lundi 9 août 2010

Une nouvelle façon de voir les choses

Par Andrew Butler.

Un article assez éloquent...

Inflation is Yesterday’s War

Generals are trained to fight yesterday’s wars. They sent cavalry to the trenches in the First World War, they built the Maginot Line for the Second World War, and more recently they used “pinpoint” strategic bombing to fight home-grown insurgents in Afghanistan and to blow up civilians and civilian infrastructure, to no discernable effect outside of increasing the number and the resolve of the insurgents.

Central bankers have been fighting yesterday’s wars with their response to the credit crisis. The theory was that by providing liquidity to banks and by lowering the base-rate, that would encourage them to lend, and so, thanks to “gearing”, for every $1 trillion “pumped”, there would be a $10 trillion increase in liquidity, which would spur economic growth, and thus mend the economy.

It didn’t work.

The money is either sitting in the Federal Reserve on deposit with the objective of “making up the numbers” for the risk-weighted capital adequacy calculation (a bit of a contradiction in terms), or it was used to buy 5-Year and 10-Year Treasuries. That’s a good business if you can get it, borrowing from the government’s agent at 0% and then lending to the government at 1.5% to Dire Straights said, ”money for nothing and chicks for free”.

It “should” have worked, if this “war” was yesterday’s war. That’s how Maestro Greenspan “controlled” the economy in the past, and before that, that’s how Volker tackled inflation (except the other way around).

Now the government, and it’s agent, are dangerously close to “running out of ammo”, the base rate can’t realistically be lowered to less than zero, and there is no evidence that buying more toxic assets at friendly prices from the marketplace, will help to kick-start the securitization business, which from 1998 to 2008 pumped $20 trillion of “liquidity” into the US Economy.

Handing out freshly printed $100 bills at street corners might generate a temporary illusion of “recovery” and the cash-for clunkers and $8,000 tax-credit certainly produced a little “relief”, but that’s not getting to the core of the problem.

There are two problems, the first is that for the past ten years or so nominal GDP growth in USA has been almost entirely (85%) driven by liquidity pulled out of increases in house prices. That created an illusion of prosperity that was not directly controlled by the Fed, from 1998 to 2008 about $20 trillion of “liquidity” was added to the system via securitization; it was that which created the “growth”.

The second problem is that for the past twenty years, American corporations (and foreign ones too), have decided to cut-back or suspend investment in new productive capability in USA (whether it relates to provision of services or things you can touch), and to make those investments in places where the business climate is more friendly.

The “unfriendliness” of America to business investment, particularly by foreigners, was recently put in the spotlight by the Toyota and the BP “affairs”.

Sure mistakes were made, and perhaps the companies that made those mistakes did what many people do when they make a mistake, they tried to cover it up, that’s normal.

But the reaction of the politicians and the media was very “unfriendly. There was talk of retroactively changing laws to “punish the perpetrators”, and all the time there was, and still is, the threat of sticking someone with “criminal negligence”, to get to “triple damages”; then Congress hauled up the “criminals” to lambast them in public in some sort of an approximation of kangaroo courts.

Of course, it is not my place, as a foreigner, to comment on what America “should or should not do”, anymore than I have any right to comment on the labour-laws in China or the practice of public executions in Riyadh.

But I can say this, those two events (they are examples, there are many others), sent a “strong” message (and I’m sure it felt good), but the next time some geek analyst puts up a PowerPoint of where to put the next investment, America will be low down on the list, if it’s on the list at all. And it’s nothing to do with labour cost, Germany is on the list.

I am qualified to say that because I’m one of those geeks, and over the past twenty years I have spent quite a lot of time doing research for privately and publically owned companies looking to set up new production (and create new jobs), America doesn’t get a look in, and the reason is it’s considered to be “unfriendly”, particularly by American companies, many of whom I have advised on how to reduce their “exposure”.

So as the debate rages amongst the rocket-scientist economists who predicted none of this, about what will happen next week and whether there will be a “double-dip” before “everything gets back to normal”. It’s hard not to wonder where the obsession for instant gratification and instant quick-fixes that is a characteristic of all American administrations will lead to?

Forget about piling on more debt, that will only paper-over the cracks, and regardless of how much money the administration borrows or the Fed prints, the inescapable reality is that the private sector in America is de-leveraging.

That’s not “inflationary”, that’s deflationary.

The problem that America faces is structural, and it will take more than quick-fixes to “cure”, but until those problems are addressed, it is highly likely that resources that are deployed to “provide some relief” will be wasted.

The Solution?

Outside of persuading American and foreign companies to consider investing in America, rather than running down their “exposure”…ever wondered how to get stellar earnings in a recession…how about reducing the amount of money put aside for new investment, or replacement of dying assets?

Outside of that, the one area where America leads the world, by miles, is in wasting money.

Four things stand out:

1: Oil
America uses twice as much oil as Europe (and many other countries do), to produce one unit of GDP.

That’s got a lot to do with the architecture of America which, thanks to the lobbying of GM was designed around the “freedom” of automobiles rather than public transport, plus the lobbying of oil companies to keep gasoline prices low (they make their money on volume not margin).

Could that change? Easy, double, triple the taxes on gasoline. Will that happen? No not until it is too late, and imagine what that would do to CPI?!!! Of course, if the objective is to increase inflation; reduce the current account deficit, and increase tax revenues, then that’s one way, but that will never happen.

2: Subsidising Home Ownership
The roots of the housing bubble were in the Clinton years when some genius had the idea that by facilitating an increase in house prices it would make it easier for “ordinary Americans” to own their own homes. That’s what Fannie & Freddie were about, they provided the credit to make that work, and they are still doing that; 90% of all home mortgages in USA nowadays are guaranteed by F&F, talk about social engineering gone mad.

Of course the housing bubble created economic growth, 85% of the nominal GDP growth in USA from 2000 to 2007 can be explained by increased house prices as the “equity withdrawals” were used to buy toys from China, just as 85% of the decline of nominal GDP can be explained by a decline in house prices.

The efforts to re-boot house prices and thus “rescue” foolish government-backed lenders; are a waste of money, for two reasons. The first is that it won’t work, there is a dynamic to how bubbles pop and “holding back the tide” is pointless.

The second reason is that over-priced housing discourages foreign investment, or re-investment locally rather than abroad. Low house prices may not be “good” for lunatic lenders, but they are good for anyone who does not have a house and wants to buy one, and they are good for international competitiveness.

3: Medical Costs
I have a friend of a friend who died in America recently, he was on a business trip and when he got off the plane he had a pain in his leg so he checked into a hospital; three weeks later he died, the bill was $2 million.

I also have (had) a sort of “friend” who died in Dubai recently, she was a house-girl with a little “business” cleaning houses; she cleaned my house twice a week for the past ten years, and she used to tell me off for being chaotic and messy. She got cancer, and over a year she had four major operations (one was twelve hours), plus chemotherapy, plus about four months in intensive-care. The “service” was excellent, the nurses and the doctors were competent and caring, I know, I went to visit her from time to time and consoled her husband.

The bill from the Dubai Government health service (OK they subsidize, but that’s for religious reasons – she was a “guest worker” with no “rights” in UAE (imagine how a “wet-back” in USA might have been treated)), was $12,000.

The American health service has been hijacked by monopoly providers; it is possible to deliver excellent health care, much cheaper.

4: Security

The most expensive luxury that America hangs on to like a bankrupt aristocrat holds on to his rotting castle, is the obsession with “safety”.

America does not need to spend half of all the money that is spent in the world on “defence”, and it does not need to “win” every argument.

A good example was the botched negotiations to capture Bin Laden.

Prior to 9/11 negotiations with the Taliban – (who had inherited the “troublemaker”; they didn’t invite him, the Northern Alliance did) had been going on (and off and on again), since 1998 mainly via Prince Turki, the head of Saudi Intelligence, who was in daily touch with the Americans.

After 9/11 the negotiation was re-started, briefly, and the Taliban agreed to hand over Bin Laden, subject to agreement on a price. The reason for the war was simply a disagreement over the price, the Americans offered zero and made a threat, then the Taliban called their bluff and said “well that will be expensive and painful”.

$300 billion dollars later, Bin Laden is not caught, and the “idea” that was Al Qaeda which can be used to persuade disillusioned young men and women to strap explosives to themselves and blow themselves up, is no less a force than it was ten years ago, and after all that, many (for example the head of MI6) say it is more of a force and it has mutated.

Forget about the human suffering, that’s taken care of under the Geneva Convention, which appears to have been largely forgotten about and was called “quaint” by the US and the UK governments, although they like to forget that “lapse” these days. But notice the new Rules of Engagement in Afghanistan say nothing about making an effort to comply with the 1949 Convention, if they were to say that, then that would be admitting to war crimes in Iraq and Afghanistan, before.

So forget about the “ethics” or the “body count” (and no one is counting the rag-heads anyway), all I want to say is that from a business point of view, is that was just not very smart.

America could have got the result that it wanted by spending less than $10 billion, plus it could have “won” a big victory in the War on Drugs (another colossal waste of money).

America has one weapon, which is nuclear arms; outside of that its military effectiveness has been proven time and time again, from Vietnam, to Somalia, to Beirut, to Afghanistan and Iraq, to be ineffective insofar as “winning” the argument is concerned. The latest argument is whether Iran should be “allowed” to have nuclear weapons, when its neighbours Israel, Pakistan, Russia, China, and India, are “allowed” to have nuclear arms.

That’s a pointless argument, nuclear weapons are defensive not aggressive, no on in their right minds (or even lunatics), would use nuclear weapons which, are in any case de-facto considered weapons of war criminals in the 1949 Geneva Convention since they explicitly target civilians not military. If Iran were to obtain nuclear weapons, and to use them except as a reaction to attack, then it would be wiped out; period.

America will lose that argument, the only issue is how much it will cost America to have the argument, and more important, can it really afford that sort of pointless argument?

There was a time when the economic health of America mattered for the rest of the world; that time has passed. The only issue now is whether America will manage to make the structural changes that it needs to make, or whether it will become, increasingly, irrelevant.

By Andrew Butter

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