China-watching, US-watching

     Economists tend to have some doubt about what is really happening with the Chinese economy; they are not sure if the numbers put out by official Chinese sources are totally legit.  China has been going through a growth slowdown for the past couple of years.  Coupled with the threat of recession in Europe, the Chinese slowdown has led to economic estimates that tend to emphasize the threat of recession in the US.
     However, the latest reading gleaned by some prognosticators has Chinese growth picking up speed again.  This could be good news for trade in the Pacific area, in which the US participates via its "left" coast.
     Some people are under the impression that if China is doing well, it must be bad for the US and that we should hope that they go into a slump.  This is not true unless the terms of trade are so bad for us that we lose money whenever we trade with them.  It is pretty certain that this is not the case.
     We on the other coast sometimes tend to overlook the economic strength of the Pacific rim.  We in the East may be suffering a little more from the crisis in the Euro area than is the rest of the country.  We are on that great Atlantic trading highway that is not in the greatest of health at the moment.
     Nevertheless, trade is truly international these days.  Not all the ships that come from Asia dock in Los Angeles, San Francisco, Seattle, Vancouver, etc.  Some of them go through the Panama Canal and all the way up to New York.
     But in some ways, the strength or weakness of our trading partners are not our primary worry, since so many of our problems are of our own making.  We are still the most powerful economy in the world, and if we could fix ourselves the rest of the world would follow behind us (for the most part).

Short-term ill-health?

     Despite longer-term indicators of economic growth, the outlook for the coming year is not good.  With or without the fiscal cliff, the economy could go into recession caused by recession in Europe and slowdown in China.  Many large US corporations are pulling back on investment in new equipment, software and buildings.
     Whether the large US budget deficits and the Federal Reserve's aggressive monetary policies will help or hurt are subjects of much debate.  Most economists and other such experts feel they are needed.
    Not all signs point down.  Consumer sentiment is up, as is small business sentiment.  Small business capital spending is up.
    The consensus of opinion is that the fiscal cliff could be a tipping point.

Fiscal Cliff Conspiracy Theory

     We all love a good conspiracy theory, and there are a number of possible scenarios available to the imagination regarding the so-called Fiscal Cliff.
     At the witching hour of midnight on December 31, a wide range of taxes will go up and an even wider band of spending will be chopped.  The consensus of opinion is that this is very bad, because it will probably cause a recession.  The most serious effect will probably be that a lot of people who work for the government, or, even more likely, many who work on government contracts, such as employees of defense contracting firms, will lose their jobs.
     The most widely expected alternative to this troubling outcome is that, after much posturing, shouting and fist-shaking, Congress will pass something that will swerve us away from the precipice at the last minute, and the President will sign it.
     But what if they don't or he doesn't?  And, more conspiratorially, what if they have already agreed that they won't?
     Preposterous, you say?
     Well, yes, you're right.  It is preposterous.
     But what if there are some factors in the backs of the minds of the participants that are saying to them, hmm, let's see how we can use this?
     What if, as in the Benghazi cover story, a spontaneous demonstration of partisan bickering is hijacked by some players who have a serious intent to block the process?
     Now, what could possibly motivate such serious intenders of harm?
     First, it has been suggested by some Republican-leaning commentators that President Obama would not mind so much if no agreement were reached, because it would accomplish his objective of raising taxes on the rich.  Then he could blame it on the Republicans.  As for the spending cuts, he could re-establish the chopped spending the following year, after a public outcry against the cuts.
     This seems a little far-fetched, too.  But its logic does have a certain internal consistency--assuming Obama is the kind of cynical strategist it would take to go that route.  (Or is that just politics?)
     But that is just an example, and it is not the point I wanted to make.
     The fiscal cliff was formulated a couple of years ago after failed negotiations on taxes and spending.  The parties agreed at that time that on January 1, 2013 (a lucky year no doubt), taxes would go back to Clinton-era rates and spending would be drastically cut across the board.  This deal kicked the can down the road and, it was hoped, gave the parties an incentive to come up with a more sensible solution before the clock ran out.
     But now we are almost there, with no solution in sight.
     Now, here's the point.  The negotiators put this plan in place.  In the backs of their minds was the thought that the deficit has to be brought under control somehow.  But the participants also knew that the experience of centuries has shown that, in a democracy, budgets can only be brought under control by taking the process out of the people's hands.  Sometimes the people realize they have to put the process into the hands of someone who will just do it.  That is happening in Europe to some degree now.  But it is not happening here.  So, an alternative is: trickery.
     We can't come to an agreement.  Oh, no, we can't do it!  So we will shout and posture and blame, but when the dust clears taxes will go up and spending will be cut.  Oh well!  It needed to be done anyway.
     And what about the economy?  Won't it suffer?
     The interesting thing there is that the economy is showing signs of getting off the mat.  If it wasn't for that factor, there would be very little thought of letting us go over such a cliff.  But the signs of recovery (a real one now, not the wimpy breath of foul air we've seen so far) may give the participants another thought in the backs of their minds that maybe we won't go into a recession.  Or maybe it won't be so bad, and we can blame it on each other, and oh well!  But look, the deficit has been cut!  It had to be done, and maybe everything will be all right in the long run.
     Crazy, huh?  Yes it is crazy, and after all it is just a conspiracy theory, an exercise of imagination.  There are a million of them.  We don't know what goes on behind closed doors.  We just hope that the checks and balances, plus the scrutiny of the press, plus the threat of the next election will prevent anything really wacky from being hatched in the dark.

Big changes in energy

    The International Energy Agency (IEA, based in London) released a report today that projects that the United States will become the world's largest energy producer by the year 2020.  By that year it is expected to be a net exporter of natural gas.  By 2035 it is expected to be "almost self-sufficient" in energy.
    The common belief in the 1970's that the world was running out of oil now appears to have been a bit premature.  One wonders in hindsight (which is always 20-20) how we could get so worked up over something that was so far off base.  And what else are we far off on today, one wonders?  Now we can say, well, we have to run out of oil soon at this rate, don't we?  Apparently we have a few more years left.
    This development has profound implications for the balances of international economics and power.  While the Middle East will continue to be important for oil--and indeed Saudi Arabia is projected to re-take the lead from the US in the 2020's--the US, and North America in general, will be in a strong position.  North America is expected to become a net oil exporter.  Most international flows of oil are expected to go to Asia, with China being the largest recipient.
    This also points out the benefits of our entrepreneurial system, which has been able to lead the way, through innovation and risk-taking, to re-inventing the entire energy sector.  Despite obstacles erected by government agencies the efforts of private companies and entrepreneurs have resulted in solutions that were, to say the least, unexpected.
    It also means that while the future may still (eventually) be in renewable energy, that future appears to be much further off than we thought.  Most reports indicate that we have enough natural gas to last 100 years.  It is also probably very premature for our Federal government to invest in such things as solar and wind energy, because these technologies would seem to have a much longer runway to self-sufficiency than is currently practical.  (There are markets for such things, but a lot of it has been subsidized.)
    But this new vision of the future does merit a grain of salt and a word of caution, for, as with the estimates so poorly performed in the 1970's, these projections are not guaranteed to come true.  Nevertheless, some of these trends have already been gathering steam for a few years and will probably continue for at least a few more years.
     The report also says that gains in energy efficiency are expected to be another important factor in the use of energy in the coming years.

Future :-) or :-( ?

Economic predictions are all over the compass these days, from rosey to totally catastrophic. In regard to the catastrophic side, there are always people predicting the end of the world, and all we can say about that is, we are still here. (At least so far.) People who have a lot of assets to protect generally understand that they need to diversify sufficiently to cover all scenarios, or at least as many as possible. Many of them, depending on where they fall on the optimism/pessimism scale, forget to provide for the possibility of an unexpected spurt of wild growth, which is one of the possibilities--albeit not a high percentage one. Many persuasive voices are calling for sustained gloom. A few pollyannas see housing getting off the floor, the fracking revolution leading to lower energy prices, and they even point to some states that are getting their budgets under control. Hope springs eternal. Whatever happens, probably somebody will have guessed right and will try to claim credit for it. As for the fate of the nation, it has been a popular phrase for generations to say that the country is going to hell. But, just as the world has not ended yet, neither have we arrived in hell yet. We did go through hell in the mid-20th century, and we came out of it. What we have gone through recently is nothing like that, and with any luck, things will continue to improve. Nothing is certain, but we are keeping our fingers crossed.

Mass real estate sales on the rise

Single family home sales have been rising steadily for about a year now, according to statistics released by the Massachusetts Association of Realtors. Prices have shown some stability as well.

More Signs

                May’s 6% jump in signed contracts to buy existing homes is a welcome sign of returning blood flow to the housing market, which has been on death’s door for a few years now.  It may be too early to say “the recovery is nigh,” but since I am basically a Pollyanna, I will say it:  “The recovery is nigh!”

                In case you are not up on your archaic English, nigh means near or almost.  So you can still take it with a grain of salt if you wish, but it is my fond wish and belief that it is nigh.

                You can also take note that the archaic definition of “fond” is foolish or silly.  Be that as it may, a number of signs and portents point in the direction of recovery.  New home sales are up, affordability is up, mortgage rates are at record lows and inventories are down to a point where home builders may actually have to increase production to keep up.

                Signed contracts were up 14.5% in the West, driven in large part by investors buying distressed properties.  Many will convert them to rentals.  The rental market is strong.  Many investors, no doubt, hope to have a capital gain in the future, figuring prices will rise.  This is known as the “bottom-feeding” play.

                Difficult days are still ahead for real estate.  But it is my fond assessment that the worst is behind us.

Diverging paths

While we are wondering if Europe will become an economic black hole, devouring the world economy, let us also take note of some interesting developments in the US. 1. A revolution in the production of natural gas which offers the promise of relatively cheap energy for, they say, several decades at least. 2. Signs that the housing slump is turning the corner and may be on the mend. For example, the Wall Street Journal reports today that there is an unexpected increase in the building of large new homes. Also, relative to rents and affordability factors, US housing may actually be underpriced right now. 3. Healthy trade in the Pacific region, which continues to grow and is already more important than the Atlantic trading area. 4. Several important US states are making good progress on returning to fiscal health, perhaps providing examples to other states on how it is done. 5. South Dakota is experiencing an oil boom, growing so fast it can hardly cope with various problems that growth creates. The natural gas revolution is something that could spread to other countries, but according to The Economist, there are some factors of the US marketplace that may be so unique that other countries may be unable to follow it in this field for some time. There are more independent operators here, less government interference and other factors. US companies are preparing to export large quantities of liquefied natural gas to other countires. Will these factors provide a powerful impetus for growth? Is our economy on the verge of blasting off? On the other hand, will these things be enough to offset the drag of Europe? Tune again this time next year; we may know more by then.

Health Care and Economics

                As a general rule of thumb, the reason a problem seems insoluble is that the actual anatomy of the problem has not been figured out.  Lacking an understanding of the problem, we heap “fixes” on top of it.  The result is that the problem gets worse. (Credit where credit is due: a talk on the anatomy of problems, by L. Ron Hubbard, circa 1961)

                Even before Romneycare was enacted in Massachusetts, the state had a highly regulated health insurance market.  And guess what, it also had the highest health insurance premiums in the country.  Is it any better now?  No, premiums are even higher.  With all due respect to the current Republican presidential candidate, maybe he could have tried looking into WHY the insurance market was so heavily regulated. 

                The free market may not seem, to some people, to be appropriate for health care.  But to what extent have we actually had a free market for it?  Are there bottlenecks, restrictions, undue influence from a dominant group, excessive regulation? 

                With all due respect (again) to the American Medical Association, maybe someone should have a serious talk with them to see what they can do to take responsibility for their own industry.  Not to impose on them what we think they should do, but perhaps to find out if they are doing anything to skew or restrain the freedom of the health care market.  (Just a thought.)

                It is a multi-level, multi-faceted, extremely complex problem.  But hey, we’re Americans, right?  What happened to our can-do spirit?  Let’s find out what’s really going on.

                Let’s solve it.

Chinese Considerations

If I may be permitted to ramble on this subject, perhaps some people who know more than I do about it can correct me where I am wrong or misinformed. And I am sure I am wrong and misinformed quite a bit on this subject. China was deeply humiliated by the Western incursions into their country during the colonial era. Certainly the Chinese have not forgotten, and undoubtedly it will be a long time before they do forget. According to the novels of James Clavell (Tai Pan, Noble House and others), Chinese culture prizes something which can be succinctly described as covert hostility. If you are going to plot against an enemy, do it secretly and show a smiling face in the meantime. This mode of behavior is not unknown in the West of course, but according to Clavell, the Chinese can take it to quite an art form. Does this mean anything in regard to our future dealings with China? European countries learned long ago not to trust each other—and with good reason. Governments seem to believe that all forms of international relations can be added to the list of things in which all is fair. Americans sometimes show a quaint tendency to trust people. That is all very nice, and can work between individuals, but in international relations we should always have our eyes open and should always prepare for the possibility that the trust could be betrayed. On the other hand, international trade gets countries locked together in relationships that theoretically benefit both sides. This is especially true when governments are less involved. Governments may be scheming against each other, but private companies, while they try to get the best deal for themselves, usually have to accept deals that allow the other side to make some money, too. Sometimes they even build up relationships in which some trust begins to creep in. In this world-wide economy, no country can stand alone. We buy, we sell with all people on earth. It is not sensible to wish that the Chinese economy would break down and we could remain number one. Of course we would like to be number one, but if other large parts of the world economy were to go into decline, that would make us weaker and poorer, too. If we are to remain number one, it should be in an environment in which all the players are doing better and better and we are simply doing the best. Theoretically, it doesn’t really matter who is number one. What matters is that everyone is moving closer to prosperity. Now, it could very well be that China has been using its industrial production as a weapon to inundate the United States with cheap products to drag down our wages and our standard of living and to build up a huge surplus of dollars that could be used against us financially. Anything is possible. Logically speaking it is stupid for countries to try to bring each other down. But that does not mean they do not do it. People who behave that way in private life—trying to sabotage and make less of the people around them—would properly be called criminal or insane. They can make life hell for the people around them. And by golly, that’s what governments so often try to do to the countries around them. At least it has happened far too often in the past. China’s history does not show the type of overseas imperialism that Westerners showed in the colonial period. They gradually expanded their land area. The Chinese believe (I have read) that they represent civilization, and all people will eventually want to join them. Many Westerners, including Americans, have found much to admire in Chinese culture. The Chinese may not realize that we, as barbarian as we are, have a considerably complex and persistent culture of our own: a barbarian civilization, as it were—something that is not going to go away. We may wonder what the Chinese are aiming for with all their growth and their increasing military spending. One good guess, I believe, is that they want to get to a point where no one can ever push them around again. They are very proud and probably believe they were treated very badly by the Western barbarians. And it is true, they were.

"Grexit," stage.....??

There were articles today in The New York Times, The Economist (online) and the Wall Street Journal about the chances of Greece exiting the Euro and what it might mean. (The New York Times article was also carried by Yahoo Finance.) The question is indeed, what will it mean? The Times article gave considerable space to the view that European banks and other institutions that could be harmed by such an event have had plenty of time to prepare for it and have taken steps to minimize the potential damage. It gave brief mention of "some experts" (unnamed) who still feel that it could be very damaging. But the thrust of the article was that it could be OK. (But probably not OK for Greece.) Government entities and their representatives do have some ability to influence the flow and content of the news simply by releasing or not releasing information, by offering opinions and analysis and so on. The news coverage today could be part of an effort to prepare the public and investors for the "Grexit," as some are now calling it. The Economist opines that it is still a bad idea, but perhaps inevitable. One of the newly famous Greek politicians, called a radical in most publications, asserted that the Eurocrats are bluffing. Maybe. But it appears that the Greeks are not bluffing in their determination to follow a course that may land them outside the Euro whether they like it or not. Journalism is far from an exact science, and it is possible that the views we are getting of the situation are inaccurate. (Heavens, how could that be!) We don't know whose fault any of this is. (Greek tabloids portraying the German chancellor as a Nazi are certainly not helping.) But events seem to be travelling in the direction of "Grexit."

Greece

The latest from Europe, or more specifically, from Greece, is not good.  According to a recent report in the Wall Street Journal, Greece seems to be politically stuck in an unfixable situation.  Representatives from the Euro zone  have tried to get them to clean up corruption and make needed changes to make the Greek economy more competitive.  There were promises at first, but when it came right down to it, the changes were not politically doable.

My philosophy is always to take these things with a grain of salt (e.g., is it really unfixable or are we about to be surprised to hear that it is fixed), but if such reports are true, there are more troubles ahead for Europe.  The Greek economy is in serious trouble.  The austerity measures imposed by the other Euro zone members as a condition for bailing Greece out of insolvency contribute to economic contraction, and the structural problems of the economy itself are damaging as well.  Recent elections have installed in their parliament a large number of extremists on the right and left.

Of course it is difficult to predict how serious such things can be for the big picture--the economies of Europe, the United States and the world.  The Euro zone members are afraid that if they cut Greece loose from the Euro, the crisis could progress on to other Euro members such as Spain, Italy and Ireland.  On the other hand the consequences of continuing to prop up Greece could be equally damaging.

Fear of the unknown is sometimes the biggest barrier.  No one really knows what will happen if Greece exits the Euro zone.  However it seems to be pretty certain that Greece will drag the Euro zone down if it remains a part of it.

Nor is Greece the only country with problems.  The others mentioned above are also vulnerable.

Economists generally agree that freer markets, especially more fluid labor markets, and also less generous social benefits, are remedies that can help Europe.  Some of the countries are moving in that direction.  It is not easy.  The politics of it are the most difficult.  But changes have to be made, and we hope they will be.

60 Minutes Corollary

I suppose Time Magazine's readership is not what it used to be. But there is another mass market "magazine" that may serve the same purpose: 60 Minutes. Granted it is on TV, but it is slow enough and sufficiently mass-oriented to be a contrarian indicator much like Time. (See previous post.) And what should appear in a recent 60 Minutes segment but the European debt crisis. Now, this crisis has been like a slow-motion train wreck for at least a couple of years, but now the editors of 60 Minutes have judged it to be enough in the public consciousness, or at least close enough to the forefront thereof, to hold the attention of a mass audience for 15 or 20 minutes. It is certainly too early to say that this means that the crisis is passing. One would hope that it is. But it also brings to mind something that our grandmother used to say: Every time the weather changes, people think it is always going to be that way. When it rains, it will never stop. When there is a drought, will it ever rain? Of course the crisis will be over at some point. We wonder when that will be and how much damage it will do. 60 Minutes wondered if it will drag the US into recession. That is possible, but the US does have other trading partners, many of whom are doing great. The Pacific is now a more powerful trading area than the Atlantic, and luckily for the US, we face both oceans. My guess is that we will survive.

Cover of Time Revisited

Back in 2010 we posited the "Cover of Time" theory, i.e., that when an issue or trend appears on the cover of Time Magazine, it is a contrarian indicator, and the trend is about to reverse. We were wondering at the time if housing prices, which had appeared on Time's cover, were going to reverse trend. They haven't done so yet; it takes a long time to change the course of a ship that size. But a recent report in The Economist asserts that housing prices in the US are now undervalued. (The Economist is not a contrarian indicator. They predicted the housing slump at least five years before it happened.) Also on that subject, anecdotal evidence suggests that real estate sales, at least on Cape Cod, are brisk right now. A lot of closings are happening. Properties are changing hands.

Productivity growth

The Economist reported in December that productivity has unexpectedly been growing robustly in the US. This is despite the fact that last year many experts were predicting slow productivity growth. Some of the people interviewed said they saw no limit to its continued climb.

The gains have been, theoretically, driven to a large extent by necessity. In the current economic environment, competition is tough, and firms are looking for any edge they can get. Workers are also eager to be productive to keep their jobs.

This last factor stems in part from the fact that the US's labor market is much more flexible than those of many other countries. Companies have more freedom to hire and fire at will. One of the things that has been holding Europe back for years is inflexible labor markets.

Productivity growth is a big driver of economic growth and an important factor in international competitiveness. US productivity growth in the past year has been faster than most other developed countries.