Perspectives on the global economic meltdown (Jan 26 2010)

Carl_T · Post by **Carl_T** » 23 Aug 2010 22:29

Bonds aren't the new tech stocks.

http://finance.yahoo.com/banking-budget ... et=&ccode=

What happens when interest rates are crazy low. I feel that these things will rapidly correct upon first sight of economic growth. May be a bubble, but it could be rational to ride on it as long as economy is bad.

enqyoob · Post by **enqyoob** » 24 Aug 2010 02:03

Atlanta puts everything on sale at City Hall East

This is hardly about economic tough times - it is about the City bozos tossing out perfectly serviceable items bought at outrageous prices from favored contractors, usually through sweetheart noncompetitive deals using tax dollars.

They are tossing these out so they can splurge again and get backsheesh from more sweetheart deals.
$500 chairs? For whose musharraf?

Hari Seldon · Post by **Hari Seldon** » 24 Aug 2010 05:52

Sri AEP back after a gap, and strangely subdued in his alarmism too (now, that is troubling)...
America no longer needs Chinese money, for now

First, how the cheenis are doing the nonmyopic, rational, cautious thing. Wish we had similarly far sighted and iron-willed leadership onlee....

[China] is building strategic reserves of oil and coal, and probably industrial metals. State entities are buying up natural gas reserves in Africa and Central Asia, or oil sands in Canada, or timber in Guyana. Where this expansion runs into political barriers, they are funding projects – such as a $10bn loan to Petrobras for the deepwater oil off Brazil. Where all else fails, they are buying equities. All of this recyles China's reserve surplus away from US debt.

But good news for unkil is that the small investor, sh!t scared of looming losses in 2 of the biggest overleveraged and overhyped asset classes that formed the bedrock of his wealth strategy these past few decades - stocks and the house - are rushing headlong into bonds. The cheeni withdrawal from the bond mkt has hence barely been noticed even without formal QEII.

So it is a good thing that US citizens have stepped into the breach, investing a record $185bn into bonds funds this year (ICI data). JP Morgan describes this as "extraordinary prejudice", evidence of irrational fear. Or perhaps JP Morgan has an extraordinary prejudice against bonds, arguably the shrewdest asset in a world where fiscal stimulus is being withdrawn before the rest of the economy has reached "escape velocity". The inventory cycle is ebbing, manufacturing has tipped over, the workforce is still shrinking, and the economy is sliding into a deflationary rut.

But other unwelcome side-effects of this shift and its implications have started to manifest. uh-oh.

As Moody's said this week, the Great Recession has made sovereign debt suspect. "The burden of proof now falls on governments". Events have "fast-forwarded history", ripping away the 20-year cushion we counted on before the "adverse debt dynamics" of our aging crisis hits home.

Yup, we all thought of how SS going neg sometime in 2042 and all were events too far away into the feasibility horizon only. How demographic deficits were all set to be replaced with immigrant youngistani booming workforce and all.

AEP as usual in inimitable flair ends with a note of caution and D&G...

Two epochal forces are colliding in the global bond market: core deflation is gathering force but the West is losing sovereign credibility just as fast. Arch-bear Albert Edwards at Société Générale advises clients to prepare for a violent policy swing from one extreme to the other. First we deflate into the abyss: then we inflate hard rates to get out again. At some point the "euthanasia of the rentier" will wear off. Misjudge the sequence at your peril.

Amen.

Jai ho.

Hari Seldon · Post by **Hari Seldon** » 24 Aug 2010 06:03

Gretchen Morgenson in NYT belabors a topic we've often dissed & cussed here - the effects of debt on consumption, productivity, asset values and the khanomy.
Debt’s Deadly Grip

IT’S one of the toughest lessons an investor has to learn: while the value of assets can plummet posthaste, it takes forever to shrink the debt that was used to buy them.
...
To be sure, the data indicates that consumers are doing what they can to kick their debt habits. But the process is slow.

For example, total consumer debt stood at $11.7 trillion on June 30, down just 6.5 percent from its peak in the third quarter of 2008. The number of open credit card accounts was down considerably — 23.2 percent — from the highs reached during the second quarter of 2008, while mortgage obligations have fallen 6.4 percent from the peak that was seen almost two years ago.

Yep. Deflation in full play only. The problem is that deflation makes it ever harder to get out of the debt trap coz incomes fall faster than the debt outstanding in aggregate, economy wide. And no, I seriously doubt the gubmint's positive GDP figures - the growth was negative, aka contraction - dressed up with lipstick on pig and all still looks awful. The national income contracted whereas the national debt didn't.

Many consumers, though, are still very much in a vise. Halfway through this year, 11.4 percent of outstanding consumer debt was delinquent, up slightly from 11.2 percent a year earlier. An astonishing $1.3 trillion of consumer debt is delinquent, with $986 billion seriously so — 90 days late and counting. While delinquent balances are down by about 3 percent from the same period last year, serious delinquencies are up a bit more — 3.1 percent.

Here are some other troubling statistics from the Fed: a half-million people had a foreclosure added to their credit reports between March 31 and June 30, an increase of 8.7 percent over the first quarter of the year. And the numbers of consumers with new bankruptcies appearing on their credit reports rose 34 percent during the quarter, to 621,000. That increase is significantly bigger than it has been in the last few years, according to the Fed.

Per capita debt balances are staggering, as well — and for many consumers, the assets underpinning these obligations have collapsed. Reflecting the heavy burden that mortgages represent for most consumers, these debts are highest in states where the real estate mania went craziest. In California, for example, the average per capita debt balance among consumers with a credit report is $78,000, the Fed said; in Nevada, it is $73,000. The nationwide average is $49,000.

ADDING to the weight of these debts is the fact that consumers’ income statements aren’t exactly flush right now, thanks to high unemployment and rock-bottom interest rates. The misery of a balance sheet deleveraging is being exacerbated by a dearth of income opportunities.

Of course, this is what happens after a spectacular asset bubble bursts. Nevertheless, for consumers who are cutting debt and trying to save, it is dispiriting indeed that they generate so little on their money. Those living on fixed incomes are also in a bind.

See, none of this is terribly new or original for dhaga regulars. But the nice part is how much of this is becoming conventional wisdom and going mainstream. The voodoo economics and mighty monetarism of old is giving way to Minsky and Hayek, at last.

It is not lost on these consumers that their minuscule returns are a direct result of the Federal Reserve’s attempt to shore up troubled banks’ financial standing. Sharply cutting interest rates vastly increases banks’ profits by widening the spread between what they pay to depositors and what they receive from borrowers. As such, the Fed’s zero-interest-rate policy is yet another government bailout for the very industry that drove the economy to the brink.

Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management concern, characterizes the Fed’s interest rate policy as an invisible tax that costs savers and investors roughly $350 billion a year. This tax is stifling consumption, Mr. Petzel argues, and is pushing investors to reach for yields in riskier securities that they wouldn’t otherwise go near.

In short, the Fed’s interest rate policy may be causing more economic problems than it’s solving.

Wow, so blame the Fed is going mainstream at last in bastions of propreity like the NYT? More please!

Read it all. Jai ho.

Neshant · Post by **Neshant** » 24 Aug 2010 08:14

SwamyG wrote:The fundamental problem with America's economy is a decline capabilities and motivation of our workforce.

And where do cutting-edge technologies come from? Modern Economists such as Paul Romer, Robert Lucas and Robert Barro, argue that technical innovations ultimately spring from the cognitive abilities of "human capital" (people) who attain these abilities through education and training.

This is one of the rare moments where economists are actually talking sense. Although some would say this is obvious.

There can be no recovery until there emerges a new industry that creates productivity/innovation linked job growth. Financing & banking BS does not produce any scientific nor technological breakthroughs. Worse yet its draining the real economy like a parasite.

What's needed is not more money being siphoned off into banking or other foolishness like printing, but a focus on the new industries of tommorrow. The most prominent one has got to be genetics. If a good portion of the funds going down the drain into Goldman Scahs was instead put into genetics research, I'm certain it would reap many multiples. Just a single breakthrough in an area like - slowing down the ageing process by 50%, a cure for cancerous cell division at the genomic level or replacable body parts - would be an industry worth a few trillion.

I'm afraid too many Geithner type guys are running around in govt diverting all resources to useless sectors like banking and burning up the firepower needed to pull the US out of this dive.

svinayak · Post by **svinayak** » 24 Aug 2010 08:48

Neshant wrote: The fundamental problem with America's economy is a decline capabilities and motivation of our workforce.

And where do cutting-edge technologies come from? Modern Economists such as Paul Romer, Robert Lucas and Robert Barro, argue that technical innovations ultimately spring from the cognitive abilities of "human capital" (people) who attain these abilities through education and training.

This is one of the rare moments where economists are actually talking sense. Although some would say this is obvious.

There can be no recovery until there emerges a new industry that creates productivity/innovation linked job growth.

No new industry can come in before the rest of the world is satisfied with some basic std and health and education. This imbalance has created less demand for newer tech and the left behind society is yet to catch up to basic stds.

Need is a mother of all inventions and current inventions are ready to satidfy majority of the human jind

Neshant · Post by **Neshant** » 24 Aug 2010 09:21

^^ I'm not sure I follow. There is no ethical component here, only scientific/technical.

Neshant · Post by **Neshant** » 24 Aug 2010 09:22

Representation Games at the IMF
http://bosco.foreignpolicy.com/posts/20 ... at_the_imf

"The United States is increasing pressure on Europe to cede some of its seats on the International Monetary Fund's powerful executive board."

-----

WOW exactly as predicted by Jim Rickards!

The shift to IMF SDRs (special drawing rights) as a global currency has begun and to get China onboard, a greater voting share at the IMF is in the cards. But this means the share has to be taken from some other entity (Europe) which strongly resists its dilution. Most likely this change is going to be announced at the next G-20 meeting in South Korea which Rickards said would be the more important one (as compared to the earlier Toronto G-20 meet).

Hope the babuz in India are alive to the situation.

June 14th interview :
http://www.kingworldnews.com/kingworldn ... 3A2010.mp3

Hari Seldon · Post by **Hari Seldon** » 24 Aug 2010 09:33

Neshant wrote:^^ I'm not sure I follow. There is no ethical component here, only scientific/technical.

There seems to be no contradiction in what you 2 are saying.

Historically, demand or 'need' or 'necessity' has spurred innovation and invention and industry. There are areas right now where demand is high - cure for cancer for example, and green energy for another - where the hopes and prayers for a miracle are high - so consequently are efforts, programs, investment $$$s etc.

But in most other areas, the rest of the non-emerged world is playing catch-up and providing ample demand for existing products and tech to expand on effortlessly taking away the innovation incentive in some measure.

Of course, even here, like our Nanos and chotukools have shown, design and engineering innovations in cost-cutting, back2basics simplicity etc is spurring change.

Let's hope a vast new source of cheap renewable energy suddenly opens up and creates the driver to more jobs, growth, sustainability and happiness.....Jai Ho.

Carl_T · Post by **Carl_T** » 24 Aug 2010 09:53

On the line of what you guys are talking about

http://blog.foreignpolicy.com/posts/201 ... ebola_cure

Neshant · Post by **Neshant** » 24 Aug 2010 10:15

Ebola hardly affects anyone in the developed world... or developing world for that matter. This is just an anti-viral drug so its no real scientific breakthrough as such.

A cure for all cancers however would be something (economically) signficant. That would be like the discovery of anti-biotics (major advancement in medicine).

It still isn't a means of generating jobs on a vast scale unless the cure itself required a lot of manual skilled/semi-skilled labor. But at least it would fill the govts coffers.

Carl_T · Post by **Carl_T** » 24 Aug 2010 10:27

There has already been a lot of government money going towards what you say. It does not mean a cure for cancer will appear just because many scientists are working towards it. It is a bad idea to focus on an industry just to create jobs. The US should just engage in where its competitive advantage lies. So not propping up manufacturing or auto industries, but IMO rather focus on educating and retraining workers laid off.

Krugman's work shows that sometimes a competitive advantage is developed arbitrarily, so in theory a government could invest and build competitive advantage in a particular field. That's fine, but the main problem is figuring out which areas it will be profitable to develop CA! I agree, though the US has a huge competitive advantage in biotech.

I feel the US's biggest problem and failure is in educating lower class whites and blacks.

ShivaS · Post by **ShivaS** » 24 Aug 2010 10:37

I have been harping for quite sometime that unless US comes up paradigm changing technological break through that it alone can supply such a product, service that for considerable time none else can provide and most importantly there is need for such a thing (product or service) it will lose its premier position gradually. It will erode/corrode (almost like delta x tends to zero in calculus).

Having worked in Pharmaceutical research and clinical development areas, I tell you even if you discover a cure for cancer; it will not create mass market for it.

Instead it would be prudent to develop a cure for diabetes and or obesity to make money …

Cure for indications are selected on the basis of earning potential, revenue streams not for any egalitarian reasons

Developing new drug is much more riskier and expensive than drilling for oil.

shyam · Post by **shyam** » 24 Aug 2010 10:45

ShivaS wrote:Instead it would be prudent to develop a cure for diabetes and or obesity to make money …

I think pharmaceutical companies do not believe in cure. They prefer to treat patients with medicines that they will take their entire llife.

ShivaS · Post by **ShivaS** » 24 Aug 2010 10:49

No cure can be administered unless the consumer is willing to adjust life style.
The adverse events for each drug in itself generate new drugs to keep Phrama industry in perpetual motion.

Singha · Post by **Singha** » 24 Aug 2010 10:58

http://www.businessweek.com/magazine/co ... 628175.htm

Due Process, Dubai Style
Hundreds who rode the boom have been detained

By Henry Meyer
BW Magazine

Not long ago, British businessman Ryan Cornelius was living the high life, doing real estate deals out of Bahrain. He took his family on safari in Kenya and on big-game fishing trips on his yacht. Today, Cornelius resides in a prison cell in Dubai, accused of loan fraud. He's been locked up for more than two years without a court reaching a verdict.

Cornelius and other executives have been targeted by Dubai's government in an anti-corruption sweep provoked by the emirate's financial and real estate collapse in 2008. The emirate's image as the Singapore of the Middle East, a cosmopolitan hub for finance and tourism, is being tested as it tries to clamp down on the excesses that government officials say accompanied an explosion of foreign investment and immigration. Many of those accused of wrongdoing protest that they are innocent victims of abusive prosecutions. They claim they are being detained without the sort of due process provided by Western courts.

"The whole legal system seems to hold you in a state of constant suspension," Cornelius, 56, says from a pay telephone at Dubai's Central Prison. "We just don't seem to move forward."

He and six co-defendants have been charged with defrauding Dubai Islamic Bank by improperly diverting the proceeds of a $501 million loan. The case is one of the biggest frauds ever alleged by authorities in Dubai, the second-largest of the seven emirates that make up the United Arab Emirates. Cornelius denies any wrongdoing.

In all, Dubai authorities may have jailed several hundred executives, according to a London-based advocacy group called Detained in Dubai. The crackdown has focused on alleged fraud involving state-run real estate concerns and other companies. Dubai's judicial system, which is based on Islamic law, or sharia, has highly punitive aspects that private lawyers in the emirate say are weighted against defendants. The U.S. State Dept. issued a report in March that said the U.A.E. lacks an independent judiciary, suggesting that its courts are subject to political influence.

About 40 percent of the 1,200 people in Dubai Central Prison have been convicted of defaulting on bank loans, Human Rights Watch said in a report in January. The emirate's financial laws impose punishment of as much as four years behind bars for a single bounced check. Even after completing their sentences, some inmates remain incarcerated until their debts are paid off, something unheard of in modern times in the U.S. or the U.K., New York-based Human Rights Watch says. "Our current criminal laws are not fit to deal with sophisticated financial crimes," says Habib Al Mulla, the former chairman of the Dubai Financial Services Authority, an industry regulator. Al Mulla, an attorney, represents one of Cornelius' co-defendants. New laws are needed "to protect bona fide businessmen from the abuse that some do face under the current legal system," he adds. "This abuse has a damaging effect on the economy and the country."

After it launched its crackdown two years ago, the government said it had uncovered kickbacks and other corruption at a variety of state-controlled companies. During its boom years, the emirate and its companies amassed debts of more than $100 billion for projects such as the world's tallest tower and a group of artificial, palm-tree-shaped islands built by property developer Nakheel. The Dubai government and prosecutor's office didn't respond to repeated requests for comment.

Some U.A.E. citizens arrested in the anti-fraud offensive have been freed after repaying what the government said they owed. The former governor of the Dubai International Financial Center, Omar bin Sulaiman, was released from prison in May, following two months of detention after he returned to the Treasury of Dubai about $14 million in bonuses he allegedly awarded himself. Hashim Al Dabal, the ex-chairman of state-owned Dubai Properties, got out in June after eight months in detention by repaying $35 million he allegedly embezzled from the real estate company.

Others remain in prison as their cases inch along. Zack Shahin, a 45-year-old former PepsiCo (PEP) executive from Ohio who went to work for the property company Deyaar Development, has been incarcerated since March 2008, charged, along with others, with embezzling $27 million. In a statement earlier this year, Shahin's lawyers said that for days on end, their client had been denied food, held in solitary confinement and darkness, blindfolded, and threatened with torture. The attorneys said that Shahin is an innocent "target of a politically charged investigation." Dubai's attorney general, Essam Essa al-Humaidan, previously has rejected allegations that Shahin or anyone else has been abused by the emirate's prosecutors or legal system. The American government has repeatedly raised Shahin's situation with U.A.E. authorities, according to the U.S. State Dept.

Outside investors are looking carefully at how Dubai is applying its financial laws to foreign executives, says John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi. "It is good they are taking some individuals to court, pursuing them," Sfakianakis says, "but the way they are pursuing them could [negatively] impact Dubai."

Cornelius and his co-defendants are accused of diverting hundreds of millions of dollars from a trade-financing loan for projects such as the Plantation, a planned 20 million-square-foot development in the desert that was to include five polo pitches with stables for 800 horses, a luxury hotel, and houses. The prosecution charges that Cornelius and others forged documents and used the loans for "fake deals," according to a court document.

"I absolutely deny all the allegations against me," Cornelius says from behind bars. He said that the money in question was mostly used for property development in Bahrain and the relocation of an oil refinery from Canada to Pakistan, as well as for the Plantation project in Dubai. He and his associates reached a debt repayment agreement in 2007 with Dubai Islamic Bank, he added. The bank took control of the Plantation after Cornelius and his colleagues were arrested. If the bank had sold the property at that time, the proceeds would have more than covered all of the debt, Cornelius says.

He now lives in a dormitory with about 100 other men. The conditions are an improvement over those in Rashidiya prison, where he says that he and more than 250 prisoners shared six rooms meant for 48, and there were only two working toilets. Cornelius says he was held in solitary confinement for the first six weeks after his arrest in May 2008. The yacht and a beach hotel he owned in Kenya have been sold.

Cornelius says he has been in court about 30 times and has been denied bail a dozen times. The proceedings are in Arabic, and he finds them difficult to follow, even with an interpreter. Originally facing a maximum sentence of three years, Cornelius and his fellow defendants could get up to 20 years under a new anti-corruption law announced after his arrest. "This has been a devastating experience," he says.

Radha Stirling, a lawyer who started Detained in Dubai, says there has been a marked increase in detentions for financial crimes since last year. The majority of cases she is dealing with are related to bounced checks or other debts. "I think a lot of people relocated to Dubai as an extension of Europe, like France, Spain, or even the U.S.," Stirling says. "It was seen as very developed with a good legal system." Now, she predicts, "the average person who was once going there to seek employment or invest will shy away from Dubai."

The bottom line: Dubai's anti-fraud crackdown has resulted in the imprisonment of hundreds of foreign executives and financial workers.

Singha · Post by **Singha** » 24 Aug 2010 11:02

"I think a lot of people relocated to Dubai as an extension of Europe, like France, Spain, or even the U.S.," Stirling says. "It was seen as very developed with a good legal system.

svinayak · Post by **svinayak** » 24 Aug 2010 11:22

Singha wrote:"I think a lot of people relocated to Dubai as an extension of Europe, like France, Spain, or even the U.S.," Stirling says. "It was seen as very developed with a good legal system.

I had a prof who was teaching business law. He was praising Dubai and its lifestyle. I want to find out what he says now

Neshant · Post by **Neshant** » 24 Aug 2010 13:12

Carl_T wrote:So not propping up manufacturing or auto industries, but IMO rather focus on educating and retraining workers laid off.

There is no quick fix to this situation since any job these mass of unemployed can be trained for can be done 10 times cheaper overseas. There is nothing these largely under-educated people can be trained for as even educated people are losing their jobs.

The only thing that is going to move the economy forward is the arrival of a new industry that has productivity linked job growth. The only industry I can see which has that kind of potential is genetics.

I don't necessarily like the govt getting into the business of investing as most of the time it makes really bad decisions (e.g. wasting money on building roads & bridges in a recession thinking that's job creation).

But within 7 years if nothing has come about and this kind of wreckless spending keeps up its pace, the US is going to be in serious trouble.

Research in genetics is not likely to be capital intensive. 50 billion dollars would be a substantial sum able to support results-based efforts of thousands of lowly paid graduates & researchers. No high rolling CEOs or six figure salaries here and no multi-million dollar FDA beaurocracy. Just proof of concept. Compare that to the trillions being pissed away on the banking black hole which is certain to generate nothing.

Hari Seldon · Post by **Hari Seldon** » 24 Aug 2010 16:08

Here's a gem from Jesse's wonderful blog that explains all the brouhaha we were witnessing in the past few yrs, nay decades, rather pithily and well...
The Seigniorage Curse

"The Seigniorage Curse appears to hollow out the economy by the following manner: First, the premium charged to holders of dollars becomes a new source of accrued, aggregate revenue. This extra capital flowing into the economy is initially seen as a global honoring of our economy’s strength, and innovation.

But when innovation falters and less value is created, seigniorage is maintained–and thus the unhealthy dynamic begins. From this point forward, whether the US economy either leads in innovation, or lags in innovation, the Dollar advantage grows regardless.

It then becomes clear that manufacturing Dollars, rather than manufacturing goods, is a better value proposition.
{Bingo! Bullseye!}
Once that dynamic is in place, then a long cycle of financialization ensues, in which innovation and talent moves from design and manufacturing to the financial sector. The financial sector then becomes rapacious, as it scours what’s left of the economy to monetize.

Whereas manufacturing and innovation were once monetized, the financial sector begins to monetize itself...
{bl00dy brilliantly blurted, sirjee...}

Every inheritance starts out as a gift. Just as oil-cursed nations remain ever vulnerable to swings in the price of oil, the United States is now vulnerable to its own number one export–the value of the US Dollar and by extension the value of US Treasury Bonds."

Wow. Read it all. Only.

Jesse has more gyan for us Austrian-ishtyle ekhanomystics....

True Money Supply is included for all you Austrian Economists, and it has enjoyed a bumper expansion under Bernanke's chairmanship. This is the money that is ready and able to be used as a medium of exchange, what the Austrians consider 'real money.' I am quite sure that Messrs Ludwig and Murray would be aghast at Bernanke's banking practices.

No doubt, no doubt.

I include Eurodollars chart at the bottom. This is the 'missing component' from the M3 series. Several commentators seek to estimate M3 by obtaining the other M3 components from existing sources and then estimating eurdollars based on correlations and trending. See M3 Hysteria and a Look at M2, MZM, GDP and PPI.

Oh, read it all. Only.

ShivaS · Post by **ShivaS** » 24 Aug 2010 16:58

I like Dubai Detention Laws ( for a DOO DDL is like mantra).
If that law is enforced our MPs MLAs most Business Men Babusand Few Good men too would be meeting in Tihar Jail or state Jails.

We surely need something like that..

ramana · Post by **ramana** » 24 Aug 2010 20:38

In the 1990s the tax break for R&D was removed as a way to reduce the budget deficit. After that R&D spening has gone down in US companies. R&D is now aligned with business product lines and is not effective in creating new products.

Hari Seldon · Post by **Hari Seldon** » 24 Aug 2010 20:43

A spoof on a star wars theme. Only.

Hari Seldon · Post by **Hari Seldon** » 24 Aug 2010 20:47

ramana wrote:In the 1990s the tax break for R&D was removed as a way to reduce the budget deficit. After that R&D spening has gone down in US companies. R&D is now aligned with business product lines and is not effective in creating new products.

Yup.

Like singha saar once lamented about the sad plight of the superconducting supercollider project, aborted by congress to cut deficit by what, a paltry $1billion, in the 90s?

Truly, a country forgetting what makes a country great is tragic only. Civilizations are, in some sense, like Bhishma of old - who was granted a boon that he could choose the time of his death. And like Arnold Toynbee says - civilizations don't die, they commit suicide - by failing to choose to live.

Or something like that. Jai Ho.

ramana · Post by **ramana** » 24 Aug 2010 21:44

Not really. In the 90s under Rubin the Secy for Treasury, the idea was to make NYC the financial markets pivot and steal the show from Londonium. Financial wizardy was taught in business schools etc. Even Tech meccas like MIT became centers for Financial Engineering! Math geeks were lured away from aerospace and NASA type areas to do Bessel functions

on finance data.

Now all that loss in key competence is coming back to bite them.

ShivaS · Post by **ShivaS** » 24 Aug 2010 21:50

Since Regan times the research budgets for all universities were cut and all budgets since then have always included cut to Research in the universities...

SwamyG · Post by **SwamyG** » 24 Aug 2010 23:52

Neshant wrote:This is one of the rare moments where economists are actually talking sense. Although some would say this is obvious.

That guy is a neuro-scientist.

SwamyG · Post by **SwamyG** » 24 Aug 2010 23:58

Carl_T wrote:The US should just engage in where its competitive advantage lies. So not propping up manufacturing or auto industries, but IMO rather focus on educating and retraining workers laid off.

To do what? I have heard this innovation, re-training ityadi several times on the radio, tv and internet. But there has been no convincing specificity.

Suraj · Post by **Suraj** » 25 Aug 2010 00:38

SwamyG wrote:To do what? I have heard this innovation, re-training ityadi several times on the radio, tv and internet. But there has been no convincing specificity.

Training to run money printing presses

{ducks and runs away}

enqyoob · Post by **enqyoob** » 25 Aug 2010 01:26

Since Regan times the research budgets for all universities were cut and all budgets since then have always included cut to Research in the universities...

Interesting. Circa 1982, the "per faculty funding" at top research universities was maybe $30K/yr, or less, and only about 50% of faculty did any sponsored research. Today it is around $400K/yr to $600K/yr, and everyone does it. Also, every college now, no matter how small and po-dunk expects its faculty to "bring in" external research $$. So how does the above math work out?

It is true that US industry with few exceptions, decided to emulate Indian industry, and stopped funding research, and gradually shut down their internal R&D as well. "Cost-cutting". Places like Bell Labs, TI & Motorola and IBM research all went more and more into Oracle Operator mode under Total Quality Management.

What has happened is that research $$ have been sucked out of "basic" research into "focused" research. For efficiency in producing Breakthroughs on Schedule.

And the percentage of time spent on Presentations and Budgets and Gantt Charts and Form-Filling went from ~10% in the early 80s to about 97% today.

So I guess it is true that real R&D funding went from 0.9x$30K to 0.03*$400K which is indeed a reduction.

All signs that the US is becoming more and more like Teesra Duniya Desh.

Mort Walker · Post by **Mort Walker** » 25 Aug 2010 01:41

^^^

So you're saying that top research universities have sucked up the R&D funds that were typically done by industry? What about defense and aerospace? I still see a lot of R&D being done by the likes of Raytheon, Northrup and LM. But I guess this wouldn't be "basic" research.

On the other hand it may explain why it costs well over $50K/year for an undergraduate degree at the Ivy Leagues, MIT, JH, Chicago, Northwestern, Stanford and Caltech.

Bade · Post by **Bade** » 25 Aug 2010 01:44

Out of $40k/yr to $400k/yr, a factor of 5 can be attributed to inflation if one uses the change in the value of land in those intervening years as an index. Still another factor of two or more is missing to account for constant level of funding or worse since those times.

But then most top 50 fizziks departments were advertising funding levels even in the early 90's in tens of millions of dollars to lure third worlders, with faculty numbering no more than ~ 50.

enqyoob · Post by **enqyoob** » 25 Aug 2010 02:18

In India for instance, the reason why industry does practically no research, is not that the money gets "sucked up" by universities. It is sheer greed. Same practice came to US too under Total Quality Management - R&D done to make discoveries is an expense that detracts from quarterly profit growth, so "modern managers" cut that out. When aerospace contracts were huge, long-term weapon deals aiming for large jumps in real capability, there was pressure to invest heavily in R&D to beat out the "competition" (i.e., Soviets). But now with smaller, piece-meal, shorter-term things, what is labeled IRAD money, goes mostly into running optimization trade studies to see which of numerous "safe" options minimizes profit risk. Oracle-operation, basically.

For an illustration, watch the Discovery Channel show on how Boeing managed to lose the JSF contract.

R&D is a profit item only when the guvrmand pays for it.

vina · Post by **vina** » 25 Aug 2010 09:26

R&D done to make discoveries is an expense that detracts from quarterly profit growth, so "modern managers" cut that out

Saar, the powerhouse R&D that you mentioned earlier like Bell Labs, IBM TJW , RCA Sarnoff, Xerox etc , Kodak, GE etc can be done only in an environment where you have natural entry barriers (scale, industry structure, technological barriers etc. etc) or the industry is a natural monopoly and in such an environment, it makes huge sense for the incumbents to pour R&D money into making the best products . They were the only ones who could afford it and did.

A case like Bell Labs . Ma Bell made 70 to 80% gross margin, it was a natural monopoly , and you could do it. IBM had the entire market for computers (back then it was only big.bigg.. dabbas remember ?) and they practically invented anything there was to invent in computers ( I would say that despite the hype about internet and everything fundamentally nothing new has been invented in computers since the IBM days of post 1970s), Xerox had a monopoly in copiers , Kodak was the Uber gorilla in anything photography and had the world sewn up.

Problem is that kind of monopoly behavior makes you ignore the fundamental distruptions that get invented in your own labs. For eg stuff like Unix, Laser and CellPhones and DSL and everything were invented at Bell Labs. But Bell Labs made close to zero money out of it. Much of that can be traced back to the fear that those could kill the existing $$$$$$Billions of cash flow. Same with IBM. They invented RISC, they invented most of networking, they invented relational databases, memory, disk storage, parallel computing, anything you can think of had an IBM patent long ago. They wanted to kill RISC and mini computers because they would threaten mainframes, didn't want to do relational databases because it would kill their bread and butter hierarchcical databases.

Well, the nice thing is if you don't want to do it, corsair pirates like a certain Mr Lawrence Ellison and companies like HP and Sun went ahead and ran with the market for relational databases and RISC based machines. Startups with wierd names like CISCO ran away with the networking space, and most of all, IBM couldn't be bothered with piddly $2000 hobby machines called home computers which they estimated to have a total market of 30,000 machines and they could make more money by selling a dozen mainframes than the entire PC market so they took some off the shelf chip by some obscure company called Intel and an unknown Harvard dropout with thick glasses brought a 2nd hand operating system to the table (see, their engineers didnt want to get their hands dirty doing stuff for PCs) and today those two companies basically put IBM out of the bulk of the hardware and software business

.

Same story with Bell Labs. It has an even more sorry tale than IBM. Same with Kodak and Xerox. All of those imaging companies with a death grip on their patents and copyrights either were wiped out by the shift to digital (notably Polaroid) or became commodity players.

Point is, we have to realize that the disruputions spawned in those labs have fundamentally altered the industry structures and made the world a better place for everyone by increasing competitive intensity. Now in a highly competitive market , you cannot do blue sky research. At best you can do near term applied research. Blue Sky kind of research gets kicked out to the public sector/govt univs which have to have the kind of funding to do it. Industry cannot sustain such things any more. Managers recognize it. That is a cold hard fact. If the experience of Bell Labs , IBM, Kodak, Xerox, GE etc is anything to go by and their inability to monetize it that is the way to go.

Singha · Post by **Singha** » 25 Aug 2010 10:42

NYT

Housing Fades as a Means to Build Wealth, Analysts Say
By DAVID STREITFELD
Published: August 22, 2010

Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good.

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.

“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.

The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.

Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.

“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.

The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.

That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.

“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”

Other buyers have grand and even grander expectations.

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.

With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.

For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.

The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.

By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.

“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”

Not everyone views the notion of real appreciation in real estate as a lost cause.

Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.

“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”

All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.

“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”

Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.

Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.

Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.

His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”

ShivaS · Post by **ShivaS** » 25 Aug 2010 10:51

The first thing that US needs to do is build a grid of super fast trains and terminals for every 200/250 miles from major cities.

For example
Detroit – Chicago – Indianapolis
Detroit – Dayton/Cincinnati- Louisville
Cincinnati- St. Louis- Kansas- Denver
Denver- Las Vegas- San Jose
Detroit– Cleveland– Pittsburgh.
Boston – NYC- Philadelphia.
Philadelphia -Washington- etc etc

US will save enormous amounts on individual commutes.
It will spur new technologies and create jobs unless of course US imports from PRC.

Meanwhile change the paradigm to Hydrogen/electric / cars that work on Maya Jal or better Mya gel on which US has monopoly for some time to come.

The intent is to cut imports cut borrowing and get back deficit in control in the short to medium term.

****
Folks apologies
My post should have started with this but I thought I quoted for the context.

I am doing it now,

The US oil import bill last year came to some $327 billion, and should easily top $400 billion this year. That's an increase of some 300% since 2002, according to PIW.

Last year, PIW reckons that the US paid out a record $245 billion for about 10 million barrels per day of crude oil imports, and another $82 billion for about 3.5 million b/d of imported oil products. This year it looks like paying out even more, with domestic crude production continuing to fall, demand for imports of high-priced transport fuels remaining strong, and oil prices around 30% higher year-on-year so far in 2008. The increase to an estimated $440 billion for 2008 is based on an average $90 per barrel crude oil price for the year. In 2002, before the current bull market for oil began, US oil imports cost less than $103 billion.

The numbers a little dated as this was at the end of 2008 Oil at its peak of $90 +dollars per bar

ShivaS · Post by **ShivaS** » 25 Aug 2010 11:13

Vina saar, while what you say is correct but, the shift in the philosophy due to Finance guys going to top shifted from product oriented profits to finance and accounting maya profits.

Any new product development is inherently risky, a Product may be good but marketing and service rendered may not be good ( a strong case against monopoly, in addition to price manipulation and create entry barriers)

Example Digital products, VAX VMS micros, VAX Alpha chip, first RISC based chip, bad and arrogant attitude to customers. VAX was rated superior to IBM.
Remember LSE (language Sensitive Editor Feature of VAX? anyone)

If you look at product life cycle curve and the BCG matrix you will notice every company will fund new product development or extension of products.

But this has been changed to war of Margins, If somehow the company instead of making new products there by creating a small time of monopoly to charge high prices was moved to cost cutting or cost transferring.

This is a second way of executing monopoly tactics (which PRC has perfected because its never a level plating field for various reasons which we can discuss later) is to take advantage of price (most product consumers are price sensitive, price elasticity of demand), make it cheaper else where and make more profits. GEs Bustard Jack Welch started this. GE takes Samsung (Korean) white goods made in PRC and sels them with GE logo to consumers in America.

The big three also played this game, GM selling Toyota Corolla as Prizim Chrysler selling Mitsibushi cars Dodge (viper to place against Ford Mustang and GM Corvette)

When GM had technocrats they were focussed heavily into engineering products, when Finance guys headed, out sourcing was the name of the game, Ivy YUM BE YEAHS were at top they wanted growth by acquisition deviating from core competency. GM went into aerospace, so did Ford… copy cat….

SO its not just monopoly its more than that….

Singha · Post by **Singha** » 25 Aug 2010 11:38

getting americans out of their cars and SUVs is a tough call. 60% are too obese to do much walking , esp lugging a office bag ... lean and trim singaporeans, nyc types or mumbai residents might easily manage 1km one way walking door to door. but american commuters are too unfit to attempt that esp in the south (where its very hot in summer) and midwest (very cold and snowy in winter). infact the dense caucasian pop in american south onlee happened after home AC was invented I read!

the whole structure of american residential, retail and office development is oriented towards driving long distances by car door to door. blessed with enourmous land holdings, they have expanded. new urbanist places are cute but less than 1% of suburbia one thinks. it will take decades of laws and efforts to reverse the Mcsuburia concept and people will whine and moan every step of the way about the "privacy" and "acres of greenery" they are giving up.

Neshant · Post by **Neshant** » 25 Aug 2010 12:52

The first thing that US needs to do is build a grid of super fast trains and terminals for every 200/250 miles from major cities.

It will spur new technologies and create jobs

I doubt it.

No real breakthroughs will be made unless they develop anti-gravity propulsion or something. Otherwise its just the same old technology as used in Japan's bullet trains which have been around for years.

The next major earth shattering breakthrough is likely to come from genetics IMHO.

ShivaS · Post by **ShivaS** » 25 Aug 2010 13:07

yes change the genetics of Americans to like Chinese to work like the slaves in Roman ships with oars to the tune of the drum.