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Mike Holt is a Senior VP, Wealth Management Strategist with The MDE Group, an innovative Wealth Management Firm located in Morristown, NJ that manages over $1 billion for corporate executives and other high net worth individuals located across the US. Mike's diverse background includes auditing... More
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  • Epilogue to TREM '11 -- Global Macro Risks that Jeopardize Investors in Rare Earth Mining Companies 51 comments
    Sep 9, 2011 8:43 PM
    The purpose of this article is to research and compile information related to the topic of global macro risks that jeopardize investors in rare earth mining companies and the development of rare earth mining companies outside China.
    It was inspired by the memory of Thomas Jefferson’s reason and imagination, and by the main reading room of the Library of Congress, pictured below.

    LOC Main Reading Room
    The LOC Main Reading Room is encircled by bronze portrait statues paying tribute to great thinkers on various topics. Let’s call them the smartest guys in the room, who were very influential in their fields. This article is intended to serve as a virtual reading room that likewise seeks inspiration from great thinkers, but rather than relying upon statues with plaques known as pendentives, this virtual reading room will draw upon the knowledge of credible experts in fields related to the topic of this article.
    Comments posted to this article should therefore include links or references to primary sources of information, and the comments themselves should consist only of brief descriptions of the source material or its author accompanied by a key quote or passage capturing the essence of the main point(s) deemed to be of greatest interest or importance. If it is believed that personal knowledge or interpretations might be helpful, they should be clearly identified as being your own thoughts or opinions, so that the integrity of information compiled in this virtual reading room is preserved to the greatest extent possible.
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  • Mike Holt
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    Author’s reply » A market is said to be in equilibrium when the quantity supplied is equal to the quantity demanded. Theoretically, there is just one price at which this is possible, and this equilibrium price is the price that will result in a perfectly competitive market that is not subject to government intervention.


    Market distortions contributed to the development of China's monopoly over rare earths, a form of market disequilibrium. However, this is not a phenomenon unique to the rare earths industry. In fact, market distortions have become so rampant that market disequilibriums on a global scale are now considered to be the norm. These market disequilibriums at the global macro level pose top down risks to investors in rare earth mining companies that can often be at least as important as the bottom-up fundamental risks unique to the individual companies in which investors are interested.


    For the sake of clarity, I am going to divide comments under this article regarding these global macro risks into the following broad categories:


    Economic Growth and the Economics of Development




    The Role of Government in the Economy


    Financial Systems and Financial Institutions


    Debt / Deleveraging
    12 Sep 2011, 10:54 PM Reply Like
  • Mike Holt
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    Author’s reply » Economic Growth and the Economics of Development
    12 Sep 2011, 10:59 PM Reply Like
  • Mike Holt
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    Author’s reply » Most business students took two economics courses during their undergraduate studies: Econ 101 - Macroeconomics and Econ 201 - Microeconomics. The challenges confronting us today seem to fall within the purview of Econ 101 - Macroeconomics, so we think our education has given us a sufficient foundation to understand the global macro risks that are playing an increasingly important role in our investment decision making.


    However, that may not necessarily be the case. Unless economics was your major course of study, or as a business student your Macroeconomics course delved into the issues of economic growth and economic development (this may seem like nothing more than semantics, but among economists, there are important distinctions between these two terms), you are likely to be less prepared than you think to:


    • fully appreciate the fundamental drivers and impediments to economic growth (so important to the denominator in the debt/GDP ratios that are being bandied about lately); and/or


    • the principles embodied by that specialized area of economics known as economic development which may help to guide policymakers in their efforts to better manage “the economy” which can sometimes result in unintended consequences for the economy(ies) that they are trying to manage and/or other economies for which they didn’t feel responsible


    To illustrate the importance of these issues, stop for a moment to consider the fundamental premise that I have used to introduce the comments in this article:


    A market is said to be in equilibrium when the quantity supplied is equal to the quantity demanded. Theoretically, there is just one price at which this is possible, and this equilibrium price is the price that will result in a perfectly competitive market that is not subject to government intervention.


    The world in which we live today is characterized by interventionist policies, and more and bigger market interventions are considered by many to be the solution to the resulting market disequilibriums. So, how do we prepare ourselves for these new market realities?


    There is a tendency to emphasize quantitative methods in our higher education curriculums, with insufficient regard being given to what many on the sidelines might call common sense. That doesn’t mean that quantitative methods are not valuable; I’m sure there are tremendous benefits to be derived from the fact that we live in an era that facilitates quantitative methods not previously possible due to their computational complexity. However, we can’t lose sight of qualitative methods of analysis, and I believe that the study of history is one important means of developing the perspective needed to hone our ability to implement such qualitative methods.


    So, in the comments to follow, I will draw upon the thoughts of credible experts in the fields of:


    • economic growth; and
    • economic development
    14 Sep 2011, 02:39 PM Reply Like
  • Mike Holt
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    Author’s reply » The University of Iowa publishes a number of e-books. This excerpt titled "How the Concept of Development Got Started" from Part One of an e-book titled Part One: Pursuing The Good Life: The Meaning of Development As It Relates To The World Bank and The International Monetary Fund [IMF] should serve as a valuable introduction to both the concept of economic development, and a brief history of its application:


    14 Sep 2011, 02:47 PM Reply Like
  • Mike Holt
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    Author’s reply » In the current environment characterized by a global economy that is increasingly driven by policy, the insight shared by Stratfor Global Intelligence can be extremely valuable. In addition to so many other fields, they understand the fundamental factors that can promote or impede economic growth and the resulting implications.


    For example, in a recent alert that I received as a subscriber, Stratfor analysts explain that one of the alternatives being presented to resolve the Eurozone debt/banking crisis is for Greece to effectively become more like Germany. However, this is more than simply a social/political/behav... issue. The success of the German economy is partially attributable to geographic factors such as its rivers that connect large, flat land masses that are conducive to the achievement of economies of scale in many important fields. Greece, on the other hand, is a much smaller country characterized by mostly mountainous territories and hundreds of islands. Their population is widely distributed among many small valleys which are not as conducive to the achievement of the same economies of scale that have been so favorable to Germany's economy. This is the focus of those who are familiar with "Economic Growth."


    Government policy decisions that don't take into consideration important distinctions such as this can lead to bad policy decisions, which in turn can lead to bad outcomes for uninformed investors.
    14 Sep 2011, 03:32 PM Reply Like
  • Mike Holt
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    Author’s reply » Even within economic circles, the definitions of economic growth and economic development can sometimes be relatively amorphous. However, I believe these concepts can most accurately be defined as follows:


    Economic Growth – an increase in some measure of the economy such as GNP or per capita income.


    Economic Development – progressive changes in the structure of the activities comprising an economy.


    So, whereas economic growth merely refers to a rise in output, development implies changes in technological and institutional organization of production as well as in the distributive pattern of income.


    Possibly because advanced economies are generally considered to be fully developed, economic growth is typically associated with developed countries, and economic development is typically associated with developing countries. As a result, I believe that economic growth has become a much more abstract concept in developed countries, and that efforts to remain competitive in a global environment in which developing countries now comprise over 50% of the global economy would be enhanced if we were to remind ourselves of the fundamental factors that contribute to the development of an economy. The latter requires much more of a strategic focus, rather than simply relying upon an arbitrary range of tools and techniques to achieve short-term “gains” in measures of economic output such as quarterly profits or increases in consumer spending which may not be the best indicators of the long-term health of an economy – or the best levers to be pulling when attempting to improve upon the long-term health of an economy.


    I will share more information later on the factors that promote or impede economic development and the processes that may be employed to optimize the use of resources within various natural and unnatural constraints in order to maintain desired socio-economic goals in an increasingly competitive and resource-constrained world. But, in the meantime, it may be helpful to simply consider the outcome of a game in which one team has its eyes primarily on the field, and the other has its eyes primarily on the scoreboard. Guess which approach leads to better results?
    15 Sep 2011, 12:47 PM Reply Like
  • Mike Holt
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    Author’s reply » For a comprehensive overview of the topic "Economic Development," including links to additional papers, articles, etc. Written by credible experts in various related fields, this link to the Saylor.org website featuring free educational materials on this topic (which they refer to as "Econ 304") is a treasure trove;




    This may seem a bit daunting, but I would argue that acquiring a familiarity with these topics is far less daunting than developing the basic familiarity with our income tax laws that all of us (including the Secretary of the Treasury himself) must have if we are to remain compliant with that myriad of statutory law, regulations, rulings, interpretations, case law, etc. -- and could lead to far more productive outcomes.
    17 Sep 2011, 08:18 AM Reply Like
  • Mike Holt
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    Author’s reply » I hope you enjoyed Ricardo Conteras’ paper summarizing the economic development of Western European society, and in the process tracing the evolution of capitalism and its impact on society. He covered many centuries in those 16 pages, so as interesting as it was to see concepts develop and patterns to emerge, it requires the reader to digest a lot of information that, in turn, can obscure the “big picture” that he is trying to communicate.


    As such, I think it would be helpful to draw your attention to a very important pattern that may or may not have come to your attention, and that is the impact that individual pursuits of liberty, justice and happiness have had on economic development. For example, in his paper, Ricardo Conteras writes:


    Exactly what fueled the transition from feudalism to capitalism in its early stages is an issue that is hotly debated. We will probably never know. What is known, however, is that government played a very marginal role in the process. The movement was a local one driven by ambitious men. Some were in search of fame, others sought prestige. But most of all, individuals were in search of personal financial gain. Development, or “progress,” as the early bourgeoisie called it, was synonymous with the improvement of an individual’s lot in society.”


    This yearning is not unique to Western European society. After being stifled by experiments by various governments around the world during the 20th century, the raw power of each individual’s pursuit of personal financial gain was unleashed around the world in a decades long trend known as globalization, which developed after the period covered by Ricardo Conteras’ paper. For example, I recall stopping to talk to a rural Chinese peasant along a roadside during a visit to China in 1987. I and others on the tour bus on which we were travelling asked him for his feedback on Capitalism vs. Communism. This may seem like a silly question to be asking a Chinese peasant, but his answer was profound: he preferred Capitalism, because with Communism, “it was always the same bowl of rice.” As you know, when the Chinese Communist Party allowed peasants to profit individually from sales of their farm production in excess of the quotas required by the state, productivity soared and Deng Xiaoping realized that he had stumbled upon an idea that could lead to something very big.


    This same idea is at the heart of a field of economics known as the Austrian school of economics, which is not mentioned in Ricardo Conteras’ paper, I think because his paper was intended to emphasize those theories and developments that led to the creation of the International Monetary Fund and the World Bank. It may be worthwhile discussing those when I later focus greater attention to the role of government in the economy, but for now, let’s just explore some basic features of the Austrian School of Economics, even though it is classified by many economists as a heterodox (“dissident, heretical”) school of thought. Bear in mind, however, that close to 50% of economists are employed by the Federal Reserve.


    Background information on the Austrian School of Economics can be obtained from a number of sources simply by conducting a google search for “Austrian School,” but for the sake of simplicity, here are some excerpts from the Wikipedia website.
    * * *


    According to Austrian School economist Joseph Salerno, what most distinctly sets the Austrian school apart from neoclassical economics is the Austrian Business Cycle Theory:[26] In contrast to most mainstream theories on business cycles, Austrian School economists focus on the credit cycle as the primary cause of most business cycles. Austrian economists assert that inherently damaging and ineffective central bank policies are the predominant cause of most business cycles, as they tend to set "artificial" interest rates too low for too long, resulting in excessive credit creation, speculative "bubbles" and "artificially" low savings.[32]


    According to the Austrian School business cycle theory, the business cycle unfolds in the following way: Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable "credit-fuelled boom" during which the "artificially stimulated" borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable. Austrian School economists argue that a correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when credit creation cannot be sustained. They claim that the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back toward more efficient uses.


    Friedrich Hayek was one of the few economists who gave warning of a major economic crisis before the great crash of 1929.[33][34 In February 1929, Hayek warned that a coming financial crisis was an unavoidable consequence of reckless monetary expansion.[35] Economist Steve H. Hanke identifies the 2007-2010 Global Financial Crises as the direct outcome of the Federal Reserve Bank's interest rate policies as is predicted by Austrian school economic theory.[36] Some analysts such as Jerry Tempelman have also argued that the predictive and explanatory power of ABCT in relation to the Global Financial Crisis has reaffirmed its status and, perhaps, cast into question the utility of mainstream theories and critiques.[37]


    * * *
    Now, let me ask you, does this sound like blasphemy, or just plain old common sense that has made itself as evident than ever, and over the past decade in particular?
    18 Sep 2011, 12:30 PM Reply Like
  • Mike Holt
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    Author’s reply » The following passages excerpted from the book, “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts will Make Things Worse” authored by Thomas E. woods Jr., further describe Austrian Business Cycle Theory [“ABCT”]. This topic has been covered in much earlier works, but I found this book to be of particular interest because it applies ABCT to recent market events.


    * * * * *
    “We take it for granted as a fact of economic life; plush times inevitably give way to lean times, and back and forth in an endless cycle. Just as the moon waxes and wanes, and the tides ebb and flow, the economy goes through booms and busts.


    But is this really so inevitable? Is the market economy really prone to such sudden and inexplicable episodes of massive business error, or could something outside the market be causing it? This is not just an academic question. The American people, currently suffering as a falling tide lowers all boats, need and deserve the answer.


    As politicians and our media drones talk about what to do next, they promise us ways to prevent another meltdown like the one we’re suffering through now. If they’re going to come close to succeeding, they need to understand the causes of the business cycle. What causes these violent swings?


    If politicians are thorough and honest in seeking out a culprit, they aren’t going to be pleased with what they find at the end of the trail of crumbs. It’s not “capitalism.” It’s not “greed.” It’s not “deregulation.” It’s an institution created by government itself.


    No one is surprised when a business has to close its doors. Businesses come and go all the time. Entrepeneurs are not infallible, and they sometimes make poor forecasts of consumer demand. They may have miscalculated their costs of production, failed to anticipate the pattern of consumer tastes, underestimated the resources necessary to comply with ever-changing government regulation, or made any number of other errors. Business failure is the inevitable consequence of our inability to know the future with certainty.


    But when a great many businesses, all at once, suffer losses or have to close, that should surprise us. Losses suffered in a single business are one thing. Again, no one has perfect foresight. But why should so many businessmen make errors all at once? The market gradually weeds out business owners who do a poor job as stewards of capital and forecasters of consumer demand by punishing them with losses and, if their inefficiency persists, driving them out of business altogether. So why should businessmen, even those well established and who have passed the market test year after year, suddenly all make the same kind of error?


    One clue lies in the historical fact that busts are especially severe in capital-goods industries—e.g., raw materials, construction, capital equipment, and the like—and relatively mild in the consumer goods sector: pencils, hats, picture frames. Put another way, things consumers actually buy don’t suffer from busts as much as do things produced in the higher-order stages of production, farther removed from finished consumer goods. Why should this be?


    The economist F. A. Hayek won the Nobel Prize in economics in 1974 for a theory of the business cycle that holds great explanatory power—especially in light of the 2008 financial crisis, which so many economists have been at a loss to explain. Hayek’s work, which builds on a theory developed by economist Ludwig von Mises, finds the root of the boom-bust cycle in the central bank. In our cases that’s the Federal Reserve System, the very institution that postures as the protector of the economy and the source of relief from business cycles.


    …the Fed, which opened its doors in 1914 after passage of the Federal Reserve Act of 1913, can expand and contract the supply of money in the economy, and can influence the movement of interest rates upward or downward.


    Looking at the money supply makes sense when looking for the root of an economy-wide problem. After all, money is the one things present in all corners of the market, as Lionel Robbins pointed out in his 1934 book The Great Depression. “Is it not probable,” he asked, “that disturbances affecting many lines of industry at once will be found to have monetary causes?


    In particular, the culprit turns out to be the central bank’s interference with interest rates. Interest rates are like a price. Borrowed money, or loaned capital, is a good, and you pay a price to borrow it. When you put money in a savings account or buy a bond, you are the lender, and so the interest rate you earn is the price you are being paid for your money.


    As with all goods, the supply of loanable funds sometimes goes up and down, and on the other hand demand for loanable funds goes up and down. The supply and demand determine the price. If more families are saving more or more banks are lending, borrowers don’t have to pay as much to borrow—interest rates go down. If there’s a rush to borrow or a dearth of loanable funds, interest rates go up.


    That’s what happens in a free market, where supply and demand set the price. There are some results of this dynamic, not obvious at first, that contribute to a healthy economy.


    The way to express this happy arrangement is to say that the interest rate coordinates production across time. It endures a compatible mix of market forces: if people want to consume now, businesses respond accordingly; if people want to consumer in the future, businesses allocate resources to satisfy that desire as well. Firms won’t devote as many resources to product development, for instance, when the consuming public prefers more existing goods right now---but then the Fed steps in.


    The interest rate can perform this coordinating function only if it is allowed to move up and down freely in response to changes in supply and demand. If the Fed manipulates the interest rate, we should not be surprised to observe dis-coordination on a massive scale.


    …the Fed has various tools it can use to manipulate interest rates, moving them upward or downward. Suppose it lowers them. As we’ve seen, on the free market, interest rates go down because the public is saving more. But when the Fed lowers rates artificially, they no longer reflect the true state of consumer demand and economic conditions in general. People have not actually increased their savings or indicated a desire to lower their present consumption. These artificially low interest rates mislead investors. They make investment decisions suddenly appear profitable that under normal conditions would be correctly assessed as unprofitable. From the point of view of the economy as a whole, irrational investment decisions are made and investment activity is distorted. The Federal Reserve’s policy of cheap credit misleads businesses into thinking that now is a good time to invest in long-term projects.


    The central bank’s lowering of the interest rate therefore creates a mismatch of market forces. The coordination of production across time is disrupted. Long-term investments that will bear fruit only in the distant future are encouraged at a time when the public has shown no letup in its desire to consume in the present. Consumers have not chosen to save and release resources for use in the higher stages of production. To the contrary, the lower interest rates encourage them to save less and thus consume more, at a time when investors are also looking to invest more resources. The economy is being stretched in two directions at once, and resources are therefore being misallocated into lines that cannot be sustained over the long term.


    The economy, in other words, can support only so many investment projects at once. The interest rate acts as the market’s restraint on how many such projects are begun, in order to prevent the initiation of more projects than the pool of savings can support in the long run. When the interest rate is artificially lowered, more loans can be extended and more projects started, but artificially low interest rates do not magically supply the additional real resources necessary to complete all the projects.


    In the short run the result of the central bank’s lowering of interest rates is the apparent prosperity of the boom period. Stocks and real estate shoot up. New construction is everywhere, businesses are expanding their capacity, and people are enjoying a high standard of living. But the economy is on a sugar high, and reality inevitably sets in. Some of these investments will prove to be unsustainable and will have to be abandoned, with the resources devoted to them having been partially or completely squandered.


    The Austrian theory of the business cycle does not, and is not intended to, account for the length and persistence of a depression. It is a theory of the artificial boom, which culminates in the bust. The bust period is longer the more government prevents the economy from reallocating labor and capital into a sustainable pattern of production.


    Attempts to inflate the economy out of the downturn by pumping in more money created out of thin air and thereby keeping interest rates artificially low only make the eventual and inevitable collapse—which, modern superstitions notwithstanding, cannot be held off indefinitely by monetary trickery—all the more severe. The malinvestments need to be discontinued and liquidated, not encouraged and subsidized, if the economy’s capital structure is to return to a sustainable condition.
    18 Sep 2011, 08:49 PM Reply Like
  • Mike Holt
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    Author’s reply » Friedrich Hayek and the Austrian School of Economics that gained popularity after the period covered in Ricardo Conteras’ paper discussed above were also featured in the book by Pullitzer Prize-winning author Daniel Yergin titled, “The Commanding Heights: The Battle Between Government and the Marketplace That is Remaking the Modern World.” This is a sweeping review of how countries around the globe have experimented over the past century with the role that government should play in the economy. As I have indicated elsewhere, Friedrich Hayek plays a prominent role in this tale, since his thoughts greatly influenced the policies simultaneously enacted by Margaret Thatcher and Ronald Reagan that set off a wave of economic developments that we often refer to simply as “globalization.”


    Not only does this book that Daniel Yergin co-authored with Joseph Stanislaw reflect their keen insight and that of the actors in this real life drama, through interviews with influential economists and politicians over the past two decades, they have managed to create a scope of perspectives as broad as the subject matter covered. I view this as required reading by anyone trying to make sense out of the world that we live in today – which should be virtually all of us. Additional information and reviews can be found at http://www.amazon.com.


    Seeking Alpha readers should also be aware that PBS developed a four part documentary based upon this excellent book titled, “Commanding Heights: The Battle for the World Economy.” This brief introduction to Part One, “The Battle of Ideas” provides a glimpse into the tremendous insight that can be gained simply by spending a few hours watching this captivating documentary:


    “The first age of globalization tied the world together at the end of the 19th century. Trade flowed freely in this newly emergent global market. This optimistic time was abruptly disrupted by the Guns of August in 1914, heralding the beginning of World War I [shortly after the creation of the Federal Reserve]. It would be almost 80 years before there was once again a truly global economy.


    The social and economic catastrophe left in the ashes of World War I ignited an intellectual and political struggle that would continue until the present day—a battle between the powers of government and forces of the marketplace over whom would control the economies of the world’s great nations.


    “The Battle of Ideas” tells the story of how, for much of the twentieth century, the world moved toward more government control—whether the centrally planned economies of the communist world or the “mixed economies” of Europe and the developing world or the United States’ regulated capitalism.


    Episode One captures that struggle through the lives of two men, whose ideas had much more influence on shaping our world than most people know. One was JOHN MAYNARD KEYNES, the elegant Englishman who advocated government intervention to control the booms and busts of capitalist economies. The other was FRIEDRICH VON HAYEK, the Austrian émigré who argued that government intervention in the economy would erode human freedom and was doomed to failure. His comment on World War I and the end of the first age of globalization has an eerie ring for our own time: “We didn’t realize how fragile our civilization was.”


    Their struggle played itself out through the great drama of depression, another world war, postwar recovery and economic boom, and economic downturn. KEYNES’ ideas dominated for decades. HAYEK labored in the shadows, mostly ignored—and increasingly forgotten [until now].


    PBS has also created a website on which, not only can the documentary be viewed, but full transcripts of interviews with influential readers can be read in their entirety, along with related resources. Here is a link:


    19 Sep 2011, 09:57 PM Reply Like
  • Mike Holt
    , contributor
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    Author’s reply » The interviews with influential economists and government leaders featured on the PBS website are enlightening, but for even greater insight, this interview with the once forgotten but still influential economist Friedrick von Hayek conducted in 1977 by Thomas Hazlett and then published in Reason magazine (http://www.reason.com) under the title "The Road From Serfdom" is terrific:


    19 Sep 2011, 11:14 PM Reply Like
  • Mike Holt
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    Comments (1869) | Send Message
    Author’s reply » Growth is to development as
    activity is to achievement.
    25 Sep 2011, 08:29 PM Reply Like
  • Mike Holt
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    Comments (1869) | Send Message
    Author’s reply » Don't mistake activity for achievement.
    --John Wooden


    Professor Mabel Newcomer (1892-1983) was an economics professor at Vassar college from 1917 to 1957. She told her Vassar freshman class in September 1935: “You are the generation about to come into control and must prepare for this responsibility. Do not fill up your leisure with meaningless activity or with causes. Have the courage to stand aside and watch for a little while. It is more important to know where we are going than to get there quickly. Do not mistake activity for achievement.”
    4 Oct 2011, 07:29 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Ron Paul's book "End the Fed" has a catchy title, but the likelihood of this happening is even less than the likelihood of Ron Paul being elected as the POTUS. However, the possibility of significant reforms to the Federal Reserve should not be ruled out altogether.


    Repeated attempts have been made by some Republicans in Congress to limit the Federal Reserve's mandate to maintaining a stable currency and warding off inflation. Unfortunately, this can also be expressed diferently, in a manner that could easily be distorted given Washington politicians' mastery of "the sound bite" which allows them to convey powerful images while actually saying very little. Limiting the Federal Reserve's mandate to maintaining a stable currency and warding off inflation can also be described as terminating the Federal Reserve's mandate to maintain full employment. This is a concept that would never be acceptable unless its meaning was properly understood, and against the current backdrop of elevated unemployment levels there is even less of an opportunity to explain that full employment is more likely to be achieved through other means.


    However, the truth is that unemployment levels are far more likely to be reduced if a number of underlying causes were addressed more directly. When the Federal Reserve attempts to reduce unemployment levels through the artificial means that we now matter-of-factly describe as monetary policy, this simply serves to distort the natural market forces of supply and demand and to weaken the economy in the process. For example, artificially inflating the prices of homes so few could afford them unless their wages are increased to levels that are even less competitive relative to wage levels in other parts of the world is more likely to increase unemployment, not reduce it.


    Fortunately, some members of Congress understand this, so have introduced bills such as the following to prevent the Federal Reserve from perpetuating the artificial boom/bust cycles that it has created in the past, and that have inflicted great harm on our economy.




    29 Feb 2012, 11:10 PM Reply Like
  • Mike Holt
    , contributor
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    Author’s reply » Distinguishing between economic growth and economic development may seem too nuanced for some, but it is actually over-simplified. Economic development is often divided further into Developmental Economics, generally associated with poorer countries with less developed economies, while Economic Development is a more general concept that should remain relevant even as an economy grows.


    There are many factors leading to economic development, and much debate over both the relative importance of each, as well as the roles of the government and the private sector in achieving this development. Both obviously play a role, but the "Role of the Government in the Economy" is one of the most hotly contested debates in the world today, shaped both by global economic trends (e.g., the increasing influence of state capitalism employed by many of the fastest growing emerging market countries) and by the internal politics of various countries.


    I have devoted a separate thread to discussions of the Role of the Government in the Economy, but within this thread regarding Economic Growth and Economic Development, it should help to note that the role played by the government in economic development can be defined by the term Economic Planning.


    These categorizations just scratch the surface, as their are many other tributaries of knowledge flowing from this stream of thought.
    Brief descriptions of these various fields of knowledge together with their tributaries can be found in this link:


    26 Aug 2012, 11:59 AM Reply Like
  • Mike Holt
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    Author’s reply » This Power Point Presentation also covers some elementary concepts, but overall does a pretty good job of putting the topic of Economic Planning into perspective:




    Readers seeking a more advanced understanding of Economic Planning might be interested in a book titled "The Economics of Planning" by Eric J. Heikkila, Professor and Director of International Initiatives at the USC Sol Price School of Public Policy.




    In their iTunes University "Road to the White House" series, the USC Judith and John Bedrosian Center on Government and the Public Enterprise (available through http://www.itunes.com) also features a discussion with Dr. Heikkila on the topic of "China from a US Policy Perspective." This is a topic of tremendous importance to the United States that has not yet received much attention in the debates leading up to the 2012 US Presidential Elections, but should take center stage if the candidates can remain focused on important issues.
    26 Aug 2012, 12:34 PM Reply Like
  • Mike Holt
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    Author’s reply » In attempting to explain why recoveries in employment levels have increasingly lagged behind recent restorations of "economic growth," Harvard Business School Professor Clayton Christensen, author of "The Innovator's Dilemma," asserts that this can best be understood if innovation is first broken down into three categories:


    1. Empowering Innovation
    2. Sustaining innovation
    3. Efficiency innovation


    He goes on to say that Empowering Innovation creates jobs, and that Efficiency Innovation destroys jobs, and that continued high unemployment levels despite positive economic growth are due to an imbalance among these three types of innovations. He elaborates on this theory in the following article published in The New York Times on November 3, 2012, titled "A Capitalist's Dilemma, Whoever Wins on Tuesday."




    In this article, it should also be noted that Professor Christensen also draws a distinction between economic growth and economic development, and points out that in their efforts to post GDP growth numbers on the scoreboard, policymakers have overlooked the nature of the conditions on the playing field. As such, they are fighting yesterday's problems with yesterday's tools by relying upon monetary policy to infuse additional capital into the economy when a shortage of capital is not the problem.


    [In fact, there is too much money chasing too few capital assets which, rather than causing inflation as it would if there was too much money chasing too few goods, can lead to overpriced assets as exemplified by historically low yields on bonds. It can also lead to asset bubbles and excessive levels of debt, a dangerous combination which can lead to a disorderly deleveraging process which fuels the deflationary forces that policy makers are trying to combat, rather than introducing inflationary forces intended to counter such deflationary forces.]
    12 Feb 2013, 07:37 AM Reply Like
  • Mike Holt
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    Author’s reply » In the following "An Insight, An Idea" interview with Harvard Business Professor Clayton Christensen featured on the World Economic Forum website, Clayton Christensen expands further upon the "Capitalist's Dilemma" that he described in his November 3, 2012 NY Times article referenced above.




    In essence, the private sector is placing too much emphasis on efficiency, which destroys jobs, and the public sector is placing too much emphasis on policies intended to address shortages of capital, but which do not necessarily translate into the "Empowering Innovaton" needed to restore employment. In other words, both the private sector and the public sector are too focused on the short-term rather than the long-term, and the result is economic growth but much less in the way of economic development.


    [An overriding theme of the World Economic Forum's annual meeting in Davos, Switzerland this year is captured by the phrase "Resilient Dynamism," coined by Klaus Schwab, the founder of the World Economic Forum. Although Martin Sorrell downplays this term as Davosian jibberish--perhaps because it was not coined by Sir Martin Sorrell who is quick to point out that talented individuals are less likely to get along with each other than the rest of us--and it does seem to have simply evolved from the term "Sustainable Growth," in coining this term I believe that Klaus Schwab has identified the same problem that Clayton Christensen has identified in his theory of the Capitalist's Dilemma. Both individuals recognize that an OVER emphasis on efficiency is a root cause of many of the economic problems that we face today.


    Although efficiency is an important driver of economic growth, and we have all learned that our economy does not function properly absent economic growth, absent the constraint of maintaining resiliency, efforts to achieve greater efficiencies can lead to economic catastrophes which are borne by society at large rather than those who caused them--and profited from them immensely while the music was still playing.


    Examples of this abound, whether it be in:


    - the financial services industry, which has largely replaced the laborious task of getting to know their customers with the more efficient assignment of FICO scores that can be processed by the same computers that slice and dice resulting "crap" mortgages into AAA securities that are quickly and efficiently removed from their balance sheets.


    - virtually ever industry that relies heavily upon the internet to achieve greater efficiencies but invests too few resources to protect against cyber espionage and/or cyber theft.


    In the aftermath of Hurricane Sandy, many unhappy motorists experienced the consequence of this over emphasis on efficiency at the expense of resiliency when they learned that few gas stations were able to remain open because most had not installed back-up generators. Given that we rely upon oil for nearly 100% of our critical transportation needs--something that deserves more attention in and of itself--it is hard to believe that this risk could have been overlooked or allowed to exist, and now that it has been exposed, it should cause us to wonder what other shortcuts have been taken in an effort to achieve greater efficiencies absent the constraint of resiliency.


    Addressing these oversights would not only make our economy, and society at large, more RESILIENT, it may also represent the opportunity to engage in the Empowering Innovation, or DYNAMISM, that is needed to achieve the economic development that can sustain our economic growth much more reliably than reflated housing prices fueled by increased debt which likely serves to destroy confidence and diminish long-term investments rather than encouraging this sorely lacking behavior.]
    12 Feb 2013, 08:28 AM Reply Like
  • Mike Holt
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    Author’s reply » The February 16, 2013 issue of Barron's magazine features an article titled "Liquid Courage" which points out that oceans of liquidity loosed by the world's central banks and sitting idly on corporate balance sheets has spurred a burst of mergers & acquisitions activity.


    "All told, some $160 billion of M&A deals have been announced so far in 2013, the fastest start to a year since 2005, according to Dealogic data cited by The Wall Street Journal."


    "What's most striking about the spate of deals is how they are all about consolidation, not innovation....These deals speak to the slowing of innovation in the U.S. economy, an idea put forth by Northwestern University's Robert J. Gordon (most recently in a Wall Street Journal op-ed, 'Why Innovation Won't Save Us,' Dec 22)."


    "Corporations have ample productive capacity to meet demand, so better to combine with competitors and eliminate any excess rather than invest in new capital."


    That should put some good numbers on the score board, pushing up stock prices and the wealth effect may cause some investors to increase their spending--provided that they're not among those who recognize the need to put more money aside for all those rainy days that appear to be lying ahead. With debt levels already as high as they are, a deflationary bout of deleveraging accompanied by the bursting of debt-induced asset bubbles seems more likely to some than the fear of inflation that central bankers and policymakers would like to instill in order to encourage an increase in spending.


    And what about the impact of this consolidation on the playing field, or "Main Street," so to say? Won't the scoreboards being used by Wall Street, central banks, and government policy makers ultimately be effected by the real economy? Or, is there another new, more "elegant" mathematical model, and another round of QE that will yield to even better results this time? That may be the case for some, but looking at the bigger picture, will it really be safe to assume that "This Time is Different?"


    Until January 2014 at least, most of us will be able to immediately identify Ben Bernanke as the Chairman of the Federal Reserve, but very few people could name the US Trade Representative, or the role that the US Trade Representative is expected to perform. Doesn't that alone tell us something? When your only tool is a hammer, every problem looks like a nail -- but I think some of our foreign competitors that are being managed primarily to maximize market share and employment rather than unsubsidized profits have found greater use for a screwdriver. How is it that they can claim not to be aware of intellectual property rights when they are so well able to identify and illegitimately access these intellectual property rights through their expansive cyber theft activities?


    Care to invest billions of dollars in innovation that is likely to be stolen, anybody? Will another round of QE address this concern? Or will that just result in more consolidation, asset bubbles, and growing debt that is the focal point of concern for many rather than a source of confidence. And, to whom do we owe a growing share of this debt? As the great bard himself would have said, "Aye, there's the rub."
    23 Feb 2013, 09:52 AM Reply Like
  • Mike Holt
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    Author’s reply » The following comments were extracted from a Wikipedia article titled, "Washington Consensus."




    The term Washington Consensus is commonly understood to have a much broader meaning than what was originally intended, i.e., a strongly market-based approach for economic development, sometimes pejoratively described as "market fundamentalism" or "neoliberalism."


    However, John Williamson, the economist who coined the term Washington Consensus in 1989 points out that the term was intended to describe a set of ten relatively specific economic policy prescriptions that he believed to constitute the "standard" reform package promoted for crisis-wracked developing countries by Washington, DC-based institutions such as the IMF, World Bank, and the US Treasury Dept.


    These ten prescriptions were:


    1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;


    2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;


    3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;


    4. Interest rates that are market determined and positive (but moderate) in real terms;


    5. Competitive exchange rates;


    6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.);


    7. Liberalization of inward foreign direct investment;


    8. Privatization of state enterprises;


    9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;


    10. Legal security for property rights.


    However, according to John Williamson:


    "Audiences the world over seem to believe that this signifies a set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery. ...I of course never intended my term to imply policies like capital account liberalization (...I quite consciously excluded that), monetarism, supply-side economics, or a minimal state (getting the state out of welfare provision and income redistribution), which I think of as the quintessentially neoliberal ideas."


    In spite of Williamson's reservations, the term Washington Consensus has been used more broadly to describe the general shift towards free market policies that followed the displacement of Keynesianism in the 1970s. In this broad sense the Washington Consensus is sometimes considered to have begun at about 1980. Following the strong intervention undertaken by governments in response to market failures, a number of journalists, politicians and senior officials from global institutions such as the World Bank began saying that the Washington Consensus was dead.


    Before reaching such a conclusion, it is important to understand what meaning this obituary ascribed to the term Washington Consensus, so as not to throw away the baby with the bath water.
    21 Apr 2013, 10:30 AM Reply Like
  • Mike Holt
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    Author’s reply » The following comments were extracted from a Wikipedia article titled, "Beijing Consensus."




    Beijing Consensus is a term that represents an alternative economic development model to the Washington Consensus of market-friendly policies promoted by the IMF, World Bank and US Treasury, often for guiding reform in developing countries. While there is no precise definition of the Beijing Consensus, ...the term has evolved into one describing alternative plans for economic development in the underdeveloped world, so-named as China is seen as a potential model for such actions.


    The term's birth into the mainstream political lexicon was in 2004 when the United Kingdom's Foreign Policy Centre published a paper by Joshua Cooper Ramo titled "The Beijing Consensus."




    Ramo was a former senior editor and foreign editor of Time magazine and later a partner at Kissinger Associates, the consulting firm of former US Secretary of State Henry Kissinger. In this paper, he [Ramo] laid out three broad guidelines for economic development.


    1. A commitment to innovation and constant experimentation;


    2. Per Capita Income (GDP/capita) should not be the lone measure of progress; and


    3. A policy of self-determination, where the less-developed nations use leverage to keep the superpowers in check and assure their own financial sovereignty.


    This [third guideline] includes not only financial self-determination, but also a shift to the most effective military strategy, which Ramo suggests is more likely to be an asymmetric strategy rather than one that seeks direct confrontation. Unlike the Washington Consensus, which largely ignored questions of geo-politics, Ramo argues--particularly in the Chinese context--that geo-politics and geo-economics are fundamentally linked.


    In his January 2012 article in Asia Policy, John Williamson describes the Beijing Consensus as consisting of five points:


    1. Incremental Reform (as opposed to a Big Bang approach);


    2. Innovation and Experimentation;


    3. Export Led Growth;


    4. State Capitalism (as opposed to Socialist Planning or Free Market Capitalism); and


    5. Authoritarianism (as opposed to Democracy or Autocracy).




    Personal Note:
    When comparing the guidelines constituting the Washington Consensus to the guidelines constituting the Beijing Consensus, I believe it is important to take into consideration the level of development (economic and otherwise) that already exists in a particular country. For example, it may be mistake to assume that democracy can take hold in a less developed country, or one in which powerful religious organizations compete with the state for power.


    Likewise, it may be a mistake to assume that heavy investments in infrastructure by an Authoritarian government would be appropriate in a country whose economy is already largely developed and whose population has already achieved a high level of personal and economic freedom.


    Non-economic factors can play a role as well, such as the extent to which a country's population identifies itself based upon its belief in individual liberty, justice, and the pursuit of happiness, or as members of a civilization in which the state has traditionally played a central role under the rule of a privileged elite such as a King, Emperor, military or religious leader, or some other strong central figure.
    21 Apr 2013, 11:20 AM Reply Like
  • Mike Holt
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    Author’s reply » The Washington Consensus and the Beijing Consensus reflect different views regarding, among other things, the role of the government in the economy, a topic covered in more detail elsewhere in this post.


    Combined with variations in social, cultural, political, and religious views held throughout the world, these differences create frictions, perhaps even sources of conflict, that can be exacerbated when they come into contact with each other. Yet, as we learned during the 2008 financial crisis, economic growth is a prerequisite for the proper functioning of our economy, as it is currently constructed at least. This means that it will be difficult to avoid the clashing of gears as the need for growth leads to greater interaction between different systems.


    How this will play out remains uncertain, but for some insight into many of the factors that can influence future outcomes, the following link may be helpful.




    Every four years, the National Intelligence Council publishes an unclassified report projecting trends over the next fifteen years. The most recent edition, Global Trends 2030 (see link above), was published in December 2012.


    There are so many valuable ideas in this report, it would not be possible to summarize them in a brief comment. Fortunately, the report does include an Executive Summary. One comment, included on page vi of this summary, may be of particular interest to investors interested in rare earths:


    "...the US will still need to increase labor productivity to offset its slowly aging workforce. A critical question is whether technology can sufficiently boost economic productivity to prevent a long-term slowdown."


    Investors in rare earth mining companies already appreciate the importance of rare earths to a wide range of high technology applications, as well as the implications of China's near monopoly over rare earths and huge lead in the development of downstream industries. They should also be aware of China's goal, through a series of Five-Year economic plans, to transform their economy into a knowledge-based economy as quickly as possible, and the government's lack of enforcement of intellectual property rights that are so important to technological development initiatives in the US and other developed countries. They may not have considered the implications of a potential hollowing out of the computer hardware industry in the US.


    IBM already sold its PC business to Lenovo, and is now considering the sale of its server business as well. HP almost sold its hardware business last year before scuttling this plan at the last minute, and the Blackstone Group just rescinded their competing offer to take Dell computer private. Apple is the lone stalwart in the hardware business, and it is largely only the design of their products that takes place in the US. Most of the manufacturing takes place in China.


    Those familiar with rare earths are also likely to be familiar with the nature and extent of cyber theft and cyber espionage activities believed to be sponsored, or at least condoned, by the Chinese Communist Party. If they followed the painfully slow progress of a WTO action intended to prevent China from imposing tariffs and quotas on exports of rare earths, supposedly to limit environmental damage caused by the mining of rare earths although similar costs and restrictions have not been imposed upon domestic manufacturers or foreign competitors willing to locate their more sensitive advanced manufacturing facilities within China, they are probably also familiar with the fact that the nature and extent of WTO actions against China is unlike anything seen before in terms of both the number of violations and the fact that most evidence rampant disregard for the law rather than subtle differences over their proper interpretation.


    This behavior would seem to be better addressed by the US Trade Representative, who most have never even heard of, than by the Federal Reserve chaired by Ben Bernanke who most have heard of. But, the purpose of the WTO was to solve disputes largely involving ambiguities among what Robert Zoellick referred to as responsible stakeholders in the international community, not economic warfare. There is a lack of structures in place to prevent that, which is why former Secretary of State Hillary Clinton, in her October 24, 2011 remarks before the Economics Club of New York called for a need to address "Economic Statecraft" now that it has become obvious that our great challenge is not deterring any single military foe, but advancing our global leadership at a time when power is more often measured and exercised in economic terms.




    Although this seems to be venturing out of the world of economics and into the world of politics, investors must by now recognize that economics and politics are not so readily compartmentalized in the brave new world that we are facing.
    21 Apr 2013, 01:04 PM Reply Like
  • Mike Holt
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    Author’s reply » Unfortunately, efforts to rein in Economic Statecraft will be compromised by a growing perception throughout the world that the Beijing Consensus is likely to enable countries to achieve more rapid economic development than that which would be possible under the Washington Consensus.


    This perception was largely facilitated by the 2008 Financial Crisis. In this April 2009 article co-authored by Jennifer Harris, who is a member of the National Intelligence Council's Long Range Analysis Unit that worked closely on the Global Trends 2030 report referenced above, and the Global Trends 2025 report that preceded it, the Geopolitical Effects of the Financial Crisis are brought into focus.


    21 Apr 2013, 01:26 PM Reply Like
  • Mike Holt
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    Author’s reply » Debt / Deleveraging


    Michael Lewis' new book, "Boomerang" was released today.  It basically traces the subprime crisis to the sovereign debt crisis -- although government debt levels were already believed by many to be a problem long before the subprime loan crisis ever reared its ugly head.  In this book, Michael Lewis has chosen Kyle Bass as his main character.


    Kyle Bass is a hedge fund manager in Dallas, Texas who parlayed half of his $10 million nest egg into a small fortune by betting against the subprime mortgage market.  Here are some excerpts from the Introduction that seem to put the content of the book into perspective:


    "By the end of 2008, when I went to Dallas to see Bass, the subprime mortgage market had collapsed.  ...having taken his profits, he had a new all-consuming interest, governments.  The US government was just then busy taking on to it's books the subprime loans made by Bear Stearns and other Wall Street banks.  The Federal Reserve would wind up absorbing the risk, in one form or another, with $2 trillion in dodgy securities.


    In Kyle Bass' opinion, the financial crisis wasn't over.  It was
    simply being smothered by the full faith and credit of rich Western
    governments.  ...They were no longer talking about the collapse of a few bonds.  They were talking about the collapse of entire countries. And they had a shiny new investment thesis.  It ran, roughly, as follows.


    From 2002 there had been something like a false boom in much of the rich, developed world.  What appeared to be economic growth was activity fueled by people borrowing money they probably couldn't afford to repay: by their rough count, worldwide debts, public and private, had more than doubled since 2002, from $84 trillion to $195 trillion.  'We've never had this kind of accumulation in world history,' said Bass.


    ...As a practical matter it included the debts inside each country's
    banking system, which, in another crisis, would be transferred to the government.  'The first thing we tried to figure out,' said Bass, 'was how big these banking systems were, especially in relation to
    government revenues.  We took about four months to gather the data. No one had it.'


    [Ireland:   25 times it's annual tax revenues
    Spain:     >10 times...
    France:   >10 times...]


    Historically, these levels of government indebtedness had led to
    government default.  Still, he wondered if perhaps he was missing
    something.  'I went looking for someone, anyone, who knew something about the history of sovereign defaults.  He found the leading expert on the subject, a professor at Harvard named Kenneth Rogoff, who, as it happened, was preparing a book on the history of national financial collapse, 'This Time is Different...' with fellow scholar Carmen Reinhart.


    'We walked Rogoff through the numbers' said Bass, 'and he just looked at them, then sat back in his chair and said, 'I can hardly believe it is this bad.'. And I said, 'Wait a minute.  You're the world's foremost expert on sovereign balance sheets.  ...If you don't know this, who does?'


    Thus his new investment thesis: the subprime mortgage crisis was more symptom than cause.  The deeper social and economic problems that gave rise to it remained.
    28 Sep 2011, 11:54 PM Reply Like
  • Mike Holt
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    Author’s reply » A bond manager recently summarized the current "market" environment as one in which Central Banks around the world are facilitating efforts by governments to increase their spending through the issuance of more debt, when the problem is too much debt.


    In the EU, some recognition is being given to the possibility that these interventions may not lead to high rates of economic growth, so efforts are underway to issue new debt on behalf of the weakest countries with dangerous debt/GDP ratios at rates below the expected economic growth rates of those countries. But, monetizing debt is inflationary, so investors buying these bonds must assess whether the interest rates being offered are high enough to compensate for this inflation risk.


    Some may believe that central banks will have their way in engineering interest rates lower and lower as economic growth becomes slower and slower. While this music plays, the name of the game may be to lock-in current rates for as long as possible. But what will they do when the music stops this time?
    30 Sep 2011, 08:33 AM Reply Like
  • Mike Holt
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    Author’s reply » The ECB under Trichet was noticeably reluctant to monetize, and therefore facilitate the growth of, sovereign debt. Most people understand why monetization of debt is part of the problem, not the solution, but the political expedient of quickly attaining a more "stable disequilibrium" is attractive to short-sighted politicians, and providing voters with government handouts without any APPARENT cost is popular among many on the receiving end of this deceptive practice. This explains why so much attention is being given to ways in which European Sovereign debt can be monetized, and why German ECB members have resigned over this issue. The Germans, with the benefit of an understanding of 20th century history, undoubtedly understood the ECB's own report on this topic, which can be found here in this 2010 ECB Working Paper titled, "The Impact of High and Growing Debt on Economic Growth."




    Here is the Abstract:


    Abstract: This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70-80% of GDP, which calls for even more prudent indebtedness policies. At the same time, there is evidence that the annual change of the public debt ratio and the budget deficit-to-GDP ratio are negatively and linearly associated with per-capita GDP growth. The channels through which government debt (level or change) is found to have an impact on the economic growth rate are: (i) private saving; (ii) public investment; (iii) total factor productivity (TFP) and (iv) sovereign long-term nominal and real interest rates. From a policy perspective, the results provide additional arguments for debt reduction to support longer-term economic growth prospects.
    7 Nov 2011, 08:30 AM Reply Like
  • Mike Holt
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    Author’s reply » On March 3, 2011, Representative Randy Neugebauer questioned Ben Bernanke about a concept known as "debt saturation," which describes a phenomenon very similar, at least, to the phenomenon described in the ECB's August 2010 report titled "The Impact of High and Growing Debt on Economic Growth," whereby additional debt can actually serve to decrease, rather than increase, economic growth, once the burden of debt exceeds certain levels.


    Congressman Neugebauer's explanation of this trend toward diminishing, sometimes negative, economic growth in the US as a result of continued debt-funded spending can be observed in this YouTube video:




    It is also interesting to note the sharp decline in the money multiplier effect to levels below "1" that occurred in 2008, and has persisted since then. The following link to the St. Louis Federal Reserve website provides a graphical depiction of this data.


    9 Nov 2011, 11:10 AM Reply Like
  • Mike Holt
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    Author’s reply » The German people may not be familiar with every nuance of the Euro, but one promise that they recall very clearly is that if Germany was to join the Euro, the German people would not be burdened with bailouts for other countries. This largely explains why European government officials have been struggling to find potential means of leveraging the €440 billion lending capacity of the European Financial Stability Facility in a manner that would allow it to address concerns regarding trillions of Sovereign Debt issued by Eurozone member countries, rather than requesting taxpayers to authorize an increase in funding commitments to the EFSF.


    The endless stream of deliberations so far seems to have led only to "plans to have a plan" and a need to rewrite Roget's Thesaurus to include new synonyms for the term "meeting." However, a more tangible result of these well publicized deliberations has been to obscure the fact that the EFSF has still not even raised the €780 billion it will need to raise to fund the €440 billion lending capacity that it is assumed to possess in the first place. In fact, it has so far raised only €16 billion!


    This is explained in the link below to a Frequently Asked Questions
    publication prepared by the EFSF itself.




    In sum, investors first need to understand that the last "F" in EFSF
    stands for "Facility" not "Fund." As indicated in the EFSF's linked
    FAQ publication, the EFSF could Pre-fund the lending capacity to which it has committed to provide to countries that request financial
    assistance from the EFSF, but so far they have chosen not to. The €16 trillion of debt that it has issued so far therefore consists of four issuances related to requests for assistance from Ireland and
    Portugal. This means that the EFSF is exposed to the need to raise the remaining €752 billion of funding in the middle of a financial
    crisis, when requests for financial assistance from member countries would seem likely to materialize.


    The IMF has committed to lend €250 billion to the EFSF, but the EFSF is relying upon pension plans, insurance companies, banks, and other large institutions to provide much of the remaining financing. Given the inter-relationships between the problems facing various countries and the problems facing many of these institutions, I would liken this to two drunks leaning on each other for support. Rather than pledging to address their addictions at some nebulous time in the future when they are forced to acknowledge that they have a problem, the EFSF and
    European governments and financial institutions need to take concrete measures now.


    Focusing on what sort of financial alchemy they may be able to use to turn funds they don't even have in the first place into a sum about 8 times larger without raising concerns by taxpayers and bond investors that they will ultimately be the ones expected to pay for the increasingly large, and well-paying, institutions needed to
    orchestrate these elaborate mechanisms hardly seems to pass muster as even a plan to have a plan. In fact, if I could borrow anything from the EFSF, I would borrow one of it's "F's" so I could use it to assign a credit rating.
    17 Dec 2011, 11:22 AM Reply Like
  • Mike Holt
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    Author’s reply » This year's 16th annual Geneva Report states that "Contrary to widely held beliefs, the world has not yet begun to delever and the global debt-to-GDP is still growing, breaking new highs. At the same time, in a poisonous combination, world growth and inflation are also lower than previously expected.


    They calculated that world debt levels stood at 212 percent of the global economy, excluding the financial sector, in 2013--up 38 percentage points since 2008. The Report also noted that debt accumulation was led by developed economies until 2008, but has lately been propelled by developing economies.


    "The ongoing vicious circle of leverage and policy attempts to deleverage, on the one hand, and slower nominal growth on the other, set the basis for either a slow, painful process of deleveraging or for another crisis, possibly this time originating in emerging economies (with China posing the highest risk)."




    3 Oct 2014, 10:18 AM Reply Like
  • Mike Holt
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    Author’s reply » The Role of Government in the Economy


    Daniel Yergin’s book, “The Commanding Heights” chronicles, among other things, the 20th century battle between Communism and Capitalism, and the shifting emphasis from a strong centralized role for the government in the economy to a much more market-oriented economy that unleashed the ambitions of individuals to gain greater control over their own lives and their own financial destinies. The following excerpts from Chapter 5, “Crisis of Confidence” illustrate, in part, how this development unfolded.


    “In retrospect it seems to have been inevitable, and yet what unfolded on the night of November 9, 1989, was also accidental. …It was unbelievable; what West German chancellor Halmut Kohl had only the year before said would not happen in his lifetime had just occurred. The Berlin Wall, for all practical purposes, had fallen.


    The Wall had symbolized the division between East and West, between communism and capitalism. …As communism was the most extreme form of state economic control, its demise signaled an enormous shift—from state control to market consensus. The apparent success, and thus the prestige, of the communist economic model had been one of the most important drivers of government control. Now, certainly, the failure of Marxism and the communist system constituted one of the most important forces shaping this new era.


    It was an era in which conceptual shifts would culminate in a sharp revision in thinking and policy about the organization of economies around the world. …It was less a revelation than a process of learning about the limits of government’s ability to run a modern economy.


    For three decades the consensus held that achieving economic growth and improvements in the standard of life and human welfare required some form of central management. The extent of coordination was considered so great that only the state could provide it. …The governments of the mixed economy did so by using some combination of five sets of tools—regulation, planning, state ownership, industrial policy, and Keynesian fiscal management. These tools could be augmented by a sixth—monetary policy.


    The basic rationale for government’s role was the economists’ concept of “market failure.” Some desired outcomes required a degree of coordination that individual competitors in the marketplace could not muster. As a result of this failure, government would step in and provide that coordination. Time horizons and returns were often important concerns. Business alone could not provide investment; it either would take too long to come to fruition or would generate benefits that went to society at large, rather than the individual firm that had made the investment. Infrastructure was an example of something that took too long to develop, as were expenditures on basic research and development—a case in which the benefits might be quite diffused and thus not capturable by the firm that spent the money.


    There was another sense to market failure as well—a failure of acumen, of knowledge. …It was thought that the more an economic activity aimed toward the future and affected the broad population, the less sufficient was simple business knowledge to see it through. The instruments of intervention became the tools with which to apply government knowledge. Resources were directed and allocated by the state, by political and bureaucratic decision making, rather than by the elemental forces of supply and demand—forces shaped by those in the marketplace.


    …At first, government’s assumption of the risks of economic activity seemed logical—and safe. …But as government’s role as insurer became entrenched, so too did the expectations of consumers, workers, and businesses. Once established, an interventionist government could only grow larger, not shrink. The expectation that government could and would guarantee growth and expanding benefits became part of the political culture.


    Yet who could deny the success of the experiment? From the end of the Second World War until the oil crises of the 1970s, the industrial world enjoyed three decades of prosperity and rising incomes that sparked aspirations and dreams. …It is no wonder that throughout the noncommunist, industrialized world, voters gave polticians the go-ahead to use that standard set of tools to guarantee a steadily growing economy—and, hence, full employment. In so doing, they deferred to government’s superior knowledge of the national economic interest.


    The warning flag was inflation. Through the 1960s, inflationary tendencies crept upward in the mixed economies, but never to the point of causing serious alarm. However, by the early 1970s, inflationary pressures were becoming more pronounced and visible. The tools government had used to muddle through—to sustain consumer demand, to match inflation with wage increases—were now inadequate.


    The lesson took time to learn, for it challenged all that had been accepted as the received wisdom. The shortage of political will to tackle the problem head-on only gave conditions time to get worse. Inflation was becoming entrenched in many ways: by the growth of government deficits, by the expansion of the welfare state, by the barriers to competition, by the rigidities of the labor market, by the “social charges” added to the labor bill, and by the nature of the bargaining between labor and management over wages and the way they would be passed through the system.


    …Poor economic performance and the muddling and confusions of government policy engendered a loss of confidence in existing arrangements. Government knowledge was less powerful; governments, less all-knowing. By the end of the troubled 1970s, a new realization had gained ground: More than daily management, it was the entire structure of the economy that had reached its limits. It was imperative to rethink government’s role in the marketplace.”
    1 Oct 2011, 03:45 PM Reply Like
  • Mike Holt
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    Author’s reply » “What happened next?” you may ask. In order to answer that question, in his book, “The Commanding Heights,” Daniel Yergin takes us further back in time in order to develop a better perspective of the subsequent developments that caused the pendulum of ideas and policies regarding the role of government in the economy to swing from the left to the right in the US, and throughout the world.


    “In retrospect, it was the awarding of the 1974 Nobel Prize in economics that first captured, almost by chance, the great intellectual change. The Swedish academy wanted to honor Gunnar Myrdal, distinguished Keynesian, a father of development economics, and a great figure of Swedish socialism. But the grantors, worried about the appearance of choosing so local a favorite, …awarded the prize to Myrdal jointly with Friedrich von Hayek. A good part of the economics profession was scandalized by the choice of Hayek; many economists in the United States, if polled, would have hardly even considered him an economist. He was regarded as right-wing, certainly not mainstream, even something of a crank as well as a fossil from an archaic era.


    …Yet the award documented the beginning of a great shift in the intellectual center of gravity of the economics profession toward a restoration of confidence in markets, indeed a renewed belief in the superiority of markets over others ways of organizing economic activity. Within a decade and a half, the shift would be largely complete. And the eventual victory of this viewpoint was really a tale of two cities—Vienna and Chicago.


    Friedrich von Hayek was the figure who tied the two together; he also connected the post-World War I Austrian School of economics to the renewed embrace of markets in the 1980s. A product of the Austro-Hungarian Empire and its collapse, …the war drove him, like many of his young contemporaries, toward an idealistic search for renewal, a quest for a better world—which meant socialism. …’This desire to reconstruct society led many of us to the study of economics. Socialism promised to fulfill our hopes for a more rational, more just world.’ But then, as he began to study economics, he went through a painful and reluctant reassessment, in which he concluded that his idealistic objectives could be better served through a market economy.


    …The problem was that under central planning, there was no economic calculation—no way to make a rational decision to put this resource here or buy that good there, because there was no price system to weight the alternatives. Central planners could make technical decisions but not economic ones. Over the rest of the century, that criticism would prove to be extraordinarily prescient.


    In 1931, Hayek was invited to become a professor at the London School of Economics (LSE). …[There] Hayek was at the forefront, not only the most consistent but indeed the most vocal critic of Keynes’ work both before and after The General Theory. Keynes’ approach, Hayek believed, was based on error; it would not solve the [1930s] slump but would institutionalize inflation.


    As World War II progressed, Hayek became increasingly apprehensive about what he saw as the advance of collectivism, central planning, and what would become Keynesian interventionism. In one of his most famous articles, he argued that the problem of knowledge defeats central control of economies: Those at the center can never have enough information to make their decisions. Much better, he argued, was the price system, which, in “its real function” was “a mechanism for communicating information.”


    At the same time, Hayek was preparing a full-scale broadside in a much more popular form—The Road to Serfdom, first published in England on March 10, 1944. [As you should know, Hayek tried to warn England and the US not to follow the footsteps of the Europeans who had experimented with collectivist policies that resulted in miserable economic conditions, followed by dictatorships and eventually armed conflict. Hayek explained that this was a slippery slope because those who initially advocated socialist policies were very well intentioned. It was therefore hard to believe that this could lead to any real danger. But, rather than recognizing that the socialist policies that they were implementing were flawed, government leaders convinced themselves that they just weren't doing enough, and that they needed a more forceful leader to enforce their policies—stripping individuals of their liberty and justice in the process. The continually increasing role of government had managed to greatly weaken the economy in the meantime, creating a power vacuum that made it possible for the likes of Hitler and Mussolini to rise to power.]


    Keynes, who read The Road to Serfdom while on his way to the Bretton Woods conference [in July 1944], wrote Hayek, more than oddly, that it was “a grand book.” He added that he was in “deeply moved agreement” with the whole of it. He then proceeded to lay out his profound disagreement: ‘According to my ideas you greatly under-estimate the practicability of the middle course…What we want is not no planning, or even less planning, indeed I should say that we almost certainly want more.” He concluded by advising Hayek to take up “the restoration of right moral thinking.” For ‘if only you could turn your crusade in that direction you would not feel quite so much like Don Quixote.’


    [However, thanks to the publication of a Reader’s Digest version of “The Road to Serfdom” published in April 1945, and the subsequent distribution of more than 600,000 copies of this condensed version by the Book of the Month Club, Hayek was able to achieve his objective of communicating his important message to as wide an audience as possible. The following link will enable readers to access this Reader’s Digest version.




    A five-minute cartoon version (see link below) was even created in order to allow Hayek’s message to be communicated to an even wider audience.]




    But after the initial splash of The Road to Serfdom, Hayek did rather seem a Don Quixote off on a fanciful campaign. In later years, Hayek would ruefully acknowledge that the book was too “popular” for his own academic good and had discredited him within the economics profession. …In 1950, Hayek left LSE for an appointment at the University of Chicago. …He was not part of the economics department and did not have much direct impact on students there.


    It was while at Chicago that Hayek wrote what many consider his outstanding work, The Constitution of Liberty, published in 1960. In it, he further developed one of his most important themes: Laissez-faire was not enough. Government did have a clear role: to ensure the development and maintenance of the institutions—the laws and rules—that would ensure a competitive economy.


    After a dozen years at the University of Chicago, he took up an appointment at the University of Freiburg, amid the Ordoliberals. The Alps had already provided the venue from which Hayek would extend his influence. In 1947, he had taken the lead in convening a meeting of a remarkable group of intellectuals, mainly economists, numbering just thirty-six. It was held at a Swiss spa on Mont Pelerin, and ever after became known as the Mount Pelerin Society.


    Among those attending that first Mont Pelerin meeting was a young economist from the University of Chicago who was making his first trip to Europe—Milton Friedman. Mont Pelerin certainly helped Friedman become part of an international network—and at the same time contributed to the dissemination of Friedman’s increasingly influential work. Indeed, the fundamental shift in the global attitude toward markets might never have happened, at least in the form it did, had it not been for several decades’ worth of highly unfashionable academic “scribbling” by Friedman and his colleagues at the University of Chicago. The Chicago School, as it became known, provided a substantial part of the foundation for the intellectual reformulation, both in the United States and around the world.


    By the end of the 1950s, people were already talking about a distinctive Chicago School, which, in opposition to the new Keynesianism, emphasized laissez-faire—free markets—and argued against government intervention. …The Chicago economists believed, in practice, in a very small number of theorems about the way decision makers allocated resources and the ways these allocations led to prices. They trusted in markets and the effectiveness of competition. Left to their own devices, markets produced the best outcomes. Prices were the best allocators of resources. Any intervention to change what markets, left alone, would achieve was likely to be counterproductive. For the Chicago economists, the conclusions for government policy were clear: Wherever possible, private activity should take over from public activity. The less government did, the better. Intervention in the money supply distorted the markets; better instead to have a steady, predictable growth in the money supply. This was the very opposite of the Keynesian idea that government could smooth out economic fluctuations. This aspect of the Chicago approach, and its later variants, became known as monetarism.


    The members of the Chicago School rejected the concept of market failure and the tenets of Keynesianism. They were also much more concerned about the extension of government power than about the dangers of monopoly, the latter having been one of the main motivators of regulation in the United States. They regarded the problem of private monopoly as much overstated, partly because of technological change. ‘Private unregulated monopoly,’ wrote Friedman, was the lesser of the evils ‘when compared to government regulation and ownership.’


    …by the early 1980s, …it became clear that the Chicago School had carried out a devastatingly successful ‘neoclassical counterattack’ in economics and in its applications. Macroeconomics management did not work, while tinkering with the money supply only increased uncertainty and discouraged investment. And the Chicago School also showed that regulation would inevitably drift away from the ideal of promoting an impersonal public good. Instead, it would be captured by special interests. On top of everything else, government had failed to prove itself as a forecaster. Faith in ‘big government’ fell under the attack.


    The work of Chicago—and, more indirectly, Hayek’s contribution—proved crucial to a general shift in the center of gravity of economic thinking and to a reevaluation of the appropriate balance of government and market-place. Fiscal management was no longer seen as an effective tool; fine-tuning was beyond the knowledge and skill of the tuners. Higher inflation did not assure lower unemployment, but it did mean more uncertainty. Smaller government was better; it was all too easy for big government to crowd out private activity. In contradiction to the received wisdom of Keynesianism, reducing deficits, rather than increasing them, could stimulate economic activity.
    2 Oct 2011, 12:06 PM Reply Like
  • Mike Holt
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    Author’s reply » The 1980’s were marked by a shift in fiscal policies toward smaller government, lower taxes, less regulation, and greater reliance upon market forces—all hallmarks of the Chicago School. Although Friedrich Hayek influenced Milton Friedman, who in turn catapulted the Chicago School to popularity at that time, it should not be forgotten that Friedrich Hayek’s greatest achievement while at the University of Chicago was the publication of his most highly acclaimed book, “The Constitution of Liberty.” In this book, Hayek reminds us that it was the ideal of freedom that inspired modern Western civilization, and helps define what it means to be an American. It should likewise not be forgotten that the decade of the 1980s, a period of rapid economic growth in the US, was also characterized by the crystallization of dramatic political, social, and cultural changes embodied by a movement known as neoconservatism that had begun to emerge in the late 1960s and early 1970s.


    In “The Commanding Heights,” Daniel Yergin writes:


    “Neoconservatism had been energized into existence in response to the “countercultural” explosion and the youth rebellion of the late 1960s, the New Left and student assaults on universities, and the celebration of militancy and radicalism. The enemies of the neoconservatives were not only socialism, Marxism, communism, and statism. Another enemy was the dominant American liberal ethos, which they believed had so permeated poltics, the media, and universities as to be almost unchallengeable. The neoconservatives became convinced that liberalism spawned laxity, decay, and moral decline and that, ultimately, it would mean the degeneration of the United States. They criticized ambitious government programs for failing to deliver what they promised, for creating cultures of dependency, and for making things worse instead of better. They based many of their most potent arguments on the law of unintended consequences. Public housing, for example, created slums instead of eliminating them and, in the process, bulldozed what had been affordable housing for lower-income working people.


    The neocons thought of themselves, at least at the time, as Democrats. Many of them were children of the New Deal. The Republican Party was for people who belonged to country clubs, not for people who had gone to City College. But the nomination of George McGovern as the Democratic presidential candidate in 1972 convinced most of the neocons that they no longer had a home in the party, because it had been captured by the liberal left, which, in their view, was naïve about communism and Soviet power and soft on defense.


    The neoconservatives called for a shrinking of government. With increasing vigor, they also offered an optimistic and confident affirmation of capitalism and the marketplace. …The irony was that the market system, as it was then, looked increasingly impaired. But under the influence of conservative economics and the neoconservative social critique, a profound change began to take place in views about the role of the American government. [This emphasis on personal freedoms and the merit of capitalism took hold in other parts of the world as well, and helped raise the standards of living of millions of people around the globe.]
    2 Oct 2011, 10:00 PM Reply Like
  • Mike Holt
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    Author’s reply » I believe the late 1970's / early 1980's represent an important inflection point in American history, not only with respect to the role of government in the economy, but in many other aspects as well.


    Daniel Yergin's excellent book, "The Commanding Heights" contains many other passages that reveal many of these important sea changes that occurred at that time. His research and explanations are so outstanding, some further synopses of his more detailed descriptions of the paths followed by different countries at that time, and where those different paths led, is warranted. But, before I do so, it may be helpful to insert this brief outline of the supposed philosophies of conservatives and liberals regarding the role of government in general.




    It was written for [public] grade school students in Grades 6-8, but the resulting simplification of the concepts involved may be helpful as a touchstone ensuring that we don't lose sight of the forest for the trees.


    If you disagree with any of the presumptions expressed, this may help explain why some just assume that certain government roles and activities make sense, while others may find themselves shaking their heads in disbelief that anyone could even believe "such nonsense.". Unfortunately, political viewpoints are likely to vary forever, and some will also interpret the economics of certain government roles and activities differently as well. But, economic outcomes may be less subjective, so I will next return my attention to the economic outcomes of paths that have already been completed, or that may help us to understand how we got to where we are today. They relate to events that occurred decades ago, but history often repeats itself, and where it does not, it may still rhyme.
    25 Aug 2012, 05:31 PM Reply Like
  • Mike Holt
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    Author’s reply » The ticking debt time bombs in Europe and the US are a major concern from both an investment perspective and a tax perspective. With US elections approaching, the issue of how the US will address the debt problem is finally taking center stage.


    How will this impact the tax structure and rates, and what government spending programs will be cut?


    Can the burden of debt be reduced by increasing economic growth, so that debt/GDP ratios can be kept in check?


    If so, are we more likely to achieve this growth through increased government spending, through private initiatives, or some combination of the two?


    All of these questions stem from a more fundamental question, namely what is the role of the government in the economy?


    As such, the following link to a June 2010 CRS White Paper titled "The Size and Role of Government: Economic Issues" should be of interest.


    27 Aug 2012, 10:30 AM Reply Like
  • Mike Holt
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    Author’s reply » The question as to ‘what is the proper role of the government in the economy?’ is one that investors must ask themselves as they witness the growing importance of global macro risks upon their portfolios. Because they were largely unprepared for these risks, the experience can be likened to that of long-time residents of a dwelling awakened to find their home shaking uncontrollably due to a large and unexpected earthquake. As objects are thrown from shelves, furniture overturned, and the entire house itself seems to have become possessed by some sort of a demon, the initial reaction is disbelief, followed by both panic and a sense of betrayal. After all, this is their home, a familiar place to which they long expected to feel safe from the outside world, and now it is a source of danger from which they must escape for reasons that are not entirely clear beyond the instinctive sense that the dwelling has turned against them.


    If they survive, other than the initial fright caused by a few after shocks, the occupants of that dwelling are likely to experience some restoration of confidence even if their home has suffered damage, because for now at least the invisible source of this mysterious event seems to have disappeared. But, is the ground upon which their home now rests really more stable than it was before? Or could tectonic shifts cause a repeat performance, especially since the existence of certain fault lines has been established, and they will not go away simply by plastering some cracks on the dwelling itself?


    Distancing themselves from a known fault line could be one remedy they might seek in an effort to manage or avoid the risk of another tremor, but do other fault lines exist? And, could an earthquake on one side of the ocean still present risks to those located many miles away? To what other risks might they be exposed as well?


    Indeed, there are many fault lines, as well as many other sources of risk that are beyond investors’ direct control, but clearly we live in a world in which, as Muhamed El-Erian puts it, markets collide and it is uncertain what will evolve from these tectonic shifts.


    According to Daniel Yergin, in his book, The Commanding Heights, “Where the frontier between the state and market is to be drawn has never been a matter that could be settled, once and for all, at some grand peace conference. Instead, it has been the subject, over the course of this [20th] century, of massive intellectual and political battles as well as constant skirmishes. In its entirety, the struggle constitutes one of the great defining dramas of the twentieth century.


    This frontier defines not the boundaries of nations but the division of roles within them. What are the realm and responsibility of the state in the economy, and what kind of protection is the state to afford its citizens? What is the preserve of private decision-making and what are the responsibilities of the individual? This frontier is not neat and well defined. It is constantly shifting and often ambiguous.


    Yet, through most of the [20th] century, the state has been ascendant, extending its domain further and further in what had been the territory of the market. Its victories were propelled by revolution and two world wars, by the Great Depression, by the ambitions of politicians and governments. It was also powered by the drive for progress and improved living conditions in developing countries—and by the quest for justice and fairness. Behind all this was the conviction that markets went to excesses, that they could readily fail, that there were too many needs and services they could not deliver, that the risks and the human and social costs were too high and the potential for abuse too great. In the aftermath of the twentieth century, governments expanded their existing responsibilities and obligations to their populaces and assumed new ones. ‘Government knowledge’—the collective intelligence of decision makers at the center—was regarded as superior to ’market knowledge’—the dispersed intelligence of private decision makers and consumers in the marketplace.


    At the extreme, the Soviet Union, the People’s Republic of China, and other communist states sought to suppress market intelligence and private property altogether and replace them with central planning and state ownership.


    Government would be all-knowing. In the many industrial countries of the West and in large parts of the developing world, the model was the “mixed economy,” in which governments flexed their knowledge and played a strong dominating role without completely stifling the market mechanism. They would reconstruct, modernize, and propel economic growth; they would deliver equity, opportunity, and a decent way of life. In order to achieve all that, governments in many countries sought to capture and hold the high ground of their economies—the “Commanding Heights.”


    For three decades, the consensus held that achieving economic growth and improvements in the standard of life and human welfare required some form of central management. The extent of coordination was considered so great that only the state could provide it.


    So, why the shift? “Why the move to the market? Why, and how, the shift from an era in which the “state”—national governments—sought to seize and exercise control over their economies to an era in which the ideas of competition, openness, privatization, and deregulation have captured world economic thinking? This question, in turn, begets others:


    • Are these changes irreversible?


    • Are they part of a continuing process of development and evolution?


    • What will be the consequences and prospects—political, social, and economic—of this fundamental alteration in the relationship between government and marketplace?”


    These were questions that Daniel Yergin’s book, The Commanding Heights, sought to answer, but these were the questions being asked thirty years ago. And, history itself seemed to have firmly answered these questions in the form of decades of strong global economic growth and the lifting of tens of millions of people out of poverty across the globe.


    It is therefore almost incomprehensible that a few years ago, the world seemed to have been suddenly turned upside down, prompting many to ask instead, “Why the move to the state?” Why, and how, the shift from an era in which the ideas of competition, openness, privatization, and deregulation to an era in which the “state”—national governments—seek to seize and exercise control over their economies?
    2 Dec 2012, 03:40 PM Reply Like
  • Mike Holt
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    Author’s reply » As Daniel Yergin pointed out, the governments of the mixed economy attempted to coordinate economic activity by using some combination of five sets of tools—regulation, planning, state ownership, industrial policy, and Keynesian fiscal management. These tools could be augmented by a sixth—monetary policy. The actual mix varied considerably among countries, depending upon their traditions and history.


    So, to those who believe that the government should play any role in the economy, it seems possible that the answers to the above questions regarding why shifts in the role of government in the economy have occurred may be found either in some flaw in one or more of the five tools used by government to coordinate economic activity—six tools if you include monetary policy implemented by central banks that seem to fall somewhere in between the public sector and the private sector. Or, the answers may lie in how the mixture of these policies—the policy mix—must be altered depending upon the traditions and history of the countries in which they are applied, their stage of economic development, or the particular sets of circumstances in effect at a particular time.


    So, let’s first look at how the shift away from government control toward more market-based economies played out in many East Asian countries, and compare this to the experiences of many other developing countries.
    2 Dec 2012, 06:47 PM Reply Like
  • Mike Holt
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    Author’s reply » Drawing again from “The Commanding Heights,” Daniel Yergin writes, “The Japanese, as officials there were fond of repeating, lived in a very small part of a few islands, with hardly any natural resources—in sharp contrast to a resource-rich Soviet Union, which spread across eleven time zones. Yet already by the mid-1980’s Japan was becoming recognized as an “economic superpower.” It was not alone. Next came the “tigers”—South Korea, Taiwan, Hong Kong, and Singapore. And close behind them came the “new tigers”—Malaysia, Indonesia, Thailand, the Philippines—plus a fifth one, the Guangdong province of China. These became the countries to emulate and from which to learn.


    What made Asia a miracle was not just the speed of economic growth. Rather, it was that growth was sustained; that it involved industrial transformation; and, most of all, that ordinary people appeared to share in it, sparking a revolution in lifestyles.


    But, politicians and academics alike hasted to argue that, far from being a miracle, East Asia’s success could be explained—and could offer practical lessons for the rest of the world. They set off a vigorous debate over the wellsprings of growth. The arguments came to focus on the role of government intervention—or government restraint.


    Success was the result of industrial policy, some said—that is, they explained, government had “picked winners” from among domestic companies, nurtured them with subsidies and tariff protection and patronage, and then worked inextricably with these national champions to go out and conquer markets around the world. The results could be measured in growth rates.


    Others disagreed. They noted that the Asian countries were still much more open to commerce and entrepeneurship than were other parts of the world. Whatever the ambiguities, the Asian nations were, as economist and Nobel Prize winner Gary Becker put it, “by world standards at the time, pretty market-oriented.”


    The latter view gained ground in the 1990s with the rise of a new formulation that directly challenged the industrial policy thesis. This was the interpretation of the “macro-fundamentalists.” The impact of government intervention they said, was much exaggerated. The decisive factor was that these Asian governments got the economic fundamentals right: low inflation, and legal frameworks that encouraged enterprise, and—crucially—a willingness to become part of the global system of international trade. In this view, governments direct positive contribution was its promotion of human capital with education and primary health. Picking winners was secondary, and in any case, as an activity it was overrated.
    2 Dec 2012, 06:48 PM Reply Like
  • Mike Holt
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    Author’s reply » Elsewhere in “Commanding Heights,” Daniel Yergin writes, “In contrast, in Mexico, the great debt crisis of the 1980s had begun. Just as stagflation and rigidity had topped the consensus within the industrial world in the 1970s, so the protracted debt crisis in the 1980s undermined both the confidence placed in the expanding state in the developing world and the adherence to third worldism. The borrowing that began with high ambition and great assurance ended in what has been described as “the most remarkable debt problem in history.” It had been generated with remarkable rapidity in the second half of the 1970s. In those years, the world’s money centers were flush with deposits from the oil producers’ windfall. Bankers rapidly recycled those newly dubbed “petrodollars” in the form of loans—many of them to developing countries, both to governments and to government-owned companies. Some worried about the ability of these government and state companies to handle the consequent debt service, but the concern was brushed aside. In fact, with the 1920s and 1930s very much in mind, there was great fear that failure to recycle those funds could trigger a world depression.


    Add to it all one other factor: Because of the downturn in industrial countries, business in the home markets of the banks was poor. Real estate in the United States had just gone bust. Intensified competition among banks led to ever sweeter and more enticing terms for would-be borrowers. In fact, the in thing was to lend to third world countries, and no one wanted to be at the bottom of the league tables.


    In ways that were not very well recognized or accounted for as it was happening, developing country borrowing exploded. Overall, between 1972 and 1981, the external debts of developing countries increased sixfold, reaching $500 billion by 1981. The infusion of money stimulated, at least for a few years, higher economic growth. By the beginning of the 1980s, the nine largest U.S. banks had committed the equivalent of 250 percent of their capital to loans to developing countries. Those who questioned the rapid buildup of debt were dismissed as grumpy old men. After all, insisted the head of America’s largest bank, governments could not go bankrupt.


    How did the borrowing turn into the debt crisis? In retrospect, the formula for bankruptcy was very simple: growing debt, rising interest rates, and falling revenues. The rapid buildup of debt reached its peak at a bad time—just at the moment when, owing to the recession in industrial countries, demand was weakening for the primary products that made up the livelihood of most developing countries. That meant lower prices for their goods, and thus lower income. At the same time, the high interest rates of the early 1980s, aimed at counteracting the inflation in the industrial countries, raised the cost of developing countries’ floating debt, increasing the repayment burden.


    Thus the rest of the 1980s was spent on the cleanup. For parts of the developing world, the 1980s became known as the “lost decade”—a period of either very modest or negative economic growth and, when taking population into account, sharply declining per capital real income. Banks, meanwhile, wrote down their loans, greatly weakening their own balance sheets. All this was the price of ambition and hubris—and imprudence.


    The debt crisis was the great turning point for the developing world. Far-reaching lessons were drawn from the entire drama. Countries had gotten into these severe straits owing in part to bloated government sectors and inefficient state-owned companies. Nations could not expect the international capital markets to finance a huge, undisciplined government sector. And it was the very expansion of government, justified by the ideas of the times, that had led these nations down the road to what in reality was bankruptcy.


    Both economic arrangements and the guiding ideas derived from development economics would have to be changed, for they could no longer deliver the economic growth they had promised. Ideas that had been beyond the pale and politically impossible only a few years earlier now moved to the fore, and doors opened to new people who would apply those ideas. Fiscal reality simply would not allow otherwise.”
    2 Dec 2012, 06:48 PM Reply Like
  • Mike Holt
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    Author’s reply » So, what has been learned from these powerful experiences that we would expect to remain indellibly etched in the minds of all those who were required to suffer their consequences? Apparently, some have learned very little.


    For example, the Saturday, December 1, 2012 issue of the Wall Street Journal features an article titled, "Latin Growth Tune Plays in Two Speeds" by Sara Schaefer Munoz. In her article, Ms. Munoz explains, "Latin America is becoming a tale of two economies, with nations like Peru, Columbia, Mexico and Chile growing faster than the global average, and nations like Argentina and Brazil struggling with crippling slowdowns."


    "Overall, resource-rich Latin America has done very well in the past decade, mostly thanks to China's ravenous appetite for raw materials to fuel its rise, which drove up prices for everything from oil to soybeans. But the global slowdown of the past two years has created a divide in the region between countries that pushed a more aggressive free-market agenda and kept a tighter grip on the public purse, and those that used the swell in coffers from rising commodity prices to embrace a bigger role for government in the economy. While the region as a whole has slowed down, the region's more open economies are holding up better than the others."
    2 Dec 2012, 07:00 PM Reply Like
  • Mike Holt
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    Author’s reply » In comparing and contrasting the outcomes for the Asian Tigers versus the highly indebted countries of Latin America that suffered a Lost Decade as a result of their "excessive borrowing" is the lesson to be learned that "debt is bad" or that "debt should be largely limited to those who will be directly accountable for that debt and have a clear understanding of the specific cost / benefit relationships that debt financed activities involve?


    In his latest book, "Antifragile," Nasim Taleb essentially argues that the latter is the lesson to be learned:


    "Much of our modern, structured, world has been harming us with top-down policies and contraptions (dubbed “Soviet-Harvard delusions” in the book) which do precisely this: an insult to the antifragility of systems.


    This is the tragedy of modernity: as with neurotically overprotective parents, those trying to help are often hurting us the most.


    If about everything top-down fragilizes and blocks antifragility and growth, everything bottom-up thrives under the right amount of stress and disorder. The process of discovery (or innovation, or technological progress) itself depends on antifragile tinkering, aggressive risk bearing rather than formal education."
    3 Dec 2012, 08:26 AM Reply Like
  • Mike Holt
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    Author’s reply » The 2008 financial crisis left in its wake much greater involvement of governments and central banks in the economy. State capitalism was already the norm in many rapidly developing emerging market countries, and many of these countries continue to experience higher growth rates relative to most developed countries characterized by less (not necessarily little) government involvement in their economies.


    There are many factors that can help to explain these divergent growth trajectories, but it has caused many to question what role governments and central banks should, and/or will, play in the economy during the years ahead with implications likely to be of importance not only for investors.


    This topic is discussed from a variety of perspectives by various experts in their fields in a number of articles / essays on the project-syndicate.org / focal-points / the clash of the capitalisms website, which I have linked below:




    The short article titled "Is State Capitalism Winning?" by the two authors of the book "Why Nations Fail: The Origins of Power, Prosperity and Poverty" may be of particular interest.
    30 Mar 2013, 09:22 AM Reply Like
  • Mike Holt
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    Author’s reply » The early 1980's ushered in Ronald Reagan as US President, Paul Volcker as the Chairman of the Federal Reserve, and a shift in the "policy mix" from fiscal policy to monetary policy under the influence of Milton Friedman and "the Chicago Boys."


    Although the logic behind taming inflation that was rampant in the 1970's through higher interest rates rather than higher tax rates now seems obvious to most, at the time it was considered somewhat controversial since it challenged the Keynesian economic model that had become so widely accepted prior to the onset of stagflation in the 1970's.


    The rationale for reducing tax rates was also based upon a belief that this would unleash the forces of entrepeneurship as individuals would become more motivated if they could keep more of the benefits derived from their activities. This certainly proved itself to be the case as economic reforms around the world resulted in a surge in global economic growth.


    However, a review of debt levels in the US will reveal a rapid accumulation of debt at this juncture. Since the US dollar was to continue to serve as the global reserve currency even though it was no longer backed by gold, how much of this debt was attributable to increased demand for dollars to facilitate global trade?


    And, how much of the increase in global economic activity was attributable to easy access to credit and reduced concern for fiscal responsibility and rising debt levels? For example, in the US, the belief in some corners that "deficits don't matter" became widespread at that time.


    Were efforts to unleash entrepeneurial forces hijacked by a growing indifference to debt? If so, to what extent was this attributable to a shift in the levers of control over the economy from politicians exercising fiscal policy to central bankers exercising monetary policy? Or, did both just begin drinking from the punch bowl together.


    According to David Stockman, who was Ronald Reagan's budget director at that time, both politicians and central bankers became much more reckless at that time. This is an unpopular argument because many believe in the free market principles that were being implemented at that time, and that may have explained much of the increased economic activity that has taken place since that time. But, there is no denying that debt also began to rapidly accelerate at that time.


    David Stockman documents this more fully in his new book, "The Great Deformation." This recent Op-Ed piece in the Sunday NY Times titled, "State-Wrecked: Corruption in Capitalism in America" provides a brief glimpse of his views.


    11 Apr 2013, 08:46 AM Reply Like
  • Mike Holt
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    Author’s reply » The role of government [and central banks] in the economy is a fundamental issue that, arguably, has had the greatest impact on shaping our world over the past century. In the US, the pendulum swung, though somewhat erratically, toward less government involvement, and since globalization that unleashed free market forces around the world was accompanied by hundreds of millions of people being lifted out of poverty, it seemed obvious to many that this was where the pendulum belonged.


    But, rates of global economic growth and development were highest in less developed countries, and governments generally played a much larger role in these economies. This may simply be a function of their lower levels of development and the need for more government involvement in those earlier stages, but especially after the 2008 financial crisis, many began to question whether the proper role of government had been correctly identified.


    After launching a massive stimulus program, the GDP of China, the poster child for state capitalism, surged from $3.5 trillion in 2007 to over $8 trillion today [with debt-fueled Fixed Asset Investment spending now accounting for about 50% of their GDP], while economic growth in the US and other western countries was barely noticeable even after massive increases in government debt and unbelievably lax monetary policies on the part of their central banks. Has "capitalism with Chinese characteristics" emerged as a superior economic model? Regardless, will more and more countries, including the US, begin to adopt this economic model? If so, what impact will these changes bring?


    There is a tendency to view the potential outcomes as a choice between "our" way of life or "theirs," with theirs expected to result in greater government control over the economy, and with this, greater government control over other aspects of our lives as well. And, political developments within the US since 2008 may have magnified these fears.


    But, the real issue may not be the growing influence of China that could require a choice between stagnating economic growth or abandoning our way of life based upon the principles of individual liberty and a sound justice system. Rather, globalization may be the central theme, and in the near-term at least that would seem likely to result in less government involvement, not more.


    For example, as Dani Rodrick , professor of International Political Economy at Harvard University points out in his book, “The Globalization Paradox: Democracy and the Future of the World Economy,”


    "there is no global antitrust authority, no global lender of last resort, no global regulator, no global safety net, and, of course, no global democracy.”


    Furthermore, he goes on to say that global governance is but a distance dream. But, he adds that,


    "In other words, global markets suffer from weak governance, and are therefore prone to instability, inefficiency, and weak popular legitimacy.”


    and then concludes,


    "In particular, you begin to understand what I will call the fundamental political trilemma of the world economy: we cannot simultaneously pursue democracy, national determination, and economic globalization.”


    So, where does this leave us? According to Dani Rodrick, not with either less globalization or less government. In other words, although global governance may be a distant dream, more government is not:


    "First, markets and governments are complements, not substitutes. If you want more and better markets, you have to have more (and better) governance. Markets work best not where states are weakest, but where they are strong. Second, capitalism does not come with a unique model. Economic prosperity and stability can be achieved through different combinations of institutional arrangements in labor markets, finance, corporate governance, social welfare, and other areas.”
    16 Feb 2014, 10:19 AM Reply Like
  • Mike Holt
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    Author’s reply » In their book, "Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy" husband and wife authors Usha C. V. Haley and George T. Haley carefully document their extensive research on Chinese government subsidies.


    Their exhaustive research and presentation of the facts make it clear that Chinese subsidies to businesses have contributed significantly to China's success in promoting strategically important export-oriented industries targeted by the CCP.


    What is not so clear is the best course of action to counter these practices. Rather than seeking to put an end to unfair trade practices in its many forms--which are quite extensive--the authors propose to essentially fight fire with fire by engaging in similar forms of government intervention in an effort to level the global playing field.


    Pragmatically, is this the only course of action that would prevent such practices, or does it just contribute further to the trend toward centralization of power and corresponding distortion of markets? And, would this make the potential winner of such economic warfare any stronger, or will it simply cause the global economy to become more fragile, to the detriment of all concerned?
    9 Nov 2014, 09:37 PM Reply Like
  • Mike Holt
    , contributor
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    Author’s reply » Although it just scratches the surface, this June 23, 2013 WSJ article provides a glimpse at some of the subsidies that the CCP authorizes the Chinese government to provide to Chinese businesses.




    In many instances, these subsidies don't enable Chinese businesses to dominate global industries. Rather, they merely serve to keep inefficient, state-owned-enterprises alive for the benefit of politically well-connected members of the CCP--in the short-term, at least.
    9 Nov 2014, 09:55 PM Reply Like
  • Mike Holt
    , contributor
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    Author’s reply » This October 10. 2014 article in Foreign Policy magazine demonstrates that subsidies for Chinese businesses continue to grow, but suggests that their opium-like addiction to these subsidies can make them weaker, not stronger, and that this is a problem that will take care of itself due to its inherent flaws.




    But, as Jeffrey Townson and Jonathan Woetzel explain in Chapter 3 of their book, "The One Hour China Book" China's "last man standing strategy" often eliminates their competitors first. This is not the best strategy to reward increased levels of productivity that can sustain continued improvements in standards of living, but it may be an effective form of economic warfare as a means of achieving greater levels of power concentrated in the hands of a few.
    9 Nov 2014, 10:17 PM Reply Like
  • Mike Holt
    , contributor
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    Author’s reply » Efforts underway to develop regional trade pacts that would largely replace the World Trade Organization may represent an intended means of putting an end to unfair trade practices in its many forms.


    Alternatively, this trend could also be the result of a transition to what Ian Bremmer and Nouriel Roubini refer to as a "G-Zero" world, which would also be consistent with Henry Kissinger's view that no single perspective of a "world order" has ever existed. From the geopolitical perches from which they view the world, developments over the past several years seem to have shifted public opinion away from the viewpoint expressed by Francis Fukuyama in his 1989 essay "The End of History" and toward the perspective expressed by Samuel Huntington in his 1993 essay "The Clash of Civilizations."


    Yet, in their book "Bridging the Pacific" rather than advocating for regional trade agreements between the US and various countries excluding China in an effort to circumvent China's flagrant unfair trade practices that the WTO has not been able to prevent, authors C. Fred Bergsten, Gary Clyde Hufbauer, and Sean Miner argue instead that China and the United States would benefit substantially from a bilateral free trade and investment accord.


    Although their motives seem to be in stark contrast with those of the Haley's in their book "Subsidies to Chinese Industry..." their policy prescriptions seem to reflect the same mentality embodied in the saying "If you can't beat them, join them."


    How will the regional trade pacts now being pursued or the alternative trade prescriptions advocated by either Usha and George Haley or C. Fred Bergsten et al answer the question posed by the controversial Martin Amstrong, namely "The tree has already been cut. Which way will it fall--Authoritarianism or Democracy?"


    Although seemingly outside the scope of topics within which most investors would prefer to confine their analyses, the answer to this question could have more profound consequences than the "more pertinent" issues that more typically preoccupy our attention.


    While I don't believe that it is possible to predict the future, I do believe that scenario analysis is helpful, and that investors will be far better able to manage risks if they have considered them beforehand rather than attempting to decide what to do after the horse has already escaped from the barn.
    25 Jan 2015, 10:48 AM Reply Like
  • Mike Holt
    , contributor
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    Author’s reply » Although the topic of this post is "The Global Macro Risks that Jeopardize Investors in Rare Earth Mining Companies," it is equally important, if not more important, for all investors to realize that the lack of investment in rare earth mining companies outside China, and the lack of development of downstream industries outside of China, is itself a very significant global macro risk with implications for all investors. In fact, these risks have far-reaching implications that extend well beyond the realm of only investors.


    The irony is that with the plunge in stock prices for rare earth mining companies, the risks associated with our dependence upon China for rare-earth-based products critical to a great many advanced technologies have faded in the minds of many investors, when in fact this global macro risk has soared exponentially due to the challenge that the decline in investor interest presents for the development of a more secure supply chain for rare-earth based materials.


    The judgemental error that we have committed is to devote more attention to the opportunities that may exist by investing in junior rare earth mining companies -- many of which may be illusory, rather than to the risks posed by China's near monopoly over rare earths and downstream industries -- even though these risks are very, very real.
    16 Dec 2011, 12:14 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Competition


    This sub-category of comments regarding competition was intended to address competiton between private sector enterprises, excluding any discussion of the government since I have created a separate sub-category of comments titled The Role of Government in the Economy.


    However, as the economies of emerging market economies comprise a growing percentage of the global economy, and the economies of emerging market economies are characterized by much higher levels of government involvment, this neat format for categorizing comments becomes less relevant. Even the largest global corporations are suddenly encountering a new competitor larger than any they have ever encountered, namely "China, Inc."


    The trend toward state capitalism is explained very well by Ian Bremmer of the Eurasia Group, particularly in his book titled "The End of the Free Market: Who Wins the War Between States and Corporations?" Many of the thoughts contained in this book are summarized, along with other geopolitical concerns, in various reports that can be viewed on the Eurasia Group's website (see link immediately below):




    Ian Bremmer will have an opportunity to debate his views with other experts this Tuesday in a debate titled "China Does Capitalism Better than the US" sponsored by Intelligence Squared. Here is a link with additional background information.




    Before you listen to this debate, you may also want to catch up with Ian Bremmer's latest thinking regarding China, that is summarized in the report linked below:




    In many ways, by offering access to these debates, Intelligence Squared allows us to enjoy an experience similar to sitting in the Main Reading Room of the Library of Congress, surrounded by all those intimidating statues of the great thinkers perched on the ledge above, except in this venue the great thinkers will be alive and in front of you. Its still permissible for you to let your thoughts soar, and if you can't attend the live event, a replay of the debate will be available at the website linked above.
    11 Mar 2012, 06:41 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Financial Systems and Financial Institutions


    When China was admitted to the WTO, it was with the expectation that this would encourage China to become a more responsible stakeholder. This was another way of saying that China would be expected to respect the existing rules-based international systems and institutions that had been developed to allow for orderly trade among countries.


    However, China did not play a role in the development of existing international systems and institutions, nor was it content with the extent of the influence it was allowed to exert within this system. This has resulted in efforts to introduce new systems and institutions over which China may exert greater control.


    One such institution is the Asian Infrastructure Development Bank, which is described in this October 9, 2014 NY Times article titled, "China's plan for regional development bank runs into US opposition."


    10 Oct 2014, 10:03 AM Reply Like
  • Shaduc
    , contributor
    Comments (3005) | Send Message
    "expectation that this would encourage China to become a more responsible stakeholder."


    According to China standards not American or Western Europe's!
    10 Oct 2014, 10:11 AM Reply Like
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