The Euro: A “False Friend?”

Far be it from me to claim any insight into the gyrations of the currency markets, but I couldn’t help noticing an article that appeared on the website of Business Week a while back warning readers against putting too much faith in the Euro, which had just recovered a couple of cents in value against the dollar. Although carefully hedged about with if, buts, and maybes as such financial articles always are, it suggested that the rally would be short-lived, and the European currency would soon test new lows. At the time, it stood at 1.2229. Bad call, Mr. Expert! As I write this, the Euro is bid at 1.2522. Meanwhile, both the Canadian dollar and the Swiss franc are worth more than the U.S. dollar, at 1.0586 and 1.0590, respectively. Not to worry, though, gold and silver both fell off a cliff today, so our dollar still managed to appreciate in value against “hard currency.” Go figure. I’ll be in Canada if you need me.

Of National Debts and Train Wrecks

One hears much hand wringing of late about the national debt, and the catastrophe it portends unless we bring it under control. Everyone has an opinion about it, but very few seem to actually understand what it is, or the extent to which it is really out of control, or even unprecedented. Based on the recent data point represented by the experience of Greece, we can safely conclude that excessive debt is potentially problematic. The trick is in determining whether, as the prophets of doom would have it, the particular train we are riding will encounter a brick wall around the next bend, or will continue to wheeze along as before for the foreseeable future.

Certainly, the train wreck hasn’t happened as quickly as some of the Jeremiahs expected. Paul Krugman, for example, predicted runaway interest rates and hemorrhaging inflation as long ago as 2003, in the expectation that the government would try to print its way out of the problem. The printing presses have been busy enough, but so far we’ve been spared a repeat of the Weimar Republic in 1923. Of course, the New York Times’ nobel laureate may yet be vindicated, but we’re not there yet.

If you try to get a handle on the problem, you soon realize just how slippery it really is. Take, for example, one of the more commonly used diagnostics in the field, public debt as a percentage of gross domestic product, or GDP. According to the CIA, in 2009 the figure for the United States was 52.9%. This compared with 192.1% for Japan, the developed country at the top of the list. The current interest rate for home mortgages in Japan is just over 2%. The reason often given for such apparently counterintuitive facts is that Japanese citizens save more than their US counterparts. It would seem, however, that it is possible for a nation to carry a much higher public debt than the United States and still not suffer exploding interest rates.

There are often great disparities in the numbers one sees bandied about on the Internet, even on pages that quote the same source. Economicshelp.org, for example, quoting the CIA figures, gives the “national” debt of Japan as the same 192.1% cited above, but lists the United States at a mere 39.7%. The same site, however, pegs the “gross” debt of the United States, which includes such things as internal pension and social security obligations, at 90.8%. According to usgovernmentspending.com, which lists the numbers going all the way back to 1792, that number has now risen to 94.27% compared to a historical post-war maximum of 121.25% in 1946. Checking these numbers at Wikipedia, it appears that the 39.7% number was taken from the CIA list for 2008, not 2009. The comparable number reported by the Organization for Economic Development and Cooperation for the same year was 70%, and the International Monetary Fund had it at 61.5%. Pick a number, any number.

Moving right along, the usually conservative Washington Times projects a public debt vs. GDP of 90% a decade from now in the year 2020. That still looks positively rosy compared to Japan’s current rate of more than twice that amount. On the other hand, we are told that Spain will soon follow Greece into the abyss, but the CIA put its public debt in 2009 at 50%, more than 2% less than that of the US.

Obviously, we are comparing apples and oranges here. For example, how does one roll the combined debts of the States of the United States into the numbers so that they can be compared with the debts of the Departments of France or the Lands of Germany? How does one compare the internal debt of the US to its Social Security trust fund to its Japanese equivalent?

All these obscure numbers and incoherent outcomes are fertile ground for alarmists of every stripe with ideological axes to grind. Sometimes the results are amusing. For example, in a recent article that appeared in the leftist German Spiegel magazine, Marc Pitzke, who specializes in Amerika bashing, seemed to be channeling conservative talk show host Sean Hannity. Their messages are identical; the US debt is out of control and we face imminent disaster. Pitzke trots out the usual fare about the recent growth in the deficit one usually hears from such odd bedfellows as Hannity and Limbaugh, but is short on numbers that make any rational comparison between the United States and Europe. According to the closest attempt to such a comparison I could find,

Europe’s national debt seems positively harmless in comparison to the USA. The total indebtedness of the Euro-zone in 2009 amounted to around seven trillion Euros, just 70 percent of the American amount.

Pitzke doesn’t explain why the US debt is a cause for hysteria but an amount 70% as great is “harmless,” nor does he elaborate on the fact that the public debts of Italy, France, Germany and the UK, the four biggest economies in the Euro-zone were 115%, 79.7%, 77.2% and 68.5% of their GDP’s, respectively, in 2009, compared to 52.9% for the US.

And the upshot of the sport? I suppose that we can keep muddling along as we are for quite some time before the “Desasters, Debakels, and Katastrophes” that Pitzke and the editors of Der Spiegel so eagerly hope will be our lot finally overtake us. I certainly don’t find the situation attractive, but there you have it. To a large extent, a modern economy is a con-game. When the suckers lose confidence, the train will hit the wall. When that will happen is anybody’s guess.

On Executive Compensation

As noted in the Wall Street Journal, “The U.S. Treasury and the Federal Reserve unveiled Thursday a set of curbs and rules for executive compensation at banks, marking a watershed moment for government intervention in the private sector.” As one might expect, the right is spinning the pay curbs as an assault on free markets and capitalism, and the left as a long overdue step to end the looting of corporate America by CEO’s in collusion with the Boards of Directors who decide their compensation.

Wikipedia has a pretty good summary of how the system currently works, and a more detailed, albeit somewhat dated, scholarly paper on the subject may be found here. I tend to lean to the left on this one, and am more or less in agreement with Mark Green’s take at Huffpo. In short, I suspect the claim that CEO compensation decisions are comparable to those for other highly paid individuals such as the top tier in major league sports, movie stars, pop singers, etc., is poppycock. I have little faith in the integrity of the system, and suspect that, in effect; CEO’s are not only cutting the cake, but are deciding who will get the first piece. I do not agree that such legitimized thievery is an essential aspect of free market capitalism.

According to the arguments on the right, summarized, for example, here and here, the Administration’s attempt to regulate executive pay won’t work. We are told that the services of these highly talented individuals are in great demand, and, if we refuse to cross their palms with silver, they’ll simply jump ship and move to more lucrative posts, or, according to a rather more fanciful argument, will start successful new private businesses of their own. To all this I can only say, I doubt it. I suspect people are standing in line to take these jobs, and that many of those in the line are not only more capable than the current incumbents, but are also willing to work for a much more reasonable level of compensation. Who is right? We are in the process of conducting an experiment to find out.

The right has made some very specific predictions about what will happen if the Administration follows through on its policies. I propose that we carefully monitor the future careers of the executives affected by the cuts. If they actually do “go Galt,” and no comparable talents can be found to replace them, I will cheerfully eat crow. If, on the other hand, it turns out that the services of these individuals were not really as critical or as indispensible as advertised, and the dire degradations in the performance of management at the affected firms predicted by the right fail to materialize, then perhaps they might consider adjusting their paradigm of what constitutes “free market capitalism” accordingly.

Germany to Reverse Course on Atomic Energy?

As a result of their dismal showing in the elections to the Bundestag on September 27, Germany’s left of center Social Democrats (SPD) have been replaced in the former “grand coalition” government with the more conservative Christian Democrats (CDU) by the market oriented Free Democratic Party (FDP). One salutary result has been an apparent reversal of course on the irrational but ideologically fashionable decision to shut down Germany’s nuclear generating capacity. According to Der Spiegel,

The Union (CDU) and FDP will accommodate the nuclear industry – but under stern conditions. The operational lifetime of German nuclear power plants can be extended on condition that high safety standards are met. According to a paper by the new coalition’s working group on the environment made available to Spiegel Online, “Nuclear energy will be necessary as a transitional and bridge technology until climate friendly and more economical alternative means of producing sufficient electricity are available capable of meeting baseload electric generation requirements. Therefore, the operational lifetime of German nuclear power plants will be extended to 32 years.

Solar Power and German Ideologues

Der Spiegel has provided us with another edifying example of the difference between sound public policy and ideological grandstanding. It turns out that the outgoing Social Democratic (SPD) “Minister of the Environment,” Sigmar Gabriel, has saddled the German people with a gift that will keep on giving in the form of a debt of at least 27 billion Euros. It comes in the form of a clause in Germany’s “Renewable Energy Law” that grants a subsidy of 43 Cents per kilowatt-hour to producers of solar power – five times higher than the cost of conventional power. But wait, it gets better; the subsidy will remain in effect for at least the next 20 years. And, by the way, that’s just for the facilities that were built between 2000 and 2008. Meanwhile, new facilities are being built hand over fist. About 2000 additional megawatts are expected to come on line in 2009, providing German consumers with another heaping helping of debt to the tune of 9 or 10 billion Euros. This remarkable example of ideological dilettantism has, at least, resulted in the creation of many new jobs – in China. Following a predictable pattern, German solar cell producers have been ramping down production at home and transferring it to Asia. Meanwhile, as Der Spiegel points out, the subsidies have had such “environmentally friendly” effects as

…keeping the world price of solar panels artificially high. The result: international producers are flooding the German market with solar modules – and very little is left for other countries, in spite of the fact that a solar facility in Africa could produce substantially more electricity than in rainy Germany.

All this comes at a time when the actual cost of solar modules has been in free fall. Spiegel cites an article in the German trade magazine “Photon,” according to which, “Solar power can now be produced much more cheaply than the high subsidies would lead one to believe.”

Judging by the quantitative results, we must assume that wind has been less afflicted by ideological meddling than solar in Germany. Wind facilities currently provide six percent of her power, as opposed to solar’s contribution of less than one percent.

There are Boycotts, and then there are Boycotts

As Tom Blumer points out:

It becomes more obvious with each passing month that General/Government Motors and Chrysler have permanently lost a large percentage of consumers who won’t buy a vehicle from a bailed-out and/or state-run company. Recent proof: Neither maker had an entry in the top 10 list of the most purchased vehicles under the cash-for-clunkers program (Toyota and Honda had three each, while Ford had two). GM’s share of sales from clunker trade-ins was only 17.6%, well below its already declining market share.

The press probably won’t recognize the informal GM-Chrysler boycott unless and until the doors shut for the final time at these companies, if even then. They’re too busy promoting usually ineffective boycotts with which they agree.

Wonder which boycott will be more effective in the long run? Here’s some anecdotal evidence for you: I will go out of my way to shop at Whole Foods. The chances that I will ever buy another GM product are vanishingly small.

My Beautiful ICE Bubble is Popped

That dour realist, Robert J. Samuelson, lost no time in exploding my lovely fantasy of speeding German ICE liners flashing over the rails between our cities. Well, I can always hope the folks at Siemens and Deutsche Bahn know something he doesn’t know.

Hard Times in Russia

In her nightmarish account of life in Stalin’s Gulag, Eugenia Ginzburg, in a dark cell in solitary confinement herself at the time, describes a young prison warden’s reaction to the screams of a tortured Italian prisoner:

But it continued – a penetrating, scarcely human cry which seemed to come from the victim’s very entrails, to be viscous and tangible as it reverbedrated in the narrow space. Compared with it, the cries of a woman in labor were sweet music… So I only whispered: “What’s the matter with her? It’s terrible to hear.” He shrugged and said: “They haven’t got the guts, these foreigners, they just can’t take it. She’s only just come in, and yet she makes all that fuss. The Russians are different, they don’t kick up a row. Look at you for instance, you’ve got five days (in solitary) and you’re still not crying…”

It’s a good thing Russians can take it. Whether in politics, economics, or war, history has not been kind to them, unless, perhaps, one can construe the sacrifice of 25 million lives to, as Churchill put it, “tear the guts” out of Hitler’s armies and achieve victory in World War II “fortunate.” Now, as France, Germany, and Japan seem to be seeing light at the end of the tunnel, Russia appears to be mired in the recession as deeply as ever. However, one of her citizens has come up with a new twist on an old way of doing business that the rest of the world might do well to take notice of.

Obama and the Stock Market

According to Bloomberg back on March 6,

The Dow Jones Industrial Average fell 20 percent since Inauguration Day through yesterday, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg. The gauge lost 53 percent from its October 2007 record of 14,164.53, slipping 4.1 percent to 6,594.44 yesterday.

Obamas enemies duly fastened the Dow Jones millstone around his neck, for example, here,

Well guess what, folks…as ANY economist will tell you, capital markets are forward-looking. The Dow Jones Industrial Average usually rises and falls based on expectations of what will happen, not based on what’s happening right now. In other words, if stocks fall, it is because investors believe the future is looking bleak, not because the present state of the economy is bad. Note that the stock market collapsed in 2001 in anticipation of the recession that followed. The stock market is collapsing now in anticipation of the fact that Obama’s plan will be ineffectual.

and here,

To those critics who claim that Obama can’t possibly “own” the decline in the stock market sincehis election, recall that these indices are a kind of futures market, with investors buying in (or selling as the case may be) based on how they believe the economy will do.

Let’s see, the stock market stood at 7949.09 at the close on Inauguration Day. Today it closed at 9361.61. Is there an economist in the house? Do these arguments work both ways, or are we dealing with what scientists call an irreversable process? Seems like it’s risky to play the stock market, both economically and politically.

On the Wisdom of Committing Suicide to Avoid Population Decline

A lot of people seem to have trouble putting two and two together. They’re concerned about the demographic problem so many developed countries are facing on the one hand, and on the other they’re worried about global warming and environmental degradation. Perhaps it’s a good thing that one of the nations most threatened by both these problems is Japan. As Mark Steyn points out, her population peaked at 127.8 million in 2004, and will drop to 89.9 million by 2055 if current trends continue. She will, therefore, be among the first nations that will be forced to solve the problem one way or another. Her people are conservative and aren’t good at assimilating foreigners. Even if they were, Japan isn’t an easy place for potential immigrants to reach, illegal or otherwise. It may be that’s a good thing, both for Japan and the rest of us. It will be good for Japan because she will likely be forced to solve the problem without inundating her islands with immigrants whose language and/or culture is alien to her own. It will be good for the rest of us because it will demonstrate that, for better or for worse, the problem can be solved without risking cultural, political and environmental suicide.

Clearly, we cannot put off the demographic problem forever. We and Canada can import the entire populations of Central and South America, and Europe can import the entire populations of North Africa and the Near and Middle East, but, eventually, the problem will just come back. No nation can support an infinite population. The problem must be faced, and, if it must be faced, it is better to do so with a population that is not wracked by ethnic tensions and that is not so large that the available environmental resources can no longer safely support it.

Human beings can survive without national health care programs. They can even survive with reduced social security benefits. They will have somewhat more difficulty surviving on the planet if we degrade the environment to the point of collapse. Our environment is already threatened by excessive population. When will it be seriously threatened? Depending on your point of view, it may be now, it may be at some distant date in the future, or it may already have been decades ago. It doesn’t matter. The question is one of risk. How much longer will it behoove us to risk the environment of the planet by forcing the growth of our populations to support government entitlement programs? I suspect we should have abandoned this dubious method of “solving” our problems a long time ago.

Why? Our environmental problems are obvious enough. The environmental impact of increasing the population in developed countries is substantially greater than similar increases in less developed countries. As for the wisdom of tolerating unlimited immigration by culturally alien foreigners, you might want to ask the Serbs how that worked out for them in Kosovo. For that matter, we have legions of subject matter experts right here in the United States who are quite capable of analyzing the potential outcome of the complexities of population dynamics in such cases. You will find them on any Indian reservation.

It would be wise for the developed nations to severely curtail immigration, accept the natural declines in their populations, and reduce entitlement benefits to sustainable levels. If they don’t now, they will eventually be forced to under much less favorable conditions, and that in the not too distant future. So much seems obvious to me. However, I realize that, at least in the United States, there are powerful blocs of opinion on both the right and the left that, whether they worry about possible declines in our economic and military power, or are concerned their “progressive” social programs will be threatened, are prepared to deny the obvious indefinitely as we stumble into an uncertain future. As a result, for the time being, rational action along the lines I’m suggesting is probably out of the question. One can only hope that Japan, fortuitously protected from the worst of these threats in spite of herself by miles of ocean and cultural taboos, will serve as a role model for the rest of us in the way she solves her demographic problem. Perhaps her solution will be sufficiently elegant to convince the rest of us to follow her example rather than continuing to risk cultural and environmental suicide.