By Robert Reich, Robert Reich
The U.S. economy continues to stagnate. It’s growing at the rate of 1.8 percent, which is barely growing at all. Consumer spending is down. Home prices are down. Jobs and wages are going nowhere.
It’s vital that we understand the truth about the American economy.
How did we go from the Great Depression to 30 years of Great Prosperity? And from there, to 30 years of stagnant incomes and widening inequality, culminating in the Great Recession? And from the Great Recession into such an anemic recovery?
The Great Prosperity
During three decades from 1947 to 1977, the nation implemented what might be called a basic bargain with American workers. Employers paid them enough to buy what they produced. Mass production and mass consumption proved perfect complements. Almost everyone who wanted a job could find one with good wages, or at least wages that were trending upward.
During these three decades everyone’s wages grew — not just those at or near the top.
Government enforced the basic bargain in several ways. It used Keynesian policy to achieve nearly full employment. It gave ordinary workers more bargaining power. It provided social insurance. And it expanded public investment. Consequently, the portion of total income that went to the middle class grew while the portion going to the top declined. But this was no zero-sum game. As the economy grew almost everyone came out ahead, including those at the top.
The pay of workers in the bottom fifth grew 116 percent over these years — faster than the pay of those in the top fifth (which rose 99 percent), and in the top 5 percent (86 percent).
Productivity also grew quickly. Labor productivity — average output per hour worked — doubled. So did median incomes. Expressed in 2007 dollars, the typical family’s income rose from about $25,000 to $55,000. The basic bargain was cinched.
The middle class had the means to buy, and their buying created new jobs. As the economy grew, the national debt shrank as a percentage of it.
The Great Prosperity also marked the culmination of a reorganization of work that had begun during the Depression. Employers were required by law to provide extra pay — time-and-a-half — for work stretching beyond 40 hours a week. This created an incentive for employers to hire additional workers when demand picked up. Employers also were required to pay a minimum wage, which improved the pay of workers near the bottom as demand picked up.
When workers were laid off, usually during an economic downturn, government provided them with unemployment benefits, usually lasting until the economy recovered and they were rehired. Not only did this tide families over but it kept them buying goods and services — an “automatic stabilizer” for the economy in downturns.
Perhaps most significantly, government increased the bargaining leverage of ordinary workers. They were guaranteed the right to join labor unions, with which employers had to bargain in good faith. By the mid-1950s more than a third of all America workers in the private sector were unionized. And the unions demanded and received a fair slice of the American pie. Non-unionized companies, fearing their workers would otherwise want a union, offered similar deals.
Americans also enjoyed economic security against the risks of economic life — not only unemployment benefits but also, through Social Security, insurance against disability, loss of a major breadwinner, workplace injury and inability to save enough for retirement. In 1965 came health insurance for the elderly and the poor (Medicare and Medicaid). Economic security proved the handmaiden of prosperity. In requiring Americans to share the costs of adversity it enabled them to share the benefits of peace of mind. And by offering peace of mind, it freed them to consume the fruits of their labors.
The government sponsored the dreams of American families to own their own home by providing low-cost mortgages and interest deductions on mortgage payments. In many sections of the country, government subsidized electricity and water to make such homes habitable. And it built the roads and freeways that connected the homes with major commercial centers.
Government also widened access to higher education. The GI Bill paid college costs for those who returned from war. The expansion of public universities made higher education affordable to the American middle class.
Government paid for all of this with tax revenues from an expanding middle class with rising incomes. Revenues were also boosted by those at the top of the income ladder whose marginal taxes were far higher. The top marginal income tax rate during World War II was over 68 percent. In the 1950s, under Dwight Eisenhower, whom few would call a radical, it rose to 91 percent. In the 1960s and 1970s the highest marginal rate was around 70 percent. Even after exploiting all possible deductions and credits, the typical high-income taxpayer paid a marginal federal tax of over 50 percent. But contrary to what conservative commentators had predicted, the high tax rates did not reduce economic growth. To the contrary, they enabled the nation to expand middle-class prosperity and fuel growth.
The Middle-Class Squeeze, 1977-2007
During the Great Prosperity of 1947-1977, the basic bargain had ensured that the pay of American workers coincided with their output. In effect, the vast middle class received an increasing share of the benefits of economic growth. But after that point, the two lines began to diverge: Output per hour — a measure of productivity — continued to rise. But real hourly compensation was left in the dust.
It’s easy to blame “globalization” for the stagnation of middle incomes, but technological advances have played as much if not a greater role. Factories remaining in the United States have shed workers as they automated. So has the service sector.
But contrary to popular mythology, trade and technology have not reduced the overall number of American jobs. Their more profound effect has been on pay. Rather than be out of work, most Americans have quietly settled for lower real wages, or wages that have risen more slowly than the overall growth of the economy per person. Although unemployment following the Great Recession remains high, jobs are slowly returning. But in order to get them, many workers have to accept lower pay than before.
Starting more than three decades ago, trade and technology began driving a wedge between the earnings of people at the top and everyone else. The pay of well-connected graduates of prestigious colleges and MBA programs has soared. But the pay and benefits of most other workers has either flattened or dropped. And the ensuing division has also made most middle-class American families less economically secure.
Government could have enforced the basic bargain. But it did the opposite. It slashed public goods and investments — whacking school budgets, increasing the cost of public higher education, reducing job training, cutting public transportation and allowing bridges, ports and highways to corrode.
It shredded safety nets — reducing aid to jobless families with children, tightening eligibility for food stamps, and cutting unemployment insurance so much that by 2007 only 40 percent of the unemployed were covered. It halved the top income tax rate from the range of 70 to 90 percent that prevailed during the Great Prosperity to 28 to 35 percent; allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax; and shrunk inheritance taxes that affected only the top-most 1.5 percent of earners. Yet at the same time, America boosted sales and payroll taxes, both of which took a bigger chunk out of the pay the middle class and the poor than of the well off.
How America Kept Buying: Three Coping Mechanisms
Coping mechanism No. 1: Women move into paid work. Starting in the late 1970s, and escalating in the 1980s and 1990s, women went into paid work in greater and greater numbers. For the relatively small sliver of women with four-year college degrees, this was the natural consequence of wider educational opportunities and new laws against gender discrimination that opened professions to well-educated women. But the vast majority of women who migrated into paid work did so in order to prop up family incomes as households were hit by the stagnant or declining wages of male workers.
This transition of women into paid work has been one of the most important social and economic changes to occur over the last four decades. In 1966, 20 percent of mothers with young children worked outside the home. By the late 1990s, the proportion had risen to 60 percent. For married women with children under the age of 6, the transformation has been even more dramatic — from 12 percent in the 1960s to 55 percent by the late 1990s.
Coping mechanism No. 2: Everyone works longer hours. By the mid 2000s it was not uncommon for men to work more than 60 hours a week and women to work more than 50. A growing number of people took on two or three jobs. All told, by the 2000s, the typical American worker worked more than 2,200 hours a year — 350 hours more than the average European worked, more hours even than the typically industrious Japanese put in. It was many more hours than the typical American middle-class family had worked in 1979 — 500 hours longer, a full 12 weeks more.
Coping mechanism No. 3: Draw down savings and borrow to the hilt. After exhausting the first two coping mechanisms, the only way Americans could keep consuming as before was to save less and go deeper into debt. During the Great Prosperity the American middle class saved about 9 percent of their after-tax incomes each year. By the late 1980s and early 1990s, that portion had been whittled down to about 7 percent. The savings rate then dropped to 6 percent in 1994, and on down to 3 percent in 1999. By 2008, Americans saved nothing. Meanwhile, household debt exploded. By 2007, the typical American owed 138 percent of their after-tax income.
The Challenge for the Future
All three coping mechanisms have been exhausted. The fundamental economic challenge ahead is to restore the vast American middle class.
That requires resurrecting the basic bargain linking wages to overall gains, and providing the middle class a share of economic gains sufficient to allow them to purchase more of what the economy can produce. As we should have learned from the Great Prosperity — the 30 years after World War II when America grew because most Americans shared in the nation’s prosperity — we cannot have a growing and vibrant economy without a growing and vibrant middle class.
(This is excerpted from my testimony to the U.S. Senate Committee on Health, Education, Labor, and Pensions, on May 12. It is also drawn from my recent book, Aftershock: The Next Economy and America’s Future.)
By Charles Hugh Smith, OFTWOMINDS There is evil, and then there’s organized evil. This is a memorial outside the village where my brother lives in the south of France. It is a typical village, quite small, perhaps a few hundred residents. The memorial commemorates three young French civilians who were taken out and shot by Nazi soldiers, either for “crimes” of resistance or perhaps as a “lesson” to the restive civilian populace. The German soldiers who pulled the triggers were of course “just following orders.” Evil must be resisted, corralled, vanquished. Interestingly, people don’t need to be forced by a central authority to resist evil, though their efforts will prove more successful if they band together and submit to a competent authority of their own choosing. This is the basis of the “good war” or “just war.” But to be part of large-scale organized evil, people do need to surrender their autonomy under threat, and be ordered by a central authority. This is the origin of the Nuremberg Defense: I was only following lawful, Superior Orders when I murdered those French civilians. The soldiers who followed the orders would have been punished had they refused; coercion is always the backbone of central authority. Hannah Arendt wrote about the Great Evil, Nazi Germany, and “The Final Solution” of death camps in Eichmann in Jerusalem: A Report on the Banality of Evil. The Nazi machine spewed plentiful opportunities to practice the banality of evil, and the death camps were simply one division of the daily grind of pressing one’s palms on evil and passing it on to the next “good German.” The routine killing of civilians went on day after day; it was the “day job” of the occupying troops. Those inside the central authority know, of course, but very few are telling, because the see-saw is just so imbalanced in a system which depends on lies and the distortion of truth to continue its domination. The truth-teller will lose their prestigious position, their generous salary and the acceptance of their peers, and perhaps their life. In exchange for this sacrifice, the truth-teller receives only the glowing, ephemeral shards of his/her integrity: in the current zeitgeist, that literally has no value. The machine will grind on without them, impervious to the tiny pricks of truth; the machinery of propaganda, artifice, misdirection and misrepresentation is well-oiled and masterful in the reach and scope of its operation. In this context, it is worth watching The Most Dangerous Man in America: Daniel Ellsberg and the Pentagon Papers. Daniel Ellsberg was only one of thousands of “good Americans” doing their job in a war machine built entirely on lies and propaganda. He was one of a handful of citizens out of those thousands, or tens of thousands, who was willing to trade his career for his integrity and conscience. The Vietnam War was “sold” to the public as a “just and necessary war” that they had “chosen” via their elected representatives. But it was all lies, propaganda, coercion, topped by the profound cowardice of an elected leadership unwilling to risk the loss of perquisites and power. Ellsberg had given excerpts of The Pentagon Papers, the secret and oh-so-dangerous unvarnished truth about America’s involvement in Vietnam, to various members of Congress; all but one did nothing. Only Rep. Pete McCloskey (R) thought the American people deserved the truth. (McCloskey is a decorated U.S. Marine Corps veteran of combat during the Korean War, recipient of the Navy Cross, the Silver Star, and two awards of the Purple Heart. He published Truth and Untruth – Political Deceit in America in 1972.) Perhaps the American people would have chosen to sacrifice its youth and its treasure on what it had concluded was a “just and necessary” in Vietnam, but it never got the chance to learn the truth which was the necessary foundation of any such decision. That’s how the banality of evil works. When truth becomes too dangerous to the Status Quo, it must be strangled every day, by tens of thousands of people, and its limp corpse hidden away. Readers forum: DailyJava.net. Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller. Of Two Minds Kindle edition: Of Two Minds blog-Kindle
Large-scale evil requires surrender of autonomy, coercion by a central authority and a willingness to follow orders.
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There is evil, and then there’s organized evil. This is a memorial outside the village where my brother lives in the south of France. It is a typical village, quite small, perhaps a few hundred residents. The memorial commemorates three young French civilians who were taken out and shot by Nazi soldiers, either for “crimes” of resistance or perhaps as a “lesson” to the restive civilian populace.
The German soldiers who pulled the triggers were of course “just following orders.”
Evil must be resisted, corralled, vanquished. Interestingly, people don’t need to be forced by a central authority to resist evil, though their efforts will prove more successful if they band together and submit to a competent authority of their own choosing. This is the basis of the “good war” or “just war.”
But to be part of large-scale organized evil, people do need to surrender their autonomy under threat, and be ordered by a central authority.
This is the origin of the Nuremberg Defense: I was only following lawful, Superior Orders when I murdered those French civilians. The soldiers who followed the orders would have been punished had they refused; coercion is always the backbone of central authority.
Hannah Arendt wrote about the Great Evil, Nazi Germany, and “The Final Solution” of death camps in Eichmann in Jerusalem: A Report on the Banality of Evil. The Nazi machine spewed plentiful opportunities to practice the banality of evil, and the death camps were simply one division of the daily grind of pressing one’s palms on evil and passing it on to the next “good German.”
The routine killing of civilians went on day after day; it was the “day job” of the occupying troops.
Those inside the central authority know, of course, but very few are telling, because the see-saw is just so imbalanced in a system which depends on lies and the distortion of truth to continue its domination.
The truth-teller will lose their prestigious position, their generous salary and the acceptance of their peers, and perhaps their life. In exchange for this sacrifice, the truth-teller receives only the glowing, ephemeral shards of his/her integrity: in the current zeitgeist, that literally has no value. The machine will grind on without them, impervious to the tiny pricks of truth; the machinery of propaganda, artifice, misdirection and misrepresentation is well-oiled and masterful in the reach and scope of its operation.
In this context, it is worth watching The Most Dangerous Man in America: Daniel Ellsberg and the Pentagon Papers. Daniel Ellsberg was only one of thousands of “good Americans” doing their job in a war machine built entirely on lies and propaganda. He was one of a handful of citizens out of those thousands, or tens of thousands, who was willing to trade his career for his integrity and conscience.
The Vietnam War was “sold” to the public as a “just and necessary war” that they had “chosen” via their elected representatives. But it was all lies, propaganda, coercion, topped by the profound cowardice of an elected leadership unwilling to risk the loss of perquisites and power.
Ellsberg had given excerpts of The Pentagon Papers, the secret and oh-so-dangerous unvarnished truth about America’s involvement in Vietnam, to various members of Congress; all but one did nothing. Only Rep. Pete McCloskey (R) thought the American people deserved the truth. (McCloskey is a decorated U.S. Marine Corps veteran of combat during the Korean War, recipient of the Navy Cross, the Silver Star, and two awards of the Purple Heart. He published Truth and Untruth – Political Deceit in America in 1972.)
Perhaps the American people would have chosen to sacrifice its youth and its treasure on what it had concluded was a “just and necessary” in Vietnam, but it never got the chance to learn the truth which was the necessary foundation of any such decision.
That’s how the banality of evil works. When truth becomes too dangerous to the Status Quo, it must be strangled every day, by tens of thousands of people, and its limp corpse hidden away.
Readers forum: DailyJava.net.
Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.
Of Two Minds Kindle edition: Of Two Minds blog-Kindle
for the full posts and archives.
We’re here at our Second Annual Bonner Family Office Partners’ Reunion. No time to write. We’ve got to pay attention!
Besides, nothing happened yesterday. No kidding. The Dow was flat. Oil was flat. Gold went down a little.
Nothing worth talking about, in other words. So, we’ll be quiet.
Things Get Curiouser and Curiouser
As if it were not strange enough! Microsoft bought a phone company with no phones for $8.5 billion. Then, the public bid up the price of another Internet company, LinkedIn, to the point where buyers were paying more than $20 for every dollar of revenue that came the company’s way. As for profits, they capitalized each one at more than 700 times. At this rate, an investor wouldn’t earn his money back until 2,711AD.
He will need luck. People don’t usually live that long; especially crazy people.
But oddities are so common now; it is as if every man you pass on the street had two heads. One out of every four American homeowners owes more on his house than it is worth. Even in desert cities, such as Las Vegas, more than 70% are underwater. Nationwide, house prices are down 33% from their peak and still falling at 1% per month. That is, the typical homeowner loses about as much on his house as he takes home from his job.
And last week, Dominique Strauss-Kahn was arrested. Who can deny that we live in a remarkable era? Odder than the charge against him was the fact that he was locked up for it. Bankers are used to getting bonuses for that sort of thing. On DSK’s watch, the IMF’s loans outstanding increased 10 times. Poor Greece was stuck with another $42 billion it couldn’t possibly repay. But at least he took the Greeks to dinner!
Richard Nixon changed the world’s monetary system back in 1971, cutting off the dollar from gold. He did it on prime time television. But the US dollar had been a reliable store of value for so long, few people imagined anything else. Only a few hard-bitten cynics, philosophers and monetary historians noticed that something very important had happened. They rolled their eyes and bought gold with both hands.
Allowed to persist, novelty becomes familiarity. Pretty soon, people begin to think that the extraordinary is normal; as for the normal, it begins to seem weird. The new system wobbled for the first 10 years, and then found its footing. Now, 40 years later, it is standing fast. It seems normal. But of all today’s oddities, nothing is odder. If the gold bugs thought the system was headed for destruction in ’71, they should see it now!
In ’71, the money base – as measured by the holdings of the US Federal Reserve bank – was only $800 billion. And it had taken nearly 60 years to get there. Yet, just since 2008, the Fed has ballooned its balance sheet up 200% to $2.5 trillion.
In ’71, the US government seemed to have thrown caution to the winds, with a deficit of $23 billion. Fiscal conservatives gasped and clutched their hearts. They’d better sit down, because today the deficit is expected to top $1.6 trillion this year alone, up 7,000%. Debt per working person rises at the rate of $115 per working day – about what the typical worker takes home.
And yet, the yield on a 10-year US Treasury note was around 6% in 1971. Today, wonder of wonders, it is only 3.13%, as if US finances had improved over the last 4 decades!
Putting ’71 and ’11 side by side you have to admit that one is strange. But which one? Surviving gold bugs – viewing these facts through their bifocals, perhaps from the comfort of their retirement homes – have begun to twitch. The price of gold has risen every year for the last 11 years. But even now, what is remarkable about the gold price is not that it is so high, but that it is so low. It is barely ordinary. Adjusted for inflation, gold sells for less today than it did in 1980. To match its previous high – set when the US ran its penultimate budget surplus and Paul Volcker had already begun to tighten credit – the price would have to climb into the mid-$2000s. But did 1981 justify a $2,500 gold price (in today’s dollars) or does 2011?
Neither quantitative easing nor the Internet had been invented in Nixon’s time. The Internet was advertised as a triumph over abnormality. With the world’s wealth of wisdom at one’s fingertips there was no further reason for mankind to err in sin and darkness. He had merely to turn on the WWW to light his way. Want to know what quantitative easing is all about…or how previous episodes of printing press money, un-backed by gold, have turned out? You have only to consult Wikipedia. It’s free.
Just look for previous examples of successful pure-paper money systems. You won’t find them. Because the gold bugs were probably right all along; removing the gold from the world’s money system is almost sure to be a prelude to disaster. It is just a matter of time. Perhaps lots of time.
For Daily Reckoning Australia
- If the US Economy is Really Following Japan Things Will Get a Lot Worse
- Come And Get It!
- Gold is More Like a Religion or a Political Position
- Have Things Turned the Corner for Funding Aussie Mortgage Growth?
- How to Get the US Back to Full Employment in 30 Days
–That great disturber of peace of mind—the Internet—happens to be off-line at your editor’s office this morning. The technicians are busy fixing it up. In the meantime, there’s always the newspaper…and some time to think about whether large bank profits are unnatural, or at least subject to mean reversion like everything else.
–Mind you, we’re not claiming that Australian banks are too profitable in some moral or ethical sense. Profits are what they are. Only the government seems willing to determine what level of profit is too high for a given industry.
–Making that kind of determination is absurd, by the way, given that most of the people in government have never run a business in their life and wouldn’t know a profit if it slapped them in the face. Of course, profit may not be the most important thing to everyone in a qualitative sense. But if you’re running a business, it’s hard to do without, in a quantitative sense. And surely it’s better to have profitable and solvent banks than weak ones.
–No, it’s not outrageous bank profits that are the issue. It’s the risk taken by bankers to get them. When credit is cheap and credit growth expands—as it has been for most of the last 20 years—banks can grow profits simply by making more loans. This is how it came to pass that Australia’s retail banks own $1 trillion in mortgages.
–Where is the risk in this? Well, the profitability of the banks is driven mainly by one single asset class. The risk is that all the price gains in that asset class are simply a function of credit growth. When the credit growth slows down or reverses, asset values will fall while liabilities (what you owe on the mortgage) will not.
–“More than any other factor,” reports Matthew Drummond in today’s Australian Financial Review, “a series of housing booms is what has fuelled the growth in banks’ profits. Mortgages are banks’ single biggest asset class (including mortgages offshore they make up 65 per cent of total assets at Commonwealth Bank and Westpac, 55 per cent at ANZ and 50 per cent at National Australia Bank.)”
—-“House prices are now either falling or going nowhere,” Drummond adds. “The effect on Australia’s banks will be profound.”
–That’s an understatement. But is it a surprise? The banks make more money making home loans and appear to take less risk than making business loans. After all, many small- and medium-sized businesses fail. Loaning money to losers is bad business. Besides, in a non-recourse mortgage market, a home loan is forever. The mortgage borrower can’t “fail” in the same way a business can.
–Given the higher profitability and lower risk in lending to house buyers, why wouldn’t the banks load up on mortgage loans? It’s the best way to grow profits. And why should shareholders worry? Australian banks have managed to generate high returns on equity through home-loan growth. If investors in banks stocks are happy—and that includes super funds that own the banks—isn’t everybody winning?
–When you live in a culture and an economy that’s been “financialised”, it’s normal to expect high returns on equity from banks. But in a non-finacialised world (where growth isn’t stolen from the future through relentless credit expansion), banking ought to be a low-risk, boring, conservative, low-profit business. Why?
–In an economy where credit growth is constrained by available savings (actual incomes on deposit with banks), lenders have to be prudent about the risks they take. They “own” each and every risk to the extent it’s a loan that resides on the balance sheet of the bank making it. It has a sobering effect.
— Ownership tends to promote the qualities of good stewardship. In times gone by, local and regional lenders would scrutinise borrowers, demand sizeable down payments, and, because the labour market hadn’t yet been globalised, lenders would have a pretty good idea of what the borrower’s income would be over time, and what size loan he’d be able to service without too much stress.
–But with globalisation and securitisation, smaller lenders have been swallowed up by larger ones. We now have a handful of massive firms that dominate the mortgage market. And they finance their lending through borrowing overseas and securitisation (although this form of financing has not fully recovered from the events of 2008).
–In other words, the big four Aussie banks have concluded nearly two decades of double-digit credit expansion in Australia by gathering unto themselves nearly all the mortgage market. They have convinced a whole new generation of borrowers that houses are investments with rich capital gains on offer year after year. They have not informed borrowers that most house price gains are simply the result of expanding credit.
–But wait, you say! Credit is expanding because demand for it is robust! Australians want to borrow because they can and because houses are good long-term investments. The growth in credit is driven by genuine consumer demand, the argument goes. Market forces at work. Nothing to see here.
–That would be true if the price of credit wasn’t artificially set by global central banks. Demand for credit was high globally up to 2007 because the price was so low. Most people think the price of free beer is more than reasonable. Free beer can even turn non drinkers into accomplished alcoholics.
–During eras where there is not a once-in-a-lifetime expansion in credit, bank profits tend to be low because banks tend to be prudent. But we are not in a prudent era. We are in the tail end of a vast global credit expansion that has put credit growth and high asset values ahead of every other economic virtue.
–Around the world, asset values are levitating, supported by relatively easy monetary policy. But for how much longer? “We’ve had systemic level failures over and over and over again, and we will in the future,” says Stefan Walter, the secretary-general of the Basel Committee for Banking Supervision, also in today’s AFR.
–“So when it comes to capital and liquidity, we shouldn’t sail as close to the wind as in the past…I think all would agree that it would have been desirable to trade off somewhat less credit growth for a less dramatic downturn.”
–Walter is writing new global banking rules designed to prevent the next crisis. But he may be wrong about everyone agreeing that less credit growth was desirable. There are plenty of people who benefit in the short term from the unsustainable expansion of bank balance sheets. Nearly everyone suffers, though, in the long term, when the expansion turns into a contraction.
Daily Reckoning Australia
- Reserve Bank Agrees There is a Housing Shortage in Australia
- Bank Failures in Slow Motion
- A National Mortgage Bubble
- House as Bank
- Hiding Level Three Assets Won’t Solve the Problem
An Interview with Patrick Cox by WYPR’s Midday with Dan Rodricks
Dan Rodricks, Host, Midday: I’m Dan Rodricks, and you’re listening to a special edition of Midday we call Power Ahead: The Energy Future. We continue our discussion about nuclear power with a specific look at something of international public concern since the tsunami hit Japan. Can even an advanced economy master nuclear power safely? Can nuclear power be safely harnessed?
I’d like now to introduce Patrick Cox to our program. Patrick Cox is an editor with Baltimore-based Agora Financial, our lead collaborator for Power Ahead. Patrick Cox is the editor of Breakthrough Technology Alert, keeping an eye on transformational technologies for investors…
We want to talk to Patrick Cox about thorium nuclear power… Please tell us about thorium nuclear power and the big picture of nuclear renaissance.
Cox: It’s interesting because in the early days of nuclear power, there were two schools. One was the current technology of light water reactors that produce plutonium, which is weaponizable. As a matter of fact, that’s why that technology was chosen, because the military wanted this plutonium in order to build the nuclear stockpile that we all know about. On the other hand, we had people like Edward Teller, who was slandered in Dr. Strangelove, and his friend Alvin Radkowsky, who was the world’s leading reactor designer, who very much were opposed to plutonium-producing nuclear power and wanted to go the direction of thorium.
And thorium has numerous innate advantages. One is that it doesn’t produce weaponizable byproducts, but it’s also true that the nature of the metal is such that it produces safer reactors. It burns at a lower temperature, and there’s also a great deal of it. As a matter of fact, there’s more energy available easily in thorium than there is in uranium, petroleum and coal combined. There’s just an enormous amount of this stuff.
Rodricks: Why isn’t it used now if it’s safer?
Cox: We have this enormous regulatory bureaucracy. If you know anything about the SEC, if you know anything about drug development and how difficult it is to get a drug into the market, that’s easy compared to nuclear reactor design. This is an international agency with huge armed tentacles everywhere, and it’s influenced by the existing players. But it’s happening outside of the United States anyway. If you go to the French, they are developing and have now signed an agreement with Lightbridge, which is the company that was founded initially by Alvin Radkowsky. They’re working on thorium.
The Red Star Russian reactor designer, which serves most of Asia, is working on thorium… There are lots of thorium reactors running, and there are lots of different strategies for bringing thorium into the mix… The thing to remember is that thorium requires an extra neutron to work. In order to create fuel, you have to add a neutron. If you stop adding the neutron, then the reaction stops.
Rodricks: So that’s what gets you to that term I heard you use a little while ago, “meltdown-proof.”
Cox: Right. And there are many different ways of doing that.
Rodricks: So the problems we’re seeing at Fukushima Daiichi, then, with those reactors, is water reactors. So you could see where maybe the world looks at that and then looks at thorium and says maybe we ought to go with thorium?
Cox: It’s inevitable.
Rodricks: Could you put thorium in 104 US nuclear power plants and make them all safer? I mean, could you transition to that?
Cox: Yes. As a matter of fact, Lightbridge (NASDAQ:LTBR) is the leader in this technology. It is consulting with the Gulf states, with the French, the Russians, and probably will end up consulting with the Indians and the Chinese, as well. There are many different strategies for getting thorium into the fuel stream. Some of them are as simple as dropping a different fuel rod into the existing light water reactors, which would somewhat improve safety, though in the long run – I think the thing we should realize is these reactors in Japan were 40 years old.
I mean, you don’t drive a car that’s 40 years old. They had made some serious mistakes. Seth Grae, the CEO of Lightbridge, points out that the backup systems on these reactors were all on one circuit, which is absurd. It’s mind-boggling that people who are known for their technical competence had done something that stupid. I mean, the problem of what we really need to do in terms of safety is to move to the next generation of nuclear reactors, which are going to be an order of the magnitude safer than what we have now operating in Japan, in the United States. There are thorium reactors running right now in Russia. I mean, they’re going to go online in the next two years. They’re going to be sold.
Patrick Cox from his interview with Midday’s Dan Rodricks
For Daily Reckoning Australia
- Thorium as a Nuclear Fuel
- Japan’s “Three Mile Island”
- Uranium is Heating Up
- Nuclear Industry Presents a Major Investment Opportunity
- Japan’s Crisis and the Energy Question
Submitted by Simon Black of Sovereign Man
Destructive Capability Is No Substitute For Freedom
I had the opportunity to tour Chile’s national military school
yesterday. As you may know, I spent some time in the military myself in
places that were not especially pleasant, so the visit was quite
meaningful for me.
My host was a particular gung-ho Chilean Army officer; curiously, he
told me that many of his fellow officers in Chile petitioned the
government to authorize a deployment of soldiers to Iraq and
Afghanistan. They want to participate in the action, if for no other
reason than for the opportunity to improve training at home.
Chile’s politicians wouldn’t hear of it, their response being
something slightly more eloquent than “no way in hell are we sending
Chileans to die in that f’ing desert.” My host seemed rather
“Trust me,” I said, “you don’t want to go over there… and you should
consider yourself lucky that your civilian leadership has the good sense
to boycott the conflict. There is nothing good waiting for you in Iraq
Young, gung-ho soldiers just want to get in the fight and don’t think
much about morality, cost, or danger… so it was incredibly encouraging
to hear how opposed his government was to the idea.
I further explained that, when I was at West Point in the post-Desert
Storm era, the biggest thing we had to prepare for was the conflict in
the Balkans. After graduation, things changed; the embassy bombings in
Africa, the USS Cole, then the September 11th incident, all
revolutionized the US military’s role.
In the 1980s, there was one single enemy… and the entire US military
was focused on the Soviet Union. When the wall fell, the US aimlessly
wandered the 1990s as the world’s policeman until ultimately adopting
the role of ‘pre-emptive strike force’ in the 2000s (assuming official
explanations are to be believed).
During my own career, I realized that the military was little more
than a blunt instrument for bureaucrats to achieve political gain. I
remember the night before the invasion of Iraq in 2003 so clearly: as
all the forces were huddled at the border in Kuwait waiting to advance, I
couldn’t stop thinking about the people on both sides who were about to
die because George W. Bush had something to prove.
In the subsequent years, little has come from that conflict other than shattered lives, lost limbs, and a mountain of debt.
You can peel back the onion further and question the benefits of
nearly every conflict– Mogadishu under Clinton, Panama under Bush I,
Grenada under Reagan, the entirety of the Vietnam War under five
presidents, the invasion of Greece in 1947, the occupation of Haiti in
the 1920s… Cuba, the Philippines, Mexico, etc.
There are scores of other instances going all the way back to the
late 1700s. And for what? To install a ruthless, puppet dictator? To
maintain the country’s addiction to oil? To expand America’s domain
until it matches the size of its government’s ego?
Libya is simply the latest in an endless string of folly. This logic
of “let’s indiscriminately bomb a country in order to protect the
civilians” can only come from the mind of a politician who quantifies
benefit in votes and awards taxpayer money to defense contractors that
make warfare more lethal.
Consider that there are entire industries with some of the most
brilliant minds on the planet dedicated to making the military more
‘powerful’, i.e. deadly.
Today, politicians can watch a predator drone or stealth bomber rain
death and destruction on a foreign population from his plasma screen.
They brag about their smart bombs (which are racking up the civilian death toll) or how powerful their nuclear arsenal is, as if the efficiency of one’s destructive power is honorable.
Donald Rumsfeld famously used the phrase “shock and awe” as a
promotional tool during the invasion of Iraq. It was something for the
press to latch onto and fill the country with a dreamy spin on the
military’s ability to exterminate foreigners like cockroaches.
They show us videos of massive explosions and Americans shriek like chimpanzees in boastful approval. Not exactly a far cry from the Roman Colosseum, is it?
In reality, there’s nothing romantic about this; the ability to kill
efficiently should not be a source of pride. And the fact that a small
group of elites has the power to send thousands of people to fight, die,
and kill, as well as cajole an entire society into tacit support, is a
total aberration of humanity.
Our descendents will surely look back on this time and wonder how we
could have been so foolish– to let these people rob our freedoms;
destroy our economies; kill foreigners on their home soil; and shower
themselves with Peace Prize medals… all while keeping society quietly
subdued with games, tricks, and bombastic patriotism.
They tell us to wave the flag, to buy yellow ribbon bumper stickers,
and to remember the fallen on days like today. Truthfully, though, the
memories of the fallen would be much better honored if the government
quit making more of them… and stopped destroying the freedom that they
supposedly died to defend.
* If you have ever doubted that freedom is on the decline, just watch this video recently shot at the Jefferson Memorial of all places.
Turkish daily Hurriyet, which paraphrases German Bild, which in turn references a CIA report, warns that Greece could face a military coup if the “tough austerity measures and the dire situation” escalate any further. On the other hand, one can avoid this belabored hypertextual chain and simply look at what happens practically every day on Syntagma square where yet again we are witnessing record numbers of people protest against what everyone now realizes is a dead end regime (luckily, in a peaceful manner, for now). More Captain Obviousness (thank you Grant Williams) from Hurriyet: “According to the CIA report, ongoing street protests in crisis-hit Greece could turn into escalated violence and a rebellion and the Greek government could lose control, said Bild. The newspaper said the CIA report talks of a possible military coup if the situation becomes more serious and uncontrolled.” Luckily, following last year’s Athens mob-inspired flash crash, and 2011’s MENA revolutions, the market is rather desensitized to this sort of thing, and nothing short of fat-finger driven invasion of Greece by Turkey, in its humanitarian bid to reestablish the Ottoman Empire 2.0, could dent the /ES or EURUSD by more than 0.01%.
Opposition parties have mostly refused to support the government in its quest to cut spending by trimming an overblown civil service and the sweeping privatization drive announced this week has attracted even stronger protests.
Meanwhile, the Dutch finance minister said his country, Germany, Finland and other EU members won’t give Greece any more bailout money, if the debt-laden country fails to adopt further austerity measures.
Jan Kees de Jager said Saturday that “it’s vital that Greece will live up fully” to conditions set by the International Monetary Fund if it’s to receive the next batch of a 110 billion euros ($155 billion) bailout loan deal it agreed to last year, the Associated Press reported.
Last year, as the financial crisis battered Greece, Bild went as far as to highlight a suggestion by a conservative politician that Athens sell off some of its many islands to help pay off its debts.
What next: CIA reports that monetary policy could set off mass food price driven revolutions in North Africa?
In an almost verbatim repeat of Carl Icahn’s words of caution which we noted yesterday, Templeton’s legendary chairman Mark Mobius said that “another financial crisis is inevitable because the causes of the
previous one haven’t been resolved” during a luncheon (menu included herb crusted chicken breast with cheese and tomato sauce, mashed potato and green vegetables, seasonal salad) at the Foreign Correspondents’ Club of Japan in Tokyo. Bloomberg reports: “There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.” Unlike Icahn, Mobius stopped short of calling for a return to Glass-Stegall and a repeal of the abominable Gramm-Leach-Bliley which unleashed the era of zero margin derivatives and financial system neutron bombs. On the other hand, it is nice of Messrs Icahn and Mobius to speak up now, two years after the ongoing systemic instability transferred $3.5 trillion in capital from current and future taxpayer generations to the present financial elite. We do, however, forgive them because in their better late than never contrition, they join the likes of Zero Hedge who since January of 2009 have warned, over and over, that nothing in the structure of capital markets has changed, and that the market could any day open not only bidless, but broken beyond even Brian Sack-ian band aid repair.
Mobius, as seems to be the conventional wisdom these days, focuses on the $600 trillion or so in OTC derivatives as the next source of systemic jeopardy:
The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.
The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008. The MSCI AC World Index of developed and emerging market stocks tumbled 46 percent between Lehman’s downfall and the market bottom on March 9, 2009.
He also blasted the lunacy of Too Big To Fail, where the Fed and the FDIC took an already unstable system, and made it even more brittle, by concentrating more deposits and more assets with a record low number of banks:
The largest U.S. banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40 percent over the next 15 years, according to data compiled by Bloomberg.
Separately, higher capital requirements and greater supervision should be imposed on institutions deemed “too important to fail” to reduce the chances of large-scale failures, staff at the International Monetary Fund warned in a report on May 27.
“Are the banks bigger than they were before? They’re bigger,” Mobius said. “Too big to fail.”
However, as long as Wall Street muppet Tim Geithner is in charge of the Treasury nothing will change.
Lastly, Mobius had some origianal words of investment advice, something that one could previously find at the Ira Sohn conference, before it became a media-fest free-for-all, book talking exercise in upcoming asset manager obscurity.
The money manager had earlier said at the same event that Africa has an “incredible” investment potential and that he has stakes in Nigerian banks.
“These banks are doing very well and are much better regulated than they were in the past,” Mobius said, without disclosing which lenders he holds.
Banks account for five of the eight stocks in the MSCI Nigeria (MXNI) Index. Guaranty Trust Bank Plc, the country’s No. 2 lender by market value, surged 31 percent in the six months through May 27, according to data compiled by Bloomberg. Shares of Access Bank Nigeria Plc recorded the second-biggest decline on the gauge in the period, the data show.
Is Africa the next bubble? And is it Africa’s banks or their gold and other precious metals? Either way, how long before the IMF decides to offer openly dictatorial regimes in Central and Western Africa, only for NATO to decide one day 2-3 years from now that the time for humanitarian intervention has come, and it is the sanctified duty of the enlightened west to rid said countries of their gold, er oil, er diamons, sorry, evil dictators who will have been for many years the happy recipients of World Bank and IMF “infrastructure” capital…
China SAFE Reports Monetary Gold Holdings Increased By $11 Billion, Or 30%, In 2010, As Gross Foreign Financial Assets Pass $4 Trillion
China’s State Administration of Foreign Exchange (SAFE) has released its breakdown of 2010 international investments. In summary: financial assets abroad rose 19% last year to $4.126 trillion from $3.457 trillion. That includes the country’s $2.914 trillion of foreign reserves at the end of 2010 as well as other assets such as direct investments, securities, and gold. As for gold, it increased by $11 billion from $37.1 billion to $48.1 billion, or a 29.6% increase (it is unclear if this number is at a fixed gold price or accounts for MTM). On the liabilities side, which increased from $1.946 trillion to $2.335 trillion, the biggest change was as a result of a surge in Foreign Direct Investment into China which increased by $162 billion to $1.476 trillion. Netting liabilities against assets leads to a net position of $1.79 trillion in external net assets.
Full breakdown of China’s foreign-held stash: