Monday, February 27, 2006

2/27/06 The New, Old Thing: Silicon Valley, Hollywood, Madison Ave—Oscar, Emmy, Clio, or “Amateur Night at the Apollo” 2690 words

revised 2/28, 11:33 pm

“You might as well do some social stuff because that is where the big problems are.” “If a lot of people come out of poverty that is a tremendous business opportunity.” Larry Page, Google’s co-founder, 2006 World Economic Forum, “Financial Times,” Jan 31, 2006

What is the Oscar-nominated movie “Brokeback Mountain” about? Who won “American Idol” last year? What’s happening on “CSI” and “24”? Who are the two current holders of highest political office in China, with one-fifth the world's population (which just passed 6.5 billion people this weekend)? In India, with more than one billion people?

Many Americans know the first three, but I would guess less than 2% could answer the last two, fewer if you exclude international business people. (An embarrassingly far higher percentage of urban Chinese and Indians would know of Bush and Cheney.)

So what, one might ask, why does it matter? At minimum, simply from a human interest viewpoint, look at some of the compelling stories Americans are missing due to the negligence of the corporate mass media:

In the past few decades, more people, many hundreds of millions, mainly in East Asia, have uplifted themselves out of poverty than has ever happened in such a short time in world history. Surely this could be the stuff of inspiring personal and family stories of perseverance and overcoming tremendous adversity?

Over the same period, an entire continent of nearly seven hundred million people, Africa, has been devastated, by wars, disease, famine, etc. Sadly the nearly incomprehensible suffering of this huge human tragedy continues to beg to be told.

An entire religion of 1.5 billion people, Islam, is in the midst of a struggle to interpret its heritage whilst coming to grips with the modernity of a globalized world. Needless to say, understanding this is in the interests of all of us.

Closer to home, the world's wealthiest nation shares a very long border with a huge continental region to the south of both deep poverty and pockets of development and hope, a prime example of the world's growing income/wealth gaps that must be addressed in a fair and honest manner by the advocates of globalization who dominate the corporate mass media.

Yet these stories are hardly ever told by the corporate mainstream media, especially in films and television. Mainstream journalism seems to do a somewhat better job, often under difficult editorial constraints, but has come up sorely lacking at critical points, most especially leading up to the U.S. invasion of Iraq and also during the stock market bubble of the late 1990s.

Mine is not a new “elitist” criticism of the corporate mass media, it has been made by cranky social critics and hopeless idealists since the beginning of television and surely long before that. But perhaps it takes on a greater urgency now.

Generally, the global economy obviously is more interconnected than ever before, so it is more important that the disparate regions of the world understand each other much better. More specifically, the U.S. now heavily relies on foreign savings/capital to maintain its living standards.

Yet the average American, whose home value is ultimately heavily dependent on savings not from his local S&L, as was the case thirty years ago, but now on mortgage-backed securities held all over the globe, is blissfully unaware of the lives of his creditors.

There is an implicit global deal, what some economists have misleadingly labeled Bretton Woods II, which links the U.S. with other nations, especially those in East Asia. This deal assumes a viable, mutually beneficial creditor-debtor arrangement between vastly different societies, mediated through supposedly rational global capital markets.

But behind these capital flows are very real human beings organized into sovereign nations with potentially very different notions of the fairness and justice of these implicit deals, arranged and supported by so-called "independent" central banks, on which the people have not been consulted and with which they ultimately might not be very happy with, much to the surprise of American debtors.

I.e. since Americans now owe foreigners a lot of money, it might at least be polite to know how they live and what they’re like.

E.g., more white Americans learned to empathize with black Americans through the tv series "Roots" in the 1970s than from their history textbooks. The world needs more stories shown in the corporate mass media that enable people to transcend their different backgrounds, cultures, etc.

It wouldn't be hard to get them, just slap some subtitles on the most popular shows from various countries. Americans can learn about the world from the foreign equivalents of "Desperate Housewives" and "Sex and the City." :-)

E.g. for the past few years, S. Korean serial tv dramas have been very popular in Japan amd China, helping to smooth over historical tensions. There's no reason why Americans shouldn't be seeing similar things in their mass media, including more Mexican television.

During the very same period in which the U.S. has become by far the world's largest debtor, to much of the rest of the world, as indicated by numerous public opinion polls, the current U.S. government hubristically has come to believe that as the self-proclaimed "sole superpower,” it alone has the unique right, historical mission, and even godly duty to tell the rest of the world what to do, regardless of national sovereignty.

Thus, it would be more than a little helpful if the American population in whose name this government is acting had a better understanding of how the rest of the world lives, and how it perceives the self-interested actions of the U.S.

Alas, thanks to the corporate media, the vast majority of Americans has very little understanding of the rest of the world, as verified over and over again in public opinion polls. And, the rest of the world knows this, and doesn’t like it. It’s easy to see how this situation could degenerate from current serious misunderstandings into something worse, perhaps much worse.

This of course is not lost on the international business community, which is far more aware of global linkages and foreign cultures than the average American. But like a lot of other things that need changing, the business elite is not doing much about this, hoping it can continue to slide by.

Yes, things are much better than before (the very crude national chauvinism preceding major wars of the past is hopefully unthinkable nowadays). The Internet has made many more people far more aware of far more things.

But unfortunately, that seems limited to a small minority of the population. The rest, which is highly dependent on the corporate mass media, still seems relatively uninformed about global interdependencies.

Finally, the corporate mass media continues to be an unabashed cheerleader for all sorts of financial speculative excesses, only slightly toned done from the stock market TMT bubble days, making it very difficult for the American population to get a better grip on economic reality.

Is Silicon Valley’s current love affair with media helping to change this potentially very dangerous situation?

For many decades, Silicon Valley made itself the coolest, hippest, most relevant place on earth by supplying the electronic infrastructure tools to greatly increase organizational and personal productivity, effectiveness and innovation.

In the 1980’s, Silicon Valley made possible the PC revolution. In the 1990s, it led the profound changes associated with the Internet and wireless, with everything linked to everything else, including databases, 24/7.

With the help of Silicon Valley, the transition over the last few decades to a highly productive America is by and large now complete, if for no other reason than there are now no more hours in the day in which to spin one’s wheels keeping busy.

In the 2000’s, the “new new thing” has been Silicon Valley’s love affair with media, advertising and consumer electronics. Unfortunately, this doesn’t seem to be working nearly as well as the previous major transformations. On the contrary, it comes across as amateur night at the Apollo, with little meaningful impact so far, with perhaps a few exceptions.

Rather than helping Americans become truly informed about the world, Silicon Valley seems pre-occupied with the rather mundane but more profitable pursuits of serving up prodigious amounts of very ordinary movies and music, web searches for the latest on Lindsay Lohan and Angelina Jolie, the nonstop adolescent gossip on, etc

Yet, despite this chase after the quick buck, Silicon Valley seems to think it is once again at the forefront of earth-shattering change to overturn the established corporate order. But Silicon Valley is not immune to speculative global market forces.

In the 1990’s it allied with (some might say sold out to) Wall Street to create the TMT equity bubble (infamously called “the greatest legal creation of wealth in history” by top vc John Doerr). A lot of vc’s got very wealthy pushing extremely shoddy deals, and most of them, despite the label "venture capitalists," did not suffer any serious consequences for doing so when the stock market bubble popped and $8 trillion in market cap went up in smoke.

Wall Street, meanwhile, simply moved on, replacing over-priced, fraudulent but legal IPO’s with mortgage-backed securities, emerging market debt, private equity and m&a deals, and incomprehensibly huge amounts of ever more convoluted derivatives with increasingly less connection to underlying economic reality. In the 2000s, with the government and big banks orchestrating a global consumer/real estate boom, Silicon Valley found media, advertising and consumer electronics after the TMT equity bust.

E.g., as recounted in the book, “The Search,” when the author, Wired’s John Battelle, first talked to Google’s CEO Eric Schmidt about advertising, Schmidt “didn’t see the point of starting a media business. Google was a technology business, he told me…’We’re looking for the next billion-dollar market in technology’….A year later I met with Eric again. Among his first words: ‘Isn’t the media business great.’”

Similar words could have been said by Steve Jobs as he re-vitalized Apple with the iPod, and sold Pixar to Disney. And in the sale of to Murdoch’s News Corp.

Yet, at the end of the day, nothing really changes, the oligopolistic corporate media still controls what the majority of Americans see and hear, and Wall Street moves from bubble to bubble without a pause.

Silicon Valley’s regional economy, once the dynamic model for the world, is now, like the rest of the U.S., mainly dependent on rampant real estate and stock market speculation. Meanwhile, the main action has moved five hundred miles southeast, to the epicenter of American social excesses and the record-breaking real estate speculation of this decade, Las Vegas.

Of course Silicon Valley companies can not be held responsible for fixing the world’s problems. But we should not pretend that those problems do not exist by ignoring them, or by uncritically reporting and accepting often misleading, at very best, solutions, as the mainstream corporate media does.

No amount of amateur-hour blogging and adolescent social networking is changing that potentially dangerous reality, despite the delusions of those in Silicon Valley to the contrary.

If Silicon Valley really thinks it is having a profound impact on the media business, then I suggest two "reality checks" over the coming year, based on the principle of "fool be once, shame on you, fool me twice, shame on me."

First reality check, will the mass media finally tell the truth about how the income-stagnant American middle class is highly dependent on speculation, especially real estate, and what will be the dire consequences of placing all the nation's economic chips on speculation if real estate turns out to be another massive bubble?

Average inflation-adujsted weekly earnings of U.S. workers are down 17% from 1972 and flat since 2000 (see Table B-47, pg 338, 2006 "Economic Report of the President" available on-line). Most of the American middle class, now heavily dependent on speculation, particularly in real estate, can no longer distinguish paper "wealth creation" from the real thing. That inability will most likely cause severe problems at some point down the road. (See previous two articles posted on this blog.)

The corporate mass media was fully complicit in the creation of the largest financial bubble in history up until that time, the TMT equity bubble ("irrational exuberance" was simply a "plausible denial" cover story for the gullible).

It is not clear if the global real estate boom will turn out to have been an even larger bubble. If it is, then the corporate mass media will have been complicit with Wall Street in grossly distorting global capital flows for the benefit of the financial elite twice in the past decade.

Thanks to the corporate mass media, the average middle-class American homeowner has now fully adopted Wall Street's "power of myth" re the benefits of so-called "free markets," which don't actually exist. Rather "independent" central banks operate largely free from market discipline, as they were somewhat constrained from wildly inflating in the original Bretton Woods system, and outside of democratic control, mainly for the benefit of the global speculative financial system.

Second reality check, in international affairs, will the free pass that was granted the Bush Administration by the corporate mass media in Iraq be repeated, with Iran, Syria, China (over trade, currency, Taiwan, energy, etc) and others, before push comes to shove once again?

E.g., here are a couple of quotes made on March 16, 2003, three days before the U.S. invaded Iraq, by Vice President Cheney on “Meet the Press”: "And we believe he [Saddam] has, in fact, reconstituted nuclear weapons. I think Mr. El Baradei frankly is wrong." “We know he’s [Saddam] out trying once again to produce nuclear weapons and we know that he has a long-standing relationship with various terrorist groups, including the al-Qaeda organization.”

Cheney never has been held accountable by the corporate mass media for this and similar statements of alleged “fact,” under the same standards the media used when Pres. Clinton was impeached over lying about sex. Such blatant double standards are not bought by the rest of the world, to the detriment of the international standing of the U.S.

We want to make it very clear that we don’t “blame” Silicon Valley or hold it primarily responsible for its potential slide. Like the rest of America, Silicon Valley clearly has been seduced to go for the quick buck in its business models, product developments, etc. by greatly distorted market signals from the global speculative financial system that benefits Wall Street and its own venture capitalists.

Could things be different? Some of Silicon Valley’s entrepreneurs still seem to have the right instincts about who really creates real wealth, as Google’s founders did in their prickly relationship with Wall Street during its IPO and their earlier relationship with their vc’s. Google’s corporate mission is “to organize the world's information and make it universally accessible and useful,” and its corporate dna is “do no evil.”

If Silicon Valley really wants to change the media industry, how about funding a new television network that actually tells honest news and holds our leaders accountable for their statements and acts? Wouldn’t that be a real “new new thing”?

If that's too ambitious, as I previously suggested, then just slap some sub-titles on the most popular tv shows from China, S. Korea, Japan, etc. and show them in prime time. The rest of the world learns about the U.S. mainly by watching American tv shows and movies. Likewise, Americans would learn more about the people of the world by watching their most popular entertainment than by reading all the news stories shown in my links.

Surely, guys, watching such stuff is worth giving up just a little NFL, NBA and NASCAR on the big-screen tv you bought from East Asia? After all, it's hard to go to war with someone after enjoying their dramas and sitcoms and seeing for oneself that we're all humans on a small planet.

Isn't it time that Silicon Valley grew up and stopped being led around by the nose by its big brothers, Wall Street and Hollywood?

Next: Innovation, "Dark Matter," and Silicon Valley’s Horizontal, Asset-Light, Slice-and-Dice Business Model

Tuesday, February 14, 2006

2/14/06 “Mommy, Where Do McMansions Come From?” 1887 words

"Capital gains, of course, cannot supply any of the saving required to finance gross domestic investment." Alan Greenspan, speech at Jackson Hole, Wyoming, August 26, 2005

“Mommy, my school teacher says Americans work longer than Europeans, but don’t save as much as Asians. But if we don’t save, then how can we buy all this stuff?”

“That’s a good question, Emily. Your school teacher is right, those Europeans really do need to stop slacking off and buckle down, like us, and the Asians have to learn how to loosen up a bit and enjoy themselves a little more, uh, again, like us!

Besides, Daddy heard from the smart man on the radio on the way to work that the very smart people on Wall Street say don’t believe that stuff about Americans not saving, the government people are just not counting it right, they're ignoring the value of our nice home. We've told you honey they can’t do anything right in Washington anyway.

Why, since we moved into this nice house just five years ago, its value has more than doubled, and your daddy and I have saved almost half of that for your college education. How can they not count as savings such a good thing as that, it makes no sense, right?

Your daddy has worked very hard for all that we have, he's earned every penny of it, you know that. So don’t worry, Emily, everything will be fine, and you can keep going to nice private schools just as long as you want.”

"But Mommy, even if we're okay, what about all those poor people in the world, don't they need savings from houses to buy stuff, too."

"That's a good question, Emily, but your mommy doesn't have time to think about it right now. I have to drive you to soccer practice. So please don't worry about it dear, they'll be fine, I'm sure. The good people in Washington will take care of it, they seem to spend all our tax dollars on foreign aid anyway."

"But Mommy, you just said that the people in Washington..."

"Never mind, Emily, we're late. I'll ask Daddy to talk with you about all this later when he comes back from work. He learns so much from that smart radio man. I just wish he didn't have to drive so far everyday."

"Mommy, my friend from public school says the rich just get richer, and the poor just get poorer. What does that mean? Are we getting richer because we own a home?"

"Not now, Emily, we really have to get going. That's just another one of those silly stories from some of those people in Washinton. They're so confusing. They're all just paper shufflers anyway, not like your daddy, who sells home mortgages so other people can buy nice houses too. Let's go."

"I thought you said he sold stocks?"

"That was before, you have to change with the times, Emily, never forget that's what makes America so great! Not like those lazy Europeans your teacher was telling you about."

Unfortunately for the hypothetical radio talk show host, Wall Street, and more importantly Emily and her mom, no less a “free market” deity than Greenspan has actually supplied the intellectual connection between their home equity ATMs and the massive global misallocation of capital, only no one has bothered to tell them, it seems.

In a speech given at the annual Jackson Hole, Wyoming confab last August 26, Greenspan made a critical point, not surprisingly relegated to a mere footnote, which virtually no economic commentators or politicians with oversight of the Fed ever mention, at least in the U.S.:

“The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 ” “6. Capital gains do not add to GDP…Capital gains, of course, cannot supply any of the saving required to finance gross domestic investment.” [Emphasis added.]

Please think about the bold-faced sentences for just a minute and let it sink in. Perhaps do a little “thought experiment” and focus on real production of goods and services, to try to finally cut through one’s “money illusions.” How does massively marking up the prices of already existing homes actually shift any real production from consumption into new investments to produce new real wealth?

It can’t, as Greenspan clearly footnoted. So, who are you going to believe, some hypothetical radio guy, Wall Street, which decimated your 401(k) in that equity bubble, or THE Alan Greenspan?

But if you believe Greenspan, then where do those real savings for real investment actually come from? As taught in econ 101, with very little savings of its own, U.S. so-called “paper wealth creation” is in fact necessarily based upon real savings from real income from real production in the rest of the world.

This is reflected in the fact that the U.S. is singularly running a huge current account deficit with the rest of the world of more than 6% of U.S. GDP, nearly 2% of world GDP, sucking in about 70-80% of the world’s so-called “savings glut” (Bernanke’s term, which we will deal with some other time, suffice to say for now that the world doesn't have too much savings, it has too little non-speculative financial intermediation).

A one paragraph look back at my previous article to set the table. I asserted that U.S. policies which distort the so-called “free market” to deliberately produce record real estate speculation, which is especially rampant in a number of blue-state regions, has the unintended, at least I hope it’s unintended, effect of also impacting the funding of educational opportunities, making them much more unequal. Since admitting this would create “cognitive dissonance” in their core value/belief system of equal opportunity, blue-state liberals, to avoid feeling guilty, support well-meaning programs inadequate to get at the core issues.

Here’s another example of this same problem, but first a very strong disclaimer. I don’t think blue-state liberals are responsible for this or any of the world’s other problems. Nor do I think blue-state liberals are any worse than red-state conservatives. Most Americans, blue-state or red-state, are hard-working, decent, well-meaning people. The main villain running through my blog is the global speculative financial system and its “power of myth” regarding so-called "free markets."

Obviously unlike their children’s education, blue-state liberals aren’t pre-occupied with global economics, but if they were, again they simply couldn’t psychologically make the connection between how their home equity ATM’s massively distort the global allocation of capital, and their views of themselves as good liberals favoring such things as increased foreign aid and humanitarian disaster relief, less military intervention abroad, and perhaps even more just global economic development.

E.g., it’s very difficult for blue-state liberals to come to grips with the fact that real estate is actually the most heavily government promoted and protected sector of the U.S. economy (in all the ways laid out in a previous article), far more than those perennial liberal whipping boys, agriculture and military.

Blue-state liberal home owners in areas of rampant real estate speculation, such as California, and the metropolitan areas of New York, Boston, and Washington D.C. might gladly support ending government subsidies for wealthy agribusiness, especially in some sparsely populated “red states,” in the Doha round of WTO talks, in order to help global economic development.

Yet these blue-state liberals would rise up like medieval peasants if you threatened their real estate tax breaks and very low mortgage interest rates.

Rather than face up to the disturbing reality that the rest of the world, including poor still developing countries such as China, are helping to finance U.S. consumption of McMansions and everything that goes in them, well-off blue-state “conscience consumers” seem to prefer to spend a few extra dollars on “fair trade” coffee and t-shirts in a well-meaning but rather futile effort to help low-wage foreign labor that is starving for capital for economic development (and most importantly, for their own viable domestic economic/financial corporations and other institutional framework that can productively use their savings).

Suffice it to say for now we find it a little hard to believe that any blue-state liberal not on a Wall Street or big media payroll, which of course are key blue state industries, takes seriously the argument that it’s a hard, even selfless endeavor for America to “shop til it drops” (which may in fact eventually happen from excess debt) in order to support the global economy, but someone has to do it (perhaps as Keynesian demand creation).

Again, it is not that the econ 101 distinction between paper speculative capital gains, on the one hand, and real economic production and real savings = real productive investment, on the other, is intellectually difficult to understand, but rather psychologically and politically hard to grapple with, due to self interest.

It is just psychologically difficult to come to grips with the fact that the often hundreds of thousands dollars in capital gains on homes is essentially “unearned,” ultimately simply due to sheer speculation in the global financial system.

At this point, the vast majority of Americans seem simply unaware of the difference between real economic wealth creation from creating new goods and services from investing real savings from real income from real production, versus “paper wealth creation” from capitalized speculative financial gains.

To almost all Americans today, after years of watching how people have become very wealthy through speculative capital gains and through intense “positive reinforcement” conditioning by distorted market incentives, these two different economic concepts, real wealth creation and speculative financial gains, have melded into one and the same thing. (A good example of this are the large, enthusiastic audiences that turn out for real estate "wealth creation" seminars.)

There are other twists to the story we won’t go into here, e.g. American corporations, not consumers or government, are in fact saving a lot, it’s just that they don’t seem to know what to do with all that cash piling up, except spend it, often wastefully, on paper deals that have strongly come back in favor the past two years, much to Wall Street’s delight, such as leveraged m&a and lbo’s, stock buybacks, etc.

We will perhaps try to assess in other articles this extremely lopsided global economic arrangement, which many mainstream economists seem to believe is neither economically sustainable nor morally defensible in the long run (so far, they've been wrong for years about the economically sustainable part), and also the political implications of Americans not understanding these simple economic facts of life about real savings and speculative capital gains.

Clearly busy, stressed ordinary working Americans are not responsible for that lack of knowledge, it is mainly the fault of the oligopolistic corporate media and the Republocrats. Unless and until the media changes (I doubt that the Republocrats ever will), this country is not going to significantly understand how to change.

Which is why, having finished our two-part look at blue-state liberals, next up may be “The New, New Thing” of this decade, Silicon Valley’s torrid love affair with Hollywood and Madison Avenue, media and advertising.

Sunday, February 12, 2006

2/12/06 The Home-Equity ATM of Blue-State Liberals and the Lopsided Inequitable Funding of American Education 1311 words

According to a January 19 story in IBD newspaper, estimated gross home equity extraction in the U.S. ran at a $990 billion annual rate in the third quarter. That’s equal to an incredible 11% of disposable personal income by my calculation.

The article quotes no less an authority than Greenspan in a very rare Fed paper he co-authored in Sept: "It is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction." The article notes that “Greenspan said in October that home equity withdrawals might explain much of the decline in the personal savings rate, which has turned negative in recent months.”

With average worker real earnings now once again resuming a thirty-three year 16% downtrend, and, relative to previous economic expansions, employment growth still lagging and business investment mediocre, the U.S. consumer, hence global economy, has been critically dependent the past five years on home equity extraction from the real estate ATM.

A one-paragraph digression. The motto of my new blog is to try to be “hopefully fair, honest, respectful, responsible, and slightly thought-provoking." Since I was critical, hopefully respectfully and responsibly, of Pres. Bush’s economic policies in my first two articles, it seems only fair to attempt to hold up for honest scrutiny in my next articles liberals in the blue states.

In a previous article, I looked at how energy is anything but a “free market,” despite Pres. Bush’s apparent professed belief to the contrary. The same of course is true for real estate. These two markets are intricately linked, with U.S. consumption of oil and everything else dependent on enormous speculative capital gains in real estate.

Those huge home equity gains were created by deliberately, drastically distorting the “free market” allocation of real resources and capital by: Greenspan’s previous three-year policy of deeply negative real interest rates (directly through lower mortgage rates and indirectly through asset allocation shifts); $200 billion per year in tax subsidies on mortgage interest and capital gains; the explosive growth of multi-trillion dollar government-sponsored entities implicitly guaranteeing the massive mortgage-backed securities market; zoning laws hindering development to protect property values.

These policies were justified both explicitly as government support of home ownership and as necessary for economic stabilization following the collapse of the huge TMT equity bubble in 2000. Significant changes in these market-distorting government policies would of course have strong negative effects on the real estate market. (Demographic factors, such as immigration and family formation, did not change so suddenly as to be able to explain the sharp speculative price surge. Increased demand for second homes was spurred less by baby-boomer demographics, more by speculative “paper wealth” created for existing homeowners.)

Most home owners of course fully realize that real estate is a highly rigged game in their favor, not a “free market,” that’s one of the key reasons to own a home. Nevertheless I think that most still prefer to believe that that they somehow have “earned” their lottery-like gains in home equity the past five years or so through their own hard work in diligently paying their mortgage, at least the interest if not principal. And I suspect that almost all homeowners implicitly strongly expect the government to do everything in its power to support their home values, their version of the infamous “Greenspan put” in the capital markets that I discussed in a previous article.

Some of the more speculative real estate players even seem to harbor the belief that they are cowboys/girls riding the suburban free ranges in their gas-guzzling multi-SUV families, and that their speculative gains are justly due to their risk-taking. Of course with such massive government support of the real estate market, nothing could be further from the truth, but it’s a comforting delusion for those who still miss the closing of the American frontier more than a century ago (even then government policies strongly favored real estate speculation).

We want to make it very clear that Americans do work very hard for what they have. The problem, however, lies with what they work at, due to distorted market incentives from the global speculative financial system.

Nor are we “blaming” homeowners for seeking to prosper from the speculative capital gains created by the global financial system, whose main beneficiaries are the huge financial entities and those who work in them. It just makes simple common sense to go for the “free lunch” offered by global speculative finance, if there doesn’t seem to be any cost. And it is just human nature to unconsciously deny or rationalize away what’s really going on if it clashes with one’s strongly held beliefs and values.

Here’s one example. Public school funding in the U.S. is mainly tied to local property values and thus extremely unequal. (Ruled constitutional in 1973 by the Supreme Court. Ironically, the Court evidently discovered in the Constitution the "right" to remain poorly educated at the very same time that it was also unearthing previously hidden Constitutional "rights" re abortion and privacy, admissibility of evidence in courts, etc., all of which blue-state liberals cheered and now hold sacrosanct.)

Thus, government promotion of massive real estate speculation is de facto by far the single most important education policy of the U.S., which in this "information age" of intense global competition makes it one of the most important and influential of all government policies.

Huge home equity gains fund well-groomed suburban public school campuses (property tax revolt notwithstanding), pay private schooling fees and out-of-control college expenses. I think it’s safe to say that without their parents’ home equity ATM, most students in the U.S. would get an even worse education than they already do. (Recall that the elite has been calling for major educational reform at least since the official 1983 report, “A Nation at Risk,” with little to show for it, for reasons discussed in a previous article.)

The funding of education by real estate speculation has the seemingly undeniable effect of greatly stacking the odds against school children living in poor neighborhoods, obviously inconsistent with the image of America as the fair land of opportunity and the Bush Administration preaching of global democracy. (Perhaps not too surprisingly, and some might claim not even accidentally, income/wealth inequality in the U.S., already at both historical and developed nation highs, is increasing, while upward mobility is decreasing and actually lower than in parts of Europe, evidently according to one recent study.)

Yet in this day of ultra-competitive child-rearing, an effect of both globalization and compulsive conspicuous consumption, blue-state liberals in regions of rampant real estate speculation, such as California and areas in and around New York, Boston, Washington D.C., while supportive of some government programs attempting to at least partially mitigate the worst effects of this hopelessly lopsided educational playing field, would simply never consider the core issues of local funding of education greatly subsidized by government-created home-equity “paper wealth.”

Like everyone else, good liberals simply unconsciously deny or rationalize these policies as an unquestioned given, because to do otherwise would create too much “cognitive dissonance” with their belief system as being more compassionate and caring than “red-state rednecks."

(Perhaps we will discuss in a later article the huge long-term negative political consequences of the blue-state liberals 1970s embrace of court-ordered busing and affirmative action as solutions for these education problems, from which they have yet to politically recover today. But suffice to say for now that Bush/Cheney were re-eletected in 2004 more due to rising real estate, rather than cultural, values, notwithstanding the views of both David Brooks at the NYT on the "right" and Sen. Hillary Clinton supposedly on the "left.")

To be continued in my next article, including a discussion of blue-state liberal support of "fair trade" buying of t-shirts and coffee.

Saturday, February 11, 2006

2/11/06 The Global Speculative Financial System as “Enabler” of America’s Addiction to Oil 1680 words

In his State of the Union address on Jan 31, President Bush supposedly surprised the nation by saying “America is addicted to oil.” What would have been actually surprising is if he had noted the link between America’s oil addiction and the global speculative financial system. Bush also has said that current energy prices are set by the market. Left unsaid is that it is a market in which only one country, the U.S., gets to pay its bills in money it prints (more on energy market distortions shortly).

Perhaps the U.S. would be less addicted to oil, and mountains of other consumer imports (the 2005 trade deficit was just reported at $726 billion), if it actually had to pay for all this stuff in a hard currency that it had to earn through exports. Instead, the U.S. pays in dollars it prints, which is then recycled back into dollar capital markets by OPEC, in the case of oil, and by East Asia, for everything else.

A better functioning global financial system would have incentivized the U.S. to compete to service its current account deficit, which is more than 6% of its GDP and nearly 2% of global GDP. If the U.S. had to run a reasonably balanced current account, like every other nation on earth, the U.S. would export more to pay for the imports it buys using the home equity ATM.

This would have created a shift away from more excessive low-tech McMansion consumption excess, and towards much higher tech-based capital goods for export, as characterized by the much more balanced current accounts of Germany, Japan, and S. Korea, including their account with China. This may have created millions of higher tech U.S. jobs, rather than the much more common Wal-Mart-type service sector jobs that average half the compensation selling all that imported stuff.

Large market distortions affecting the global economy are caused by the current world monetary “system” (a term loosely used), which enables the U.S. to continually run huge current account and fiscal deficits with seemingly very little consequences.

This is because since 1971 the dollar is legally tied to nothing of real value, so that there never has to be actual settling of accounts of the dollar claims held by foreigners. Absent such market discipline, there has also been no “adult supervision” by the Fed in the creation of these dollar claims.

The end result has been predictable. Since the dollar-gold link was severed in 1971, dollar-denominated debt has been growing incredibly faster than actual real GDP, which on a time series graph appears as a huge, seemingly unbridgeable gap opening up between the two lines over the past thirty-five years.

The value of the dollar is currently dependent on the perceived sustainability of the power of the U.S. in the world political/economic system. Because of this power, including over the global oil market, the dollar is the world’s reserve currency used for oil and other international trade.

All other nations have what some economists call the “original sin” of needing to earn foreign exchange to pay their import bills and service their foreign debt. The U.S. alone can simply print more dollars to stimulate its economy, pay its import bills, service its debts, and let other nations, such as China, try to adjust to the global liquidity flood it unleashes as best they can.

The energy market is riddled with other distortions, starting with the supply side dominated by a few major global oil companies and the OPEC cartel, which has regained its role as marginal producer in a market where short-term demand does not decline much even with very large price increases.

On the demand side, U.S. policies in the real estate market, to be discussed in my next article, have resulted in wearying long suburban commutes to work and trips to the mall to fill up huge gas-guzzling SUV's with goodies imported from East Asia, such as big-screen tv’s.

The oil market does not function well due to lack of information. OPEC nations won’t adequately disclose their reserves, including Saudi Arabia, which is being counted upon to supply much of the projected incremental supply over the next fifteen years. Because of this secrecy, despite everything that has been written about “peak oil,” pro or con, no one really knows what the long-term supply picture may look like.

Even short-term demand is not well known. E.g., evidently China says its oil demand actually fell by 0.2% in 2005, after surging by 15% in 2004. While some question this, the lack of viable marginal supply/demand information creates a dysfunctional market environment rife with rampant hedge fund speculation of energy futures.

For many years prior to the rise in oil prices, short-sighted, overly speculative financial markets previously had negatively impacted the spending of energy companies on very long-lead time projects. Political instability, the threat of war, U.S. foreign/military policy, etc. also all affect the energy market. The result of this is huge profits for energy speculators and the oil companies the past few years.

The world may not know if “peak oil” will soon be upon us until enough time has passed to see if these very high profits do indeed call forth increased energy supply, as market price signals are supposed to do. But perhaps by then will be it too late to make the very long lead time investments in the infrastructures of alternative energy.

The 2005 energy bill “funnels billions of dollars to energy companies, including tax breaks and loan guarantees for new nuclear power plants, clean coal technology and wind energy,” according to an AP story.

Besides the usual pork-barrel corporate entitlements, this was an attempt to deal with a fundamental problem of the global speculative financial system, namely that it is extremely heavily skewed in favor of seeking ultra-high short-term “paper” capital gains, usually through quick gimmicks and essentially using private "insider" knowledge, ultimately at the public's expense.

Hedge funds and proprietary trading desks chase huge speculative returns on all sorts of highly leveraged so-called "carry trades" financed by the ultra-cheap liquidity provided by major central banks. Private equity funds look for a big killing on their leveraged debt deals through essentially "flipping" "business fixer uppers," by imposing layoffs, eliminating legal contractual benefits and pensions, often under the threat of outsourcing and/or bankruptcy, etc,. then selling their cosmetically-repaired handiwork back into the less-informed public securities markets.

Global mega-corporations seek a quick boost to growth via m&a, rather than expensive "organic" development of innovative new products and services. Venture capitalists push for the fastest exit/liquidity event strategies, by selling out their companies to the global mega-corporations desperate for growth and, like the private equity firms, to the less-informed public securities markets, which was the essence of the 1990s TMT equity bubble.

I.e., the hedge funds and proprietary trading desks can make huge profits from overly leveraged trades in the explosively growing, very opaque private credit and derivatives markets (the latter now $300-400 trillion in notional value) because they have an implicit public guarantee of insurance via liquidity provision from the central banks should their trading models ever prove wrong.

And the private equity firms, who also use leverage, and venture capitalists essentially arbitrage off their private knowledge as insiders to take advantage of the mispriced valuations in the heavily regulated public securities markets.

Little of the most highly speculative, unrelenting chase after the very big quick buck is ultimately fair and honest, nor is it economically productive and viable, relatively short-term appearances to the contrary.

Rather, it greatly distorts the global market allocation of resources, since it results in the massive under-funding of basic, long-term projects that are the foundation for generating real wealth, but which can’t compete for capital allocation against short-term speculative capital gains offering much higher returns. Speculative finance capital, aka hot money from all sorts of unregulated private funds, is replacing sound productive long-term investments.

These private funds and proprietary traders can get over-leveraged because of the perhaps most well-known way in which the Fed has distorted capital market allocation, the infamous “Greenspan put.” This is the universal belief held for many years in capital markets that large speculators can take excessive risks because Greenspan could always be counted upon to bail them out. Those who still believe in the myth of free capital markets simply are not in touch with the strong speculative incentives created by this “moral hazard.”

The capital markets strongly believe that “Helicopter Ben” Bernanke, Greenspan’s successor, will continue this insurance policy, which of course is why he was appointed. E.g. on a recent television appearance, Paul McCulley of Pimco, the enormous fixed-income investment firm, almost drooled over the magic words, provide liquidity, when he assured the viewers that Bernanke would know what to do in a financial crisis.

Another way in which the Fed distorts market forces, less talked about in polite company than the Greenspan put, is its asymmetrical policy re asset and wage inflation. Greenspan never seemed concerned about the former, claiming that he couldn’t recognize asset bubbles in advance (which obviously seemed strange since he helped create them).

But he never hid the fact that, like a good Wall Street banker, he was vigilant against even the slightest hint that the employment cost index might increase faster than price inflation, i.e. that real wages might actually rise after declining 17% since 1972 (see "2006 Economic Report of the President," Table B-47, pg 338, link), despite huge increases in real GDP per capita, productivity, and profits.

According to Morgan Stanley’s chief economist, Stephen Roach, “Over the 2001-05 interval productivity growth averaged 3.3% in the nonfarm business sector of the US economy -- basically double the 1.6% gains in real hourly compensation over the same five-year period.”

With the exception of Roach, Wall Street simply never even thinks about this discrepancy in policy toward speculative asset inflation and wage increases in line with productivity. It just assumes that the natural order of things is speculative assets going up, good, real earnings of American workers going down, who cares.

I.e., heads I win, tails you lose. This highly rigged game is only surprising to the naively gullible who still believe in a “free market” and think that the Fed is actually a so-called “independent” institution (which in itself would be problematic under our Constitution, let alone given the Bush administration’s constant preaching of global democracy).

Friday, February 10, 2006

2/10/06 Bush’s American Competitiveness and Advanced Energy Initiatives: “Deja Vu All Over Again” Twenty-five Years Too Late? 1974 words

“The American Competitiveness Initiative will help our nation remain the world's economic leader. By investing in research and development, unleashing the innovative spirit of America's entrepreneurs, and making sure that our economy has workers highly skilled in math and science, we will lay the foundation for lasting economic prosperity.” President Bush, Radio Address, Feb 4, 2006

“Even Silicon Valley executives were shocked recently…For the first time ever, the nation's electronics sector [trade balance]…had gone into the red. And not just slightly...America's high-tech trade problem centers largely on the huge and growing deficit with Japan….The Young commission's report, which apparently has generated no more than polite applause among Administration officials….does hammer home the need to get on with previous proposals, such as creating a Cabinet-level Science & Technology Dept. to coordinate research efforts -- and a Trade & Industry Dept. to help focus federal resources on international competitiveness…believe it's essential to retain the R&D tax credit…would like to see the credit expanded to include all R&D spending. Trimming the federal deficit to ease interest rates is another top-priority item... revising the tax code to stimulate savings and long-term investments….Without at least the minimum remedies, high-tech companies will have little choice but to move more and more manufacturing offshore. Some executives don't find that notion disturbing…they believe the U.S. will ultimately end up functioning as a hothouse for new technology and venture capital startups. Then, when a business gets firmly established, it would shift its production to Asia or South America. ” “America’s High-Tech Crisis,” "Business Week" cover story, March 11, 1985

“America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology. Since 2001, we have spent nearly $10 billion to develop cleaner, cheaper, more reliable alternative energy sources, and we are on the threshold of incredible advances. So tonight, I announce the Advanced Energy Initiative, a 22% increase in clean-energy research at the Department of Energy, to push for breakthroughs in two vital areas. To change how we power our homes and offices, we will invest more in zero-emission coal-fired plants, revolutionary solar and wind technologies, and clean, safe nuclear energy. We must also change how we power our automobiles. We will increase our research in better batteries for hybrid and electric cars, and in pollution-free cars that run on hydrogen. We will also fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips, stalks or switch grass.” President Bush, “State of the Union,” January 31, 2006

“This intolerable dependence on foreign oil threatens our economic independence and the very security of our nation….Beginning this moment, this nation will never use more foreign oil than we did in 1977 -- never. From now on, every new addition to our demand for energy will be met from our own production and our own conservation. The generation-long growth in our dependence on foreign oil will be stopped dead in its tracks right now...To give us energy security, I am asking for the most massive peacetime commitment of funds and resources in our nation's history to develop America's own alternative sources of fuel -- from coal, from oil shale, from plant products for gasohol, from unconventional gas, from the sun.” President Jimmy Carter, “Crisis of Confidence” speech, July 15, 1979

In his State of the Union Address, President Bush put out his new agenda for improving America’s competitiveness and energy independence. As the quotes above indicate, these ideas have been around for over twenty-five years. Unfortunately, we think this is probably, yet once again, going to be far too little, far too late, long after the horses have been leaving the proverbial barn.

Most of what Bush proposed in his State of the Union speech seems to be re-cycled, re-packaged, already-existing programs, with a small bump up in additional funding. With the U.S. budget running deep deficits far into the baby boomer retirement horizon, and Bush’s “political capital” currently quite low, the Administration evidently feels it is not in a position for bold new initiatives.

Much more fundamentally, the major problems confronting the U.S. probably can’t be solved unless the U.S. seriously addresses flaws in how the market allocation of resources is being massively distorted by the global speculative financial system. Unless and until that is changed, tinkering at the margin with government programs, while perhaps well meaning, simply won’t have much impact in the real world, and is likely to miss the mark anyway, given the current array of political forces.

The Democratic Party, for lack of a better noun, has yet to respond with a program of its own. But it looks like the Republicans and Democrats (some call them Republocrats) have finally found something they can agree on, the need for America to become more competitive and energy independent, certainly worthy goals. Pres. Bush then took his new competitiveness show on the road, including a scheduled appearance with Intel’s highly regarded Craig Barrett, according to a press report.

Very brief background, the American competitiveness movement has been around for a long time, including a commission chaired by John Young, then CEO of Hewlett-Packard, in the mid-1980s referred to in a quote leading off this article. With the long-term devastation of American manufacturing since the late 1970s, which was at its worst, losing millions of high-paying jobs, during Reagan’s first term and then again in Bush II’s first term, the competitiveness movement went into deep hibernation, most recently coming out with a “National Innovation Initiative Summit” on Dec 15 by the Council on Competitiveness.

Long-considered reforms don’t make any headway in the U.S. (See 1 below for a list of some reforms from across the political spectrum.)

E.g members of the elite, currently including such corporate leaders as high-tech ex-CEOs Gerstner and Barrett and journalists such as Friedman, have continually sounded the alarm for much needed K-12 educational reform at least since the official 1983 report, "A Nation at Risk: The Imperative for Ecuational Reform," with little real progress ever since. But why should American students be motivated to study and compete globally in engineering, the hard sciences and advanced math when much more lucrative and easier career paths seem open in real estate and other speculative financial areas?

The reasons for the lack of seriousness of purpose and tangible results regarding much-needed reforms, which would not be tolerated in corporate America, seem simple. First, globalization has meant that the leaders of increasingly nation-less global, including financial, corporations simply do not feel seriously enough affected by these issues, since they can seemingly sidestep many of their more dire domestic consequences simply by outsourcing and offshoring. And second, the housing boom of the past eight years, offseting the ongoing five-year stagnation of workers' average real earnings (which are down 16% since 1972), has provided enough new “paper wealth” for the middle class voter to feel somewhat satisfied with the current state of things, for the time being.

Warnings of potential risks for the U.S. have been made ad nausea for the past few years by everyone from the most die-hard perma-bears and gold bugs to the IMF, OECD, BIS, various “enlightened capitalist” financiers, such as Robert Rubin, and numerous well-known economists (2). Some in the elite, such as ex-Fed Chairman Volcker, even have said that it may take a crisis to wake up the U.S. (See 3 below for a list of some well-known potential risks to the U.S.)

Without a real sense of urgency, America will probably continue to muddle through its various well-known problems, perhaps unless and until a major economic downturn were to occur and force re-thinking of basic assumptions.

Right now, financial markets continue not to consider that even a remote possibility, with interest rates, credit spreads and risk premiums low, and valuations high, especially for more risky assets and trades. While the price of energy, commodities and gold have soared, since the more dire predictions haven’t materialized, the financial markets simply ignore them as coming from boys crying wolf one too many times, with a “what, me worry” grin (all the way to the bank).

But the basic problem with muddling through isn’t just that it builds up financial and other stresses that may eventually erupt. While Nero fiddles away, over the past thirty years the U.S. increasingly, perhaps irretrievably, has lost its “margin of safety” and “fallback” position.

If the permanent structural shift to an economy dominated by global financial speculation and asset-light business models ever does start to look like its not working for the elite and upper middle class (it stopped working for everyone else a long time ago), a shift presided over during the 19-year tenure of just retired Fed Chairman Greenspan, then there may no longer be sufficient lead times and necessary resources to turn things around.

In the real world, one can’t just snap one’s fingers, devalue the dollar, promise to some day balance the budget, and then hope and pray that competitive U.S. exports magically appear, courtesy of the “free market,” to lessen global economic imbalances.

In addition, income/wealth inequality keeps worsening everywhere. While most of Wall Street seemingly could care less, politicians must pay a little more heed to the potential consequences. If the financial “masters of the universe” don’t finally start to realize this problem, and don’t hold your breath on that, then sooner or later, in some form or another, there will be a larger backlash than is already occurring that will set back globalization.

Several well-connected speakers at the World Economic Forum in Davos clearly warned about this. E.g. the European corporate CEO co-chair of the 2006 Annual Meeting said, “I think this dream [of building the global village] is over for me.” Larry Summers (Harvard Pres, Clinton Treasury Secretary and Rubin’s point man in the emerging market crises of the 1990s) noted that “continuation [of global integration] is by no means guaranteed. Issues of local disintegration, whether that means Flint, Michigan, whether that means failed states, whether that means struggling middle classes caught in binds everywhere, are of equal importance.”

Not to mention more than 1 billion people living on less than $1 per day and 2 billion on less than $2.

(1) Proposed reforms include: providing affordable and adequate universal healthcare coverage; reforming K-12 education; responsibly funding retirement programs; re-training programs and tax relief for displaced U.S. workers; raising the minimum wage; boosting government funding of basic science and technology; increasing immigration of highly skilled workers; tightening borders against illegal immigration; focusing on homeland security; reigning in Sarbox; reforming and simplifying the tax code; increasing foreign aid to pledged levels; supporting philanthropies and ngo’s; “Fair trade” buying of coffee and t-shrts; creating and enforcing global labor and environmental standards; passing “Patriot Corporations” legislation; etc.

2) The most well-known include Rogoff, Obstfeld, Eichengreen, Krugman, Wolf, Summers, Cline, Mann, Truman, Roubini, Rajan, Cotis, Roach, Xie.

3) The standard litany of potential risks, almost all of which continue to get worse, include: high energy and other commodity prices; topping of the global real estate markets; huge global economic imbalances and fiscal deficits, threatening the dollar; intense global competition, especially impacting workers; out of control health care costs, combined with under-coverage; terrorism, nuclear proliferation and geopolitical instability; the unfunded costs of the impending retirement of the baby boomer generation in aging developed economies; the effects of widespread global poverty, including disease (e.g. HIV/AIDS, bird flu, malaria, etc.), civil wars, famine, natural disasters; global warming, water shortages and environmental degradation; derivatives markets whose size defies comprehension that have never been “stress tested” (a Dec 28 op-ed in the “Financial Times” by law professor Frank Partnoy notes that “in 2006, the derivatives market will grow to nearly half a quadrillion dollars (fourteen zeros), more than 10 times the world's domestic product”); etc.