Epilogue To TREM '11 -- Cyberspace, The Friend Or Foe Of Technology And Western Civilization? [View instapost]
The US Dept of Defense issued its Annual Report to Congress yesterday titled, "Military and Security Developments involving the People's Republic of China 2013.
The following excerpt from page 36 of the Report is of particular interest:
Cyber Activities Directed Against the Department of Defense.
In 2012, numerous computer systems around the world, including those owned by the U.S. government, continued to be targeted for intrusions, some of which appear to be attributable directly to the Chinese government and military. These intrusions were focused on exfiltrating information. China is using its computer network exploitation [CNE] capability to support intelligence collection against the U.S. diplomatic, economic, and defense industrial base sectors that support U.S. national defense programs. The information targeted could potentially be used to benefit China's defense industry, high technology industries, policymaker interest in US leadership thinking on key China issues, and military planners building a picture of U.S. network defense networks, logistics, and related military capabilities that could be exploited during a crisis.
In the following section on that same page, the report goes on to explain:
Cyberwarfare in China's Military.
Cyberwarfare capabilities could serve Chinese military operations in three key areas. First and foremost, they allow data collection for intelligence and computer network attack purposes.
Second, they can be employed to constrain an adversary's actions or slow response time by targeting network-based logistics, communications, and commercial activities.
Third, they can serve as a force multiplier when coupled with kinetic attacks during times of crisis or conflict.
A callout section on Page 37 further explains:
Role of Electronic Warfare [EW] in Future Conflict
An integral component of warfare, the PLA identifies EW as a way to reduce or eliminate US technological advantages. Chinese EW doctrine emphasizes using electromagnetic spectrum weapons to suppress or deceive enemy electronic equipment. PLA EW strategy focuses on radio, radar, optical, infrared, and microwave frequencies, in addition to adversarial computer and information systems.
Chinese EW strategy stresses that it is a vital fourth dimension to combat and should be considered equally and traditionally with traditional ground, sea, and air forces. Effective EW is seen as a decisive aid during military operations and consequently the key to determining the outcome of war. The Chinese see EW as an important force multiplier and would likely employ it in support of all combat arms and services during a conflict.
The report drew some controversy as well as criticism by certain Chinese Communist Party representatives, as described in this article in CIO magazine:
1. whether China will have gained a stronger foothold in various downstream industries when new applications for rare earths create the stronger than expected surge in demand that you suspect. Cyber theft emanating from China for the purpose of acquiring valuable intellectual property rights has been rampant for years, and these activities, together with dominance in various high tech industries, pose even greater risks than China's near monopoly over rare earths.
2. whether China will have gained access to further rare earth supplies sufficient to fuel that demand. Very significant rare earth resources can be found in Greenland, but it will require a lot of capital to develop these resources and the infrastructure necessary to bring them to market. This may explain former Chinese President Hu Jintao's unexpected visit to Denmark last year, the first of its kind in 62 years.
Shock Exchange, with rare earth prices down, and shares of the many, many junior mining companies down with them, attention to our dependence on China for these critical metals and downstream components has significantly waned.
To many, the now absent euphoria surrounding investments in rare earth mining companies suggests that they are not so critical after all, and that all the attention given to rare earths a few years ago was unfounded.
Nothing could be further from the truth. The decline in rare earth prices, which makes it more challenging for potential new entrants into this market to achieve profitability, serves to increase the risk associated with China's near monopoly over these critical materials and their huge lead in the development of downstream industries.
The real story was about risk, with important geopolitical and geoeconomic implications that could have a significant impact on the US military and high tech industries in particular. But, due to misguided expectations that these risks would translate into huge investment profits from investments in junior mining companies, many investors were likely burned and there now seems to be much less appreciation for the significance of the risks that remain.
JayMMe, many of the financial crises over the past 25 years were attributable to a mistaken reliance on some elegant new mathematical model, so why in the world would you be seeking yet another mathematical model that could supposedly predict the future?
The decisions of billions of people acting independently in all the nooks and crannies of the economy, adjusting themselves in real-time can't be modeled, so suggesting that a mathematical model is needed to negate the use of mathematical models that, in this case, facilitate centralized decision-making, is absurd.
It would be better not to distort the market in the first place than to wonder about the best way to limit the damage caused by such distortions. Its time to let markets function as they should, rather than experimenting with what might happen if someone was to push this button this time.
There is a need for financial market regulation, and for a lender of last resort. But, when the Fed extends its role to serve as a fourth branch of government setting policy that is not subject to the checks and balances that apply to the other branches of government, sh*t happens.
In my comment above, I should have referred to Demetrios Mirantis rather tah Ron Kirk, who resigned as the USTR last month. Demetrios Mirantis served as the Deputy Trade Representative under Ron Kirk, and became the acting Trade Representative when Kirk resigned.
"A bigger flaw, in my view, is that central banks don’t have any important control over the unemployment rate, while they have important control over inflation."
Well said Inflation Trader. Whether central banks are more likely to encourage asset bubbles than inflation is another important question that must be asked, but I would agree that the causes of high unemployment seem to have much less to do with an insufficient monetary base than with issues outside the Fed's purview such as:
Higher costs of living in developed countries relative to developing countries pushing up wages to levels that incent business owners and managers to outsource jobs and/or to further automate their operations;
Slowing demand on the part of aging and often indebted baby boomers incenting businesses to scale down their operations and to seek greater efficiencies, rather than to ramp up capacity;
Disrespect for intellectual property in certain rapidly industrializing countries that discourage R&D investments (aka disruptive innovation) on the part of established companies in developed countries;
Competition from State Owned Enterprises and State Champions managed to maximize employment rather than profits since a failure to provide employment opportunities in developing countries could lead to unrest that threatens to topple autocratic regimes.
These issues are better addressed through means other than monetary policy, and may even be worsened by monetary policies intended to boost asset prices or to reduce interest rates. Increased uncertainty on the part of business owners and managers as to the potential impact of a confusing array of market interventions on the part of governments and central banks that discourages long-term investments is just one of many examples of the potential harmful effects.
But, alas, few seem to even recognize the name Ron Kirk, while everyone recognizes the name Ben Bernanke, so excessive reliance on monetary policy to cure all ailments seems destined to continue. And, reducing unemployment levels may simply be an excuse to justify efforts to stir-up inflation or inflationary expectations in order to combat the deflationary forces that remain a bigger source of concern for policy makers.
A lack of planning and courage to address fundamental issues that should have been anticipated decades ago, such as the impact of the inevitable aging of the baby boom population leaves policymakers with few if any viable alternatives at this point. But, I would counter the title of your article with the admonition, "Not so fast on the inflation expectations." Debt-induced asset bubbles such as the housing bubble can also result from easy money conditions, and the bursting of these asset bubbles is deflationary, not inflationary.
Epilogue to TREM '11 -- Global Macro Risks that Jeopardize Investors in Rare Earth Mining Companies [View instapost]
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.
Epilogue to TREM '11 -- Global Macro Risks that Jeopardize Investors in Rare Earth Mining Companies [View instapost]
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.
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.
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.
JP has often indicated that EVangelicals must compete with an emerging middle class in developing countries for the materials needed for either expensive toys or more basic modes of transportation.
This link to the Matthews Asia Funds website seems to capture that concept very well.
Misunderstanding The Monetary System Is Hazardous To Your Portfolio's Health [View article]
Wind, you're right: the dollar's status as the global reserve currency allows the US to get away with more debt than, let's say, the "old Argentina." Since commodities, most notably oil, are denominated in US dollars, increased demand for oil translates into increased demand for dollars. As such, the exchange value of the dollar is supported even as more dollars are printed.
Conversely, it can be argued that global economic growth requires more dollars to be printed in order to satisfy the corresponding global demand for dollars.
However, if too much reliance is placed on the status of the US dollar as the global reserve currency, this can also serve as a curse rather than a blessing. In effect, the ability to incur more debt without causing either a rise in interest rates or a decline in the exchange rate for the dollar encourages more debt. What happens if interest rates rise?
Some glibly dismiss this concern with a statement something like this: "Why should I be concerned if interest rates were to increase to 6%? They were at that level before and everything seemed to function normally." What is being overlooked by this statement is that the level of debt is many times higher than the levels of debt outstanding before. The carrying cost on this debt is not much higher because interest rates have fallen. If interest rates rise, the carrying cost on this debt would soar. So, what would be different would be that carrying costs on $15 trillion of 6% debt today would be much, much higher than carrying costs on $1 trillion of 6% debt before.
What I find disturbing is that there doesn't seem to be any clear understanding as to why interest rates remain low. This is demonstrated in the attached article by Kenneth Rogoff titled "The Long Mystery of Low Interest Rates" that appears on the "Project Syndicate" website, a forum for the views of many top economists.
In light of this apparent lack of understanding, I'm surprised that the Federal Reserve would feel confident enough to experiment on such a large scale with one series of innovative new forms of monetary policy after another. How will they know when to take their foot off the pedal to avoid a hike in interest rates if they don't even know what they should be looking for, or where? Did they anticipate the Bank of Japan's decision to essentially replicate their actions? Are they anticipating potential announcements by central banks elsewhere to do the same in an effort to devalue their currencies?
Perhaps what's most troubling about these experiments is that we are essentially the guinea pigs. We can debate whether inflation or deflation will ensue, but both are forms of market disequilibrium and this can be harmful either way.
Inflation may be the intended outcome, but I will continue to posit that deflation may be an unintended consequence.
Misunderstanding The Monetary System Is Hazardous To Your Portfolio's Health [View article]
"...as businesses and consumers have been paying down debt over the last 5 years.'
There has been deleveraging in the financial sector, but very little among businesses and consumers. Businesses have been refinancing debt for new debt with lower interest rates, and consumer debt has shifted from mortgage debt to other forms of debt, including credit card debt and student loans. Much of the reduction in mortgage debt has been due to defaults and foreclosures rather than debt repayments.
That's why you've seen so much deleveraging in the financial sector, with the help of the Fed--and increased government debt.
Misunderstanding The Monetary System Is Hazardous To Your Portfolio's Health [View article]
That cash may be needed to repay the even larger amount of outstanding debt that remains at incredibly high levels. To the extent that debt has served to prop up asset prices, a decline in asset prices should result in a reverse wealth effect, meaning less spending not more.
Regardless, even if spending increased, price inflation wouldn't necessarily result unless the supply of goods couldn't keep up with the demand, and right now there is a lot of surplus manufacturing capacity.
Concern about potential deflation is the main reason the Fed is trying to create inflationary expectations. You must understand this in order to understand its actions. Most people do, which is why the cash is just accumulating on the sidelines.
Debt, demographics, and geo-economics are powerful forces that must be dealt with, not disguised. When these fundamentals are addressed, confidence will improve. Thinking that the real problem is merely a lack of confidence, and that increased confidence will cure these fundamental problems is largely just politically expedient wishful thinking. Besides, even if efforts to reflate assets with even more debt may restore confidence among some, increased debt and increased intervention on the part of governments and central banks creates confusion and a sense of artificiality that reduces confidence among many others.
Inflation may occur here and there, but asset bubbles followed by deleveraging and deflation should be of greater concern.
Misunderstanding The Monetary System Is Hazardous To Your Portfolio's Health [View article]
We're experiencing inflation in some sectors such as health care and education, as well as in food and energy, but a glut of manufacturing capacity, much of it shifting to Asia, is simultaneously leading to falling prices of manufactured goods. I'd call that biflation.
Also, within the US, monetary stimulus is most effective with respect to higher order goods that require capital, and thus borrowing. Among consumers (~65% of US GDP), most debt is incurred to buy homes. The housing bubble led to a sharp drop in the demand for home loans. To this extent, the "monetary transmission mechanism" was therefore broken.
Yet this didn't stop governments and central banks from engaging in all sorts of activities, since voters still expect them to "do something." Largely due to the factors identified above, this generally hasn't led to too much money chasing too few goods here in the US, but it may be contributing to too much money chasing too few investments, as well as asset bubbles and market distortions, both in the US and overseas.
Epilogue To TREM '11 -- Cyberspace, The Friend Or Foe Of Technology And Western Civilization? [View instapost]
http://1.usa.gov/17KMQdb
The following excerpt from page 36 of the Report is of particular interest:
Cyber Activities Directed Against the Department of Defense.
In 2012, numerous computer systems around the world, including those owned by the U.S. government, continued to be targeted for intrusions, some of which appear to be attributable directly to the Chinese government and military. These intrusions were focused on exfiltrating information. China is using its computer network exploitation [CNE] capability to support intelligence collection against the U.S. diplomatic, economic, and defense industrial base sectors that support U.S. national defense programs. The information targeted could potentially be used to benefit China's defense industry, high technology industries, policymaker interest in US leadership thinking on key China issues, and military planners building a picture of U.S. network defense networks, logistics, and related military capabilities that could be exploited during a crisis.
In the following section on that same page, the report goes on to explain:
Cyberwarfare in China's Military.
Cyberwarfare capabilities could serve Chinese military operations in three key areas. First and foremost, they allow data collection for intelligence and computer network attack purposes.
Second, they can be employed to constrain an adversary's actions or slow response time by targeting network-based logistics, communications, and commercial activities.
Third, they can serve as a force multiplier when coupled with kinetic attacks during times of crisis or conflict.
A callout section on Page 37 further explains:
Role of Electronic Warfare [EW] in Future Conflict
An integral component of warfare, the PLA identifies EW as a way to reduce or eliminate US technological advantages. Chinese EW doctrine emphasizes using electromagnetic spectrum weapons to suppress or deceive enemy electronic equipment. PLA EW strategy focuses on radio, radar, optical, infrared, and microwave frequencies, in addition to adversarial computer and information systems.
Chinese EW strategy stresses that it is a vital fourth dimension to combat and should be considered equally and traditionally with traditional ground, sea, and air forces. Effective EW is seen as a decisive aid during military operations and consequently the key to determining the outcome of war. The Chinese see EW as an important force multiplier and would likely employ it in support of all combat arms and services during a conflict.
The report drew some controversy as well as criticism by certain Chinese Communist Party representatives, as described in this article in CIO magazine:
http://bit.ly/16VYhAN
Rare Earth Weekly [View article]
1. whether China will have gained a stronger foothold in various downstream industries when new applications for rare earths create the stronger than expected surge in demand that you suspect. Cyber theft emanating from China for the purpose of acquiring valuable intellectual property rights has been rampant for years, and these activities, together with dominance in various high tech industries, pose even greater risks than China's near monopoly over rare earths.
2. whether China will have gained access to further rare earth supplies sufficient to fuel that demand. Very significant rare earth resources can be found in Greenland, but it will require a lot of capital to develop these resources and the infrastructure necessary to bring them to market. This may explain former Chinese President Hu Jintao's unexpected visit to Denmark last year, the first of its kind in 62 years.
http://reut.rs/YeC3oF
Rare Earth Weekly [View article]
To many, the now absent euphoria surrounding investments in rare earth mining companies suggests that they are not so critical after all, and that all the attention given to rare earths a few years ago was unfounded.
Nothing could be further from the truth. The decline in rare earth prices, which makes it more challenging for potential new entrants into this market to achieve profitability, serves to increase the risk associated with China's near monopoly over these critical materials and their huge lead in the development of downstream industries.
The real story was about risk, with important geopolitical and geoeconomic implications that could have a significant impact on the US military and high tech industries in particular. But, due to misguided expectations that these risks would translate into huge investment profits from investments in junior mining companies, many investors were likely burned and there now seems to be much less appreciation for the significance of the risks that remain.
Not So Fast On The Deflation Talk [View article]
The decisions of billions of people acting independently in all the nooks and crannies of the economy, adjusting themselves in real-time can't be modeled, so suggesting that a mathematical model is needed to negate the use of mathematical models that, in this case, facilitate centralized decision-making, is absurd.
It would be better not to distort the market in the first place than to wonder about the best way to limit the damage caused by such distortions. Its time to let markets function as they should, rather than experimenting with what might happen if someone was to push this button this time.
There is a need for financial market regulation, and for a lender of last resort. But, when the Fed extends its role to serve as a fourth branch of government setting policy that is not subject to the checks and balances that apply to the other branches of government, sh*t happens.
Not So Fast On The Deflation Talk [View article]
Not So Fast On The Deflation Talk [View article]
Well said Inflation Trader. Whether central banks are more likely to encourage asset bubbles than inflation is another important question that must be asked, but I would agree that the causes of high unemployment seem to have much less to do with an insufficient monetary base than with issues outside the Fed's purview such as:
Higher costs of living in developed countries relative to developing countries pushing up wages to levels that incent business owners and managers to outsource jobs and/or to further automate their operations;
Slowing demand on the part of aging and often indebted baby boomers incenting businesses to scale down their operations and to seek greater efficiencies, rather than to ramp up capacity;
Disrespect for intellectual property in certain rapidly industrializing countries that discourage R&D investments (aka disruptive innovation) on the part of established companies in developed countries;
Competition from State Owned Enterprises and State Champions managed to maximize employment rather than profits since a failure to provide employment opportunities in developing countries could lead to unrest that threatens to topple autocratic regimes.
These issues are better addressed through means other than monetary policy, and may even be worsened by monetary policies intended to boost asset prices or to reduce interest rates. Increased uncertainty on the part of business owners and managers as to the potential impact of a confusing array of market interventions on the part of governments and central banks that discourages long-term investments is just one of many examples of the potential harmful effects.
But, alas, few seem to even recognize the name Ron Kirk, while everyone recognizes the name Ben Bernanke, so excessive reliance on monetary policy to cure all ailments seems destined to continue. And, reducing unemployment levels may simply be an excuse to justify efforts to stir-up inflation or inflationary expectations in order to combat the deflationary forces that remain a bigger source of concern for policy makers.
A lack of planning and courage to address fundamental issues that should have been anticipated decades ago, such as the impact of the inevitable aging of the baby boom population leaves policymakers with few if any viable alternatives at this point. But, I would counter the title of your article with the admonition, "Not so fast on the inflation expectations." Debt-induced asset bubbles such as the housing bubble can also result from easy money conditions, and the bursting of these asset bubbles is deflationary, not inflationary.
Epilogue to TREM '11 -- Global Macro Risks that Jeopardize Investors in Rare Earth Mining Companies [View instapost]
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.
http://bit.ly/11skvWk
Epilogue to TREM '11 -- Global Macro Risks that Jeopardize Investors in Rare Earth Mining Companies [View instapost]
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.
http://1.usa.gov/11Y1ivV
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.
http://1.usa.gov/14H3Z9Q
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.
Epilogue to TREM '11 -- Global Macro Risks that Jeopardize Investors in Rare Earth Mining Companies [View instapost]
http://bit.ly/17bVfpE
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."
http://bit.ly/12xHEb3
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).
http://bit.ly/17bVhhk
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.
Epilogue to TREM '11 -- Global Macro Risks that Jeopardize Investors in Rare Earth Mining Companies [View instapost]
http://bit.ly/XOYHni
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.
Are EV Dreams Going Up In Smoke? [View article]
This link to the Matthews Asia Funds website seems to capture that concept very well.
http://bit.ly/117Nv47
Misunderstanding The Monetary System Is Hazardous To Your Portfolio's Health [View article]
Conversely, it can be argued that global economic growth requires more dollars to be printed in order to satisfy the corresponding global demand for dollars.
However, if too much reliance is placed on the status of the US dollar as the global reserve currency, this can also serve as a curse rather than a blessing. In effect, the ability to incur more debt without causing either a rise in interest rates or a decline in the exchange rate for the dollar encourages more debt. What happens if interest rates rise?
Some glibly dismiss this concern with a statement something like this: "Why should I be concerned if interest rates were to increase to 6%? They were at that level before and everything seemed to function normally." What is being overlooked by this statement is that the level of debt is many times higher than the levels of debt outstanding before. The carrying cost on this debt is not much higher because interest rates have fallen. If interest rates rise, the carrying cost on this debt would soar. So, what would be different would be that carrying costs on $15 trillion of 6% debt today would be much, much higher than carrying costs on $1 trillion of 6% debt before.
What I find disturbing is that there doesn't seem to be any clear understanding as to why interest rates remain low. This is demonstrated in the attached article by Kenneth Rogoff titled "The Long Mystery of Low Interest Rates" that appears on the "Project Syndicate" website, a forum for the views of many top economists.
http://bit.ly/13iRPiB
In light of this apparent lack of understanding, I'm surprised that the Federal Reserve would feel confident enough to experiment on such a large scale with one series of innovative new forms of monetary policy after another. How will they know when to take their foot off the pedal to avoid a hike in interest rates if they don't even know what they should be looking for, or where? Did they anticipate the Bank of Japan's decision to essentially replicate their actions? Are they anticipating potential announcements by central banks elsewhere to do the same in an effort to devalue their currencies?
Perhaps what's most troubling about these experiments is that we are essentially the guinea pigs. We can debate whether inflation or deflation will ensue, but both are forms of market disequilibrium and this can be harmful either way.
Inflation may be the intended outcome, but I will continue to posit that deflation may be an unintended consequence.
Misunderstanding The Monetary System Is Hazardous To Your Portfolio's Health [View article]
There has been deleveraging in the financial sector, but very little among businesses and consumers. Businesses have been refinancing debt for new debt with lower interest rates, and consumer debt has shifted from mortgage debt to other forms of debt, including credit card debt and student loans. Much of the reduction in mortgage debt has been due to defaults and foreclosures rather than debt repayments.
That's why you've seen so much deleveraging in the financial sector, with the help of the Fed--and increased government debt.
Misunderstanding The Monetary System Is Hazardous To Your Portfolio's Health [View article]
Regardless, even if spending increased, price inflation wouldn't necessarily result unless the supply of goods couldn't keep up with the demand, and right now there is a lot of surplus manufacturing capacity.
Concern about potential deflation is the main reason the Fed is trying to create inflationary expectations. You must understand this in order to understand its actions. Most people do, which is why the cash is just accumulating on the sidelines.
Debt, demographics, and geo-economics are powerful forces that must be dealt with, not disguised. When these fundamentals are addressed, confidence will improve. Thinking that the real problem is merely a lack of confidence, and that increased confidence will cure these fundamental problems is largely just politically expedient wishful thinking. Besides, even if efforts to reflate assets with even more debt may restore confidence among some, increased debt and increased intervention on the part of governments and central banks creates confusion and a sense of artificiality that reduces confidence among many others.
Inflation may occur here and there, but asset bubbles followed by deleveraging and deflation should be of greater concern.
Misunderstanding The Monetary System Is Hazardous To Your Portfolio's Health [View article]
Also, within the US, monetary stimulus is most effective with respect to higher order goods that require capital, and thus borrowing. Among consumers (~65% of US GDP), most debt is incurred to buy homes. The housing bubble led to a sharp drop in the demand for home loans. To this extent, the "monetary transmission mechanism" was therefore broken.
Yet this didn't stop governments and central banks from engaging in all sorts of activities, since voters still expect them to "do something." Largely due to the factors identified above, this generally hasn't led to too much money chasing too few goods here in the US, but it may be contributing to too much money chasing too few investments, as well as asset bubbles and market distortions, both in the US and overseas.