evident that that is what is going to have to happen if the existing cost structures around the world remain as they are. And I think the Chinese are sufficiently sophisticated to understand that."

Inflows of "hot money" into China have recently forced the central bank to buy an average of $600m (£422m) a day to keep the currency steady against the dollar. This pushed China's foreign exchange reserves above $340bn by the end of June from $316bn at the end of March. The surge is viewed by many as evidence of the undervaluation of the currency. Mr Greenspan noted that John Snow, the US Treasury secretary, had already advised the Chinese authorities that they should float their currency.

The Fed chairman's words are part of an increased willingness among American policymakers publicly to discuss floating the renminbi. Though they have generally avoided directly pressing China on the issue - believing that it might be counter-productive - US officials have praised moves towards greater flexibility in the Chinese exchange rate.

Mr Greenspan on Wednesday questioned whether public pressure on the Chinese would actually help move their private discussion along. The US administration is also under pressure from the US business lobby, particularly manufacturing, which says that Asian currency manipulation is costing American jobs. China's trade surplus with the US grew from $28.2bn in 2001 to $43.3bn in 2002.
Source: Financial Times

News From Italy

Francisico has sent me this link about Italy. The central point is that as part of the 2004 'economic relaunch' the government is considering offering to pay 800 euros per newborn child. For those of you who understand some Italian, here it is:

Un premio a chi fa più figli: 800 euro per neonato
Il ministero del Welfare: stesso assegno per tutti, ricchi e poveri. Spunta il reddito di ultima istanza ai meno abbienti
ROMA - Un assegno da ottocento euro per ogni nuovo figlio a tutti, poveri e ricchi, dieci milioni di euro per costruire nuovi asili nido anche nei luoghi di lavoro, nuove regole per agevolare l’ingresso delle donne nel mercato del lavoro, misure che garantiscano l’assistenza, anche economica, ai figli disabili. E ancora: sgravi fiscali alle famiglie, revisione degli assegni di invalidità, nuovo fondo per gli anziani non autosufficienti da finanziare con una nuova tassa, introduzione del Reddito di ultima istanza per sostituire il reddito minimo di inserimento.

Il nuovo piano del governo per il sostegno della famiglia è pronto. Arriverà a settembre - si legge nella seconda parte del Documento di Programmazione economica, quella probabilmente da sottoporre a verifica con i sindacati prima del varo - con un disegno di legge collegato alla Finanziaria del 2004, pronto a scattare all’inizio del prossimo anno. Le risorse per un rilancio classico dell’economia scarseggiano e il governo cerca nuove strade, per mettere in moto nuove leve per la ripresa del Paese.

Varando, innanzitutto, «una decisa politica di sostegno alla natalità». Non solo perché l’Italia «soffre di uno dei più bassi tassi di fecondità in Europa», ma anche perché questa, in fin dei conti, è l’arma migliore con cui combattere in futuro la battaglia previdenziale.

«Il governo intende intervenire prevedendo un assegno "una tantum" non differenziato per fasce di reddito e concesso a tutti per ogni nuovo nato» si legge nella seconda parte del Dpef. «Sarà una cifra di circa 800 euro che aumenterà per il secondo e il terzo figlio» spiega il sottosegretario al Welfare, Grazia Sestini. Che sarà associato, si legge nel testo, «a un intervento di accompagnamento per un periodo determinato, e differenziato per fasce di reddito, con l’obiettivo di rendere meno onerosa l’assunzione di responsabilità da parte delle famiglie di nuova formazione». Queste potranno contare anche sulla promessa di «nuovi alleggerimenti fiscali» con la Finanziaria del 2004.
Source: Corriere della Serra

The Generation Gap: Part III

I can't believe it. After all my trials and tribulations with interviews, I find that my own son had actually beaten me to it. Not only that, he's trying to tell me how to do it. Skeptics of the 'youth premium' be warned! Still, despite my advanced age, I'm doing my best.

By the way that has also been an observation of mine. When i meet and talk to my mates I've noticed that those immigrants whose dads are businessmen (in other words entrepreneurs (which is what all immigrants are in a way)) quite often tend to have a closer relationship with the white community and quite a few (i'm informed) had white girlfriends in their younger days.

The best example of this is my friend neepa. Her dad is pretty bloody loaded (i'm talking millionaires here) and she has mentioned to me a few times that he nearly married an english woman when he was younger (this betrays her underlying emotions about this i feel... the fact she has brought it up a few times especially as she probably thinks her parents would dissaprove of a white boy friend... and don't even mention the idea of a black boy-friend..........

I think this is a success, or probably a class, thing. I mean the guys who step off the boat and can't speak a word of english are less inclined to integrate (cos they can't and these guys end up working in the kitchens of the indian restaurants) whereas those with a bit more nonce about em (the indian delboys so to speak) who can talk the lingo and are probably a bit better educated tend to be the guys who set up their own businesses and make a bit of cash etc. but it is in their interests to mix a bit more and they (i think) are more inclined to do so which is why only a certain type of immigrant tends to marry the locals..Its a personality type in my opinion.

Furthermore, the really educated bunch (like the doctors) who come over never marry english wives (cos usually they are already married to similar professionals) and again i reckon this is a personality type thing. They hold on to their belief (and each other) more as a way of protecting their identity than abandoning it and changing (which is a trait of successful entrepreneurs.... the ability to adapt to the environment and change as neccessary.... in fact this applies to all living creatures and intelligence itself!). Change is of course necessary in every sense!

With regard to the internet cafe, I think if they wanna intergrate the youngsters forget all the other stuff, school should sort that out with time. Homogenise them all thru the same education. I mean they will eat the same infomercials from tv, use the same msn, enjoy the breakdown of their respective religions (oh sorry- did the enlightenment leave out Bulgaria and spain)------ and by the time they are all 25 they will probably realise there is in fact very little that they don't have in common. This may then rub off on their own kids!

BTW the really bitchin part of the interviews is not the interview itself... which is usually fun in my experience, but rather the transcribing. I mean what are you looking to get from these interviews? Are you gonna try to formalise your findings or are they just gonna remain a bunch of in depth thick descriptions with reference to quotes every few lines? I take it these are open/ semi structured interviews in which case you have to just keep your mouth shut or else you are gonna lead the interviewee and their answers are limited in usefulness. Besides you should always be asking yourself how generalisable are my results (for me this is bloody important)... are your findings only going to apply to a small community in the middle of spain?? With any qualitative research (which is what i'm assuming your doing) there is always a toss up between internal and external validities and at the end of the day, being a scientist by nature, i find it difficult to take seriously any research that relies heavily on interviews to provide a meaningful long term solution to anything that is robust and generalisable (and don't take this personally i am talking about my own project here as well, which will probably get published in some form).

BTW I find interviewing the most interesting part as you actually get insight and then can reflect on the stuff you talked about which leads to more theorising. Just remeber the reflexive role of the researcher etc (you know about stuff like the hawthorne effect and the experiments carried out by the general elctric company in the early 20's i think it was?).

BTW, it's clear he's asking me all the right questions, what to do with the findings, thick descriptions or more analytical, the relations between the interviews and the model etc etc. You see, he's been through all this just two months ago. Now I am the one who is learning. Still, my interviews are getting better.

Wednesday, July 16, 2003

Deflation 'Practically Impossible' in Switzerland.............Or Is It?

Another country high on the deflation hit list, this time both the IMF's and mine, is wobbling. Switzerland, according to sources in the Swiss Economics Ministry is again entering recession. We watch, and wait.

Switzerland's economy risks contracting this year as Germany, its largest trading partner, struggles to emerge from a slump and the franc's gains curb exports, an adviser to Economics Minister Joseph Deiss said. Europe's seventh-largest economy may not recover until early next year, said Aymo Brunetti, a ministry economist, in an interview in Bern, the seat of the Swiss government. The government may in early August revise its estimate that the economy won't grow for a second year in 2003, he said. "There are clear risks to the economy -- the situation in Germany is certainly not very positive,'' Brunetti said. "We expect a recovery toward the end of this year but it's very possible it will be delayed by a couple of months.''

The Swiss economy probably stalled in the second quarter after shrinking in the first three months of the year, Swiss National Bank President Jean-Pierre Roth said in June. The central bank has cut interest rates seven times to 0.25 percent since March 2001 to revive the economy and stem the franc's gains. "We would be in a severe recession if the central bank hadn't been so expansive,'' Brunetti said. With exports accounting for almost half of Swiss gross domestic product, growth will hinge on a recovery in Germany, which buys about a fifth of Swiss goods sold abroad, the government has said. The U.S. buys about 11 percent of exports.

The Swiss currency gained 5.9 percent against the dollar in the year's first five months, making exports more expensive for the world's largest economy. Exporters including Swatch Group AG, the biggest watchmaker, and Clariant AG, the world's second- largest specialty chemicals maker, have seen earnings dwindle following the franc's appreciation. A slump in exports was the main reason why the Swiss economy slipped into its second recession in as many years. Companies scaled back production and curbed investment amid concern about the Iraq war and rising unemployment held consumers from spending. With interest rates close to zero, Swiss National Bank policy makers have said they're ready to stem an increase in the franc by buying foreign currencies, such as euros. The bank hasn't used the measure since 1978.

"It's striking that the SNB is clearly indicating that it would combat an increase in the franc -- it's credible because it would be technically possible without any problems,'' Brunetti said. Another increase in the franc would "undoubtedly'' hurt economic growth, he added. The Swiss currency tends to rise in times of political and economic crisis because of Switzerland's perceived stability. The country's government coalition has been unchanged for the past 44 years. The franc surged 5 percent against the euro in the 10 days after the Sept. 11 attacks.

Brunetti also repeated comments by the SNB's Roth that deflation -- declining prices combined with economic stagnation - was "unlikely'' as long as the franc doesn't surge. Deflation is "practically impossible'' as long as the central bank takes measures against it, he said. The economy has also been hurt by a rising jobless rate. Unemployment rose to 3.8 percent in June, adjusted for seasonal changes, following job cuts at companies including UBS AG, Syngenta AG and Swiss International Air Lines Ltd. The unadjusted jobless rate was unchanged at 3.6 percent. Companies will probably cut more jobs in coming months, with the jobless rate expected to further increase towards the end of the year on both "economic and seasonal reasons,'' Brunetti said. He said he expects unemployment to peak in January or February of 2004.
Source: Bloomberg

On the Generation Gap Part II

Or how to follow in the bad footsteps of your father. Perhaps this should be subtitled: Sentimental Education, the difference between being young in Europe and being young in the US. More from my son on his literary-philosophical wanderings. Please bear in mind that this person is supposed to be taking advantage of his precious time studying medicine! (I think the ousider was the first real book I ever read, and this, like many things in my life, was a complete accident. It has always remained one of the most important).

I am enjoying a well earned rest and spending my time lying in the sun or playing footy. I am currently 40 pages into grapes of wrath and enjoying it (so far). the only other steinbeck i've ever read was 'of mice and men' which i thought was great. Following neitzsche's ramblings I've now moved onto a bit of heidegger which is not as interesting but equally taxing. I think i will eventually end up at satre and camus if i follow this road... but saying that, I read 'the outsider' about a year ago and i must confess it is probably the best book i have ever read. ha ha

Italy in Recession?

The latest industrial production figures seem to suggest that Italy could be entering into recession. Certainly the short term outlook doesn't look too promising. Remember Italy is my deflation litmus test. The coutry everyone else has marked on their card as 'out of danger', but which, if the demographic thesis has any life in it, should be among the next to fall. Meanwhile Guilio Tremonti, Italy's finance minister blames everything on disloyal competition from the Chinese.

Italian industrial production plunged 1.6 percent in May, its steepest monthly fall in more than four years and the newest sign that the country, Europe's fourth-biggest economy, could slip into recession. The production of consumer and investment goods led the decline, followed closely by cars and small trucks. Fiat, the struggling carmaker that is Italy's largest private-sector employer, is confronting its worst-ever slump with a plan that calls for more than 12,000 layoffs and the shutting of factories in Italy and abroad.

"The fall in industrial production sets off alarms on many fronts, including in the labor market," said Tito Boeri, an economics professor at Bocconi University in Milan and a founder of a Web site that tracks developments in Italy's economy. The Italian government has had little success in stimulating the economy, and three months ago it cut in half its estimate for growth this year, to 1.1 percent. May industrial production tumbled an adjusted 4.4 percent compared with the level a year ago. The latest numbers put to rest expectations that an 1.8 percent jump in output in April reflected new momentum in the economy.

Most economists now say that the government's growth forecast for this year cannot be reached and will have to be lowered again. That outlook was based on expectations of a strong rebound in the second half of the year; that now seems increasingly remote. The economy shrank 0.1 percent in the first quarter. A recession is defined as two consecutive quarters of negative growth. Italy, like most industrialized economies, has been hurt by a rise in crude oil prices the last year, and one of the few Italian industries to show a rise in production in May was oil refining, according to statistics released by the government's statistics office, Istat.

The drop in industrial production is the latest in a line of problems that have confronted Italy's prime minister, Silvio Berlusconi. He touched off a diplomatic crisis this month when he compared a German member of the European Parliament to a concentration camp guard. And last week, a tourism under secretary made remarks that portrayed German tourists as beer-guzzling boors. The official later resigned. The prime minister has also been busy patching up disagreements among his coalition partners at home.

The European Straightjacket

This row is set to continue all summer, and as far into the future as the eye can see. In fact I don't see where we can find an 'end game' here. Certainly the 3% limit means seems to have become the yardstick rather than the upper limit. It is impossible to know how many states will be over the limit in fiscal 2004, and it is difficult to see the 'usual suspects' coming much below 3% in the foreseeable future. This means that the growth and stability pact must be effectively dead, despite Pedro Solbes' best efforts. It is simply a question of when the doctors (who make their diagnosis with one eye on the politicians, and the other on their reputations, since if the pact is dead, where is plan B?) diagnose the fact. In this I have a certain sympathy for Pedro Solbes who at least (see my demography website page, and see especially the material on the problematic state of the French system) recognises that these financial dynamics are not sustainable, and it is only a qustion of time before this reality dawns on the financial markets and the herding phenomenon takes hold. Of course, in the final analysis his position is also unsustainable, since simply clinging to the liferaft of the stability pact won't work either. Europe needs a bold initiative, courage and foresight. But this is precisely what the rigid EU system of vested local interests via tha nation state politicians (always playing for the short term), the bureaucratic machine in Brussels and the 'closed mindset' a la ECB simply can't deliver. What Europe needs is a bold gamble, what in Spanish we call una huida por delante (a flight - 'fleeing' - forward) on the fiscal front, backed by real instituational and minset changes, a new sense of solidarity and sacrifice by one state for another (not leaving Germany, for example, to do all the heavy lifting), and a welcoming process for some systematic re-population (let's not mince words, and call something by its real name). But since Europe's politicians seem congenitally incapable of grasping this nettle, it is hard to be optimistic these days. (Incidentally, I don't want to brag or anything, but since both Brad and Paul understandably like to sentimentally recall their 'good calls', and since now it seems that virtually every garden variety politician is talking about the euro and stability pact 'straightjacket', I would just like you to consider for a moment where you might have seen this expression first. Don't worry, if my theories are anything like on target, this won't be the last time you read about it first in Bonobo Land. And they like to say we bloggers are a bunch of inept 'amateurs'. Amateurs, I don't know, but aficcionados, certainly. (As you will have noticed, blog critics certainly are right about the spelling mistakes).

The club of European finance ministers which sets policy for the single currency was in disarray following an acrimonious dispute on Tuesday over France's rising budget deficit. Small member states, which have battled to stick to the EU's budget rules, finally lost their temper with France, which is threatening to break them for the third successive year.

The code of secrecy which surrounds meetings of the 12 member "eurogroup" of finance ministers was broken by Austria's Karl-Heinz Grasser, who revealed that France had admitted it expected to break the rules in 2004. France retaliated by accusing Mr Grasser of trying to "kill" the eurogroup, by revealing the private dinner table discussion in Brussels.

Mr Grasser's indiscretion is a symptom of rising tensions within the 12-member single currency zone, with some claiming that big countries such as France and Germany are flouting the EU's stability and growth pact with impunity. Mr Grasser said Francis Mer, French finance minister, warned on Monday night that his 2004 budget was likely to break the stability pact's deficit ceiling of 3 per cent of gross domestic product.

Mr Grasser said: "He [Mer] said that from his point of view in 2004 [the French deficit] would clearly not be below 3 per cent. "If France were to go over 3 per cent for a third year, then sanctions must be the consequence." Charlie McCreevy, Irish finance minister, called on France and other countries to stick to the rules. "We have gone through hell and high water to agree with the stability pact," he said. Gerrit Zalm, Dutch finance minister, accused Jacques Chirac, French president, of trying to "storm the stability pact" when he called on Monday - Bastille Day - for the pact to be softened.

A French government spokesman refused to comment on Mr Mer's comments, but reacted furiously to the Austrian finance minister's words. "Mr Grasser can make whatever comments he wants, especially if he wants to kill the eurogroup." The dispute is one of the most serious to hit the eurogroup, which holds private talks without notetakers on sensitive issues of fiscal and monetary policy.

It also raises the prospect of some euro members demanding that the European Commission take punitive action against France and Germany if it becomes clear that their 2004 budgets will breach the stability pact. The controversy over the pact is set to be reignited on Wednesday when a group of experts set up by Romano Prodi, commission president, will call for further changes to its rules.

The group, set up by Mr Prodi a year ago, addresses one of the core aspects of the pact. The experts write that "the conditions under which the 3 per cent deficit threshold can be breached should be modified" - an idea that could affect the centrepiece of the pact itself. On Tuesday, Mr Prodi's spokesman said that the group was independent and did not reflect the views of the commission itself, but it includes two of Mr Prodi's key advisers. John Snow, US treasury secretary, meanwhile praised Mr Chirac for sparking debate on the stability pact. He said: "It's a mistake for economies to put themselves in straitjackets. Whether [the stability pact is a straitjacket] I do not know, but to raise the issue is very appropriate."


Down and out in........Enguera

Continuing with my 'slow-crawl' blogging. Today I am, guess where?

In the computer room of the school. The computer teacher is guess what?

Bulgarian, and she lets me use the computers as I want. As I indicated yesterday the internet cafe here is also run by a Bulgarian - although there I have to pay. The cafe boss is a very intelligent and very nice boy (even if he does have some strange ideas!!), an autodidact, he learnt about computers when he did the military service. He understands something about complexity and self-organisg processes. Wow. The cyber cafe seems to form a focal centre for the Bulgarian community, and it is posssibly the only place where Spanish and Bulgarian youngsters are truly integrated.

The owner is one of the 'wise men' of the community, and many of the others come to the cafe to try to get their problems solved. However, even he needed his Spanish girlfriend as a 'front' to start the business, since the residence permit system makes it difficult to establish a business before you have been here a considerable number of years. He is one of the few Bulgarians I have met to have established a 'couple' with a Spanish girl.(Now I think of it the Lithuanian who had the locutorio in Barcelona was also married to a Spanish woman: interesting theme, intermarriage and entrepreneurship). Curiously enough people from Lithuania and Poland seem to take Spanish wives more frequently (although the small Lithuanian community, in an even more obscure village up-river a bit, are alleged - possibly Bularian gossip this - to have wives back home). Maybe they inter-marry more because their communities are smaller, and also, possibly, as a means to obtain citizenship. But I would not say the cyber cafe boy was particularly integrated, rather his girlfriend has gone 'native' and assimilated with the Bulgarians.

One of the big topics which is emerging is that of 'family' and 'friendship', and it is clear that these terms have a very different meaning in the two cultures, and this itself makes inter-marriage difficult. Most Bulgarians say that they find it difficult to make Spanish 'friends', since they say that they feel friendship in Spain revolves around what they call interests, by which they tend to mean family and work. The Bulgarians seem to have another idea of social life and friendship.

I arrived at the school furious with the local Spaniards, since I have just come from having a coffee in a bar. This bar is an interesting place since it constitutes what Margy calls a slave market. It is a place where Bulgarian day labourers go to wait for a 'boss' to pass-by and offer work. They sit round drinking beer or coffee, and you can imagine the prices paid are not exactly the same as those paid by the locals. Well you have to remember that I too am a foreigner here, and they notice it straight away. So when I came to pay, I of course got the 'expensive' price - 1.20 euros sitting at the bar, in a small village in the middle of nowhere. For comparison the price is about 1 euro in a normal bar in Barcelona. Now this is not a lot of money but it's the principle I don't like. And the look from the barman. I don't like this kind of treatment. But this has been happening to me for ten years now - not the money part, although I have got in the habit of always checking my change - but the 'frialdad' (coldness) in the attitude towards ousiders - I don't like it. I don't get this treatment in say France or Germany, or in the villages of Catalonia. I see these kind of 'closed' attitudes as a great obstacle to the creation of a diverse, multi-cultural society here in Spain.

Anyway just to show you can't generalise, I came to the scool looking for my Bulgarian friend, to find she hadn't arrived yet (maybe this is one thing Bulgarians share with Spanish people!) and went to talk to the cook in the kitchen. (One day I will write a post about how I seem to get on better in life with the caretakers, cleaners and kitchen staff of this world.....) Lolli. A lovely, kind, generous woman. She immediately offered me an enormous breaskfast and all the coffee I wanted. Free, of course. So it just goes to show how difficult it is to talk about the 'typical' Spanish person, or the typical Bulgarian (or the typical British person, which I most certainly am not!).

A dying Breed?

Margy is in melancholic mood today. She is reading the local newspapers and she doesn't care much for what she sees.

"No one goes on in this household
We are a dying Breed"

These days I often listen to this song from Lonesome Bob - a famous country singer in the USA. Probably because the Bulgarian media keep telling us:

In 2002 in Bulgaria there were 67,038 children born. As a comparison, in 1990, there were 105,180 new born kids. Infant mortality in 2002 was 887 (13.3 per 1 000). Death rates for 2002 - 112,617 (14.3 per 1000). In the year 2002 we have lost 43 000 people because of emigration (official figures, the reality is certainly a lot more). The id coeficient of natural population growth is therfore minus 5.8. Life expectance is 71.87. 2002 is the worse year in our modern history they say. You can find the official data here , in Bulgarian of course!

So, I just keep listening to Lonesome Bob.

Tuesday, July 15, 2003

Well, for my content starved readers, here's a piece from Andy Xie that should give plenty of food for thought.

Shanghai is China’s dream factory. Everyday, one can observe some progress in its march towards becoming a modern metropolis. Like Chicago in the 1920s or Hong Kong in the 1990s, its skyline is constantly changing. The Shanghai government recently announced that the city’s GDP grew by 10% in the first half of 2003 from last year, despite SARS, and that its per capita income (US$4,020 last year) has just surpassed Shenzhen’s, making it the richest city in China.

The throughput at its ports reached 5.2 million 20-foot equivalent units (TEU) in 1H03, almost surpassing the third-busiest port in the world, Busan, Korea. Over the weekend, the city commenced the construction of the world’s largest deepwater port at Little Yangshan Islands, which could reach capacity of 20 million TEU by 2020. The first phase of construction is scheduled to cost Rmb 14.3 billion (or US$1.73 billion), which involves the construction of a 31-km long bridge.

On the other hand, there are signs of rampant speculation and over-speculation. The city will likely complete over 20 million square meters of property development this year. The increase in property sales was equal to 34% of the increase in GDP between 1999 and 2002. The price for mass residential property has about doubled during the same period. I calculate that rental yields have declined from 8% to 4% in the past three years, due to a combination of price increases and rent declines.

I was wandering around Shanghai over the weekend, pondering the ‘bubble or miracle’ question. The former is a leverage-cum-capital inflow story. The latter is about productivity. There is clearly a huge leverage story in Shanghai. Loans extended by financial institutions grew by Rmb 355.3 billion or 2.6 times the GDP increase between 1999 and 2002. The same for China as a whole was 1.6 times. If we apply domestic credit as a better indicator of national leverage, the ratio was 2.7 times. Thus, Shanghai is at least as debt-driven as the country as a whole.

There is, however, an even greater capital inflow story. Deposits at Shanghai’s financial institutions increased by Rmb 555.6 billion or 1.5 times the loan increase during the same period. A dramatic decline in the loan/deposit ratio would cause sharp economic deterioration, unless the rise in deposits is due to capital inflows. This has been clearly the case. Shanghai’s surplus liquidity has been an important source of investment funds for the rest of the country. This is why Shanghai’s attractiveness to the international community is vital to China as a whole.

Foreign direct investment (FDI) into the Shanghai area has been impressive, increasing from US$3 billion in 1999 to US$5 billion in 2002. However, the increase cannot explain the extremely strong liquidity in Shanghai. Its surplus liquidity totaled US$25 billion during this period. Other types of capital must have been bigger than FDI. Property purchases by non-residents have been the main source of liquidity inflow, in my view.

Property sales in Shanghai reached Rmb 81 billion last year (or US$9.8 billion), equivalent to 15% of GDP, and could reach 16% of GDP this year. As land or resettlement costs exceed construction costs, property sales enrich both the Shanghai government and its residents. Non-resident buyers have been the dominant force in the luxury segment. I would not be surprised if one-third of the property sales are to non-residents. The property sector is, therefore, vital to Shanghai’s finances and its growth.

Thus, Shanghai’s liquidity boom depends on capital inflow. It looks quite similar to Hong Kong’s macro picture ten years ago. The obvious questions are: Who is pouring money into Shanghai? Do they have the capacity to sustain this investment? When will their objectives be met? And would this lead to declining capital inflows?

Purchases by non-residents are mostly for speculation, in my view. Taiwanese investors form the biggest group. We often observe that Taiwanese property investors in Shanghai flip flats to each other at rising prices. There are several reasons for the influx of Taiwanese money into Shanghai. The most important is the political instability in Taiwan -- it is no coincidence that Taiwanese money has poured into Shanghai since 2000.

The emergence of the Yangtze River Delta as a cheaper export base than the Pearl River Delta is the second reason. Taiwan’s electronics manufacturing services (EMS) companies have moved into the region on a massive scale in the last three years. Their staffs have settled in the region and found Shanghai a potential home. According to reports, half a million Taiwanese have settled in Shanghai.

Entrepreneurs from Zhejiang province have been the second source of demand for Shanghai’s properties. Many are speculators, in my view. They have also made their money from exports. Indeed, they have been targeting their Taiwanese competitors for market share. A Taiwanese businessman in the region complained to me over the weekend: “Zhejiang people cut prices like mad”. The Yangtze River Delta’s exports doubled to US$102 billion between 1999 and 2002 and increased by 45% YoY in the first five months of this year. The fruits of this export success have flowed into Shanghai’s property market, enriching its government and people beyond what they could earn in terms of productivity gains.
As capital inflows drive the city’s property market, property prices have become disconnected to income levels among the local population. I did a survey of eight taxi drivers in the city over the weekend and found their income was one dollar per hour with virtually no variance. A taxi driver usually works 60 hours per week, and his income is considered above average. A university graduate can expect 50-100% more per hour. A senior executive may make US$500 per month. The average selling price for mass market property is between US$500-600 per square meter. Thus, it appears that an overwhelming majority of people in Shanghai cannot afford property at today’s prices.

Shanghai’s per capita income numbers, however, suggest a higher income. Yet per capita income is misleading. Government revenue was 40.7% of GDP, of which about 70% went to the central government. Foreign businesses are probably taking a bite out of the city through income remittance. The money left for the local population is probably less than half of GDP. Shanghai thus is likely much poorer than what its GDP figures suggest.

The huge demand from local residents currently comes from people who have received resettlement payments that become their equity in purchasing a new property. A resettlement payment comes from a Taiwanese investor or Zhejiang entrepreneur who pays three times the mass market rate. The property game in Shanghai thus depends on other people’s money.

I am not suggesting that Shanghai is just a property bubble. There is clearly a productivity story. The urban design and management are among the best in the world, reflecting the high quality of local talent. An increasing number of multinational companies are choosing Shanghai as their headquarters in China. Shanghai’s physical infrastructure is playing the same role for the Yangtze River Delta as Hong Kong did for the Pearl River Delta a decade ago.

However, productivity gains in China do not necessarily translate into financial gains. Excessive competition always transforms productivity gains into lower prices that benefit consumers. Investment, hence, depends on borrowing money from savers who can cut their consumption cost and save more. The alternative is to attract capital inflows.

I heard Shanghai taxi drivers complaining that their competitors from Chongming -- an island at the mouth of the Yangtze River -- were accepting lower wages. We are not even talking about the hundreds of millions of people in Hunan, Sichuan or other poor provinces who have very little. Why shouldn’t they compete for the jobs in Shanghai, either through migration or the hollowing out of Shanghai’s manufacturing activity?

The absence of quantity constraints is another reason why GDP growth has not translated into property price rises. It seems difficult to believe, but Shanghai’s property prices today are at the same levels they were ten years ago. Of course, there was a substantial fall somewhere along the way. In Hong Kong, property prices rose faster than per capita income, because the government did not make land supply sensitive to price. Local government officials in China are judged by the physical progress in the areas under their control. When property prices rise, I believe it is a safe bet that they would increase land supply to mark out their accomplishments.

The logic for buying Shanghai property is that it is much cheaper than in other major metropolitan cities like London or New York. Property prices ultimately depend on the purchasing power of local people. As China’s wages tend to rise at a slower pace than GDP, it would be a long wait to achieve price convergence. The only way out in the meantime is to flip to another foreign investor.

For example, Hong Kong financial sector employees have bought up old houses that were built by western communities in the 1920-30s. They have managed to create a bubble entirely independent of others by flipping these properties to each other. “The same stuff costs four times as much in Chelsea” is the rallying cry for the charge into Shanghai’s rundown old houses.

I walked by just such a property over the weekend. It was under massive renovation. I estimated that someone had paid more than US$1 million for the place and was putting another half million dollars into renovating it. Right next door, a middle-aged man was selling watermelon out of a similar house. He probably makes one dollar per hour. Yes, I believe eventually there will be price convergence between London and Shanghai, but only after the original occupants of these houses have moved on.

I believe that Shanghai’s relative property value is less attractive now. It is always dangerous to compare properties in different cities, although as a native of Shanghai and a long-time resident of Hong Kong, I will make an attempt. Ceteris paribus, Hong Kong property was 20 times Shanghai’s in terms of price in the summer of 1997, but is now three times. But Hong Kong’s per capita wealth is more than ten times Shanghai’s. Yes, Shanghai is growing faster -- but how long will it take for Shanghai to close this wealth gap?
Source: Morgan Stanley Global Economic Forum

Greenspan Sees No Bottom Limit to the Fed Funds Rate

Correcting a lot of the recent interpretation about how low Big Al was prepared to go, the man himself has now made it clear: there is no bottom limit above zero. Meantime the recent news is definitely on the optimistic side. Let's just all hope they're right.

Federal Reserve Chairman Alan Greenspan said on Tuesday there is no level of the federal funds rate below which the Fed would not cut interest rates further, even though there may be an impact on some financial institutions. "I don't see that there is a downside to what we can do conventionally," Greenspan told the House of Representatives Financial Services Committee in response to a question. "I don't envisage that will be necessary but to presume that there's a certain level that's often been stated, say 75 basis points, that that's as low as we can go -- I think that is mistaken. I think we have far more flexibility than is implied in that question," he said. The Federal Reserve cut interest rates to a 45-year low of 1.0 percent last month, and many in financial markets speculated it would be reluctant to cut rates much further.
Source: Forbes