Zark's

The Creaks of Capitalism

I didn't know about Davos until I read David Rothkopf's Superclass: The Global Power Eleite and the World They Are Making.  The World Economic Forum meets annually at Davos, a mountain retreat in the eastern Alps.  About 2500 of the world's elite meet to discuss global economics.  These 2500 are the wealthiest and most influential in the world. 

Didn't make it to Davos? tells the hottest topics and ideas this year.  Jim Frederick explains one that has most agreeing - Capitalism Needs a Fundamental Overhaul.  As I have articulated over the past couple of years, the fundamental forcing function of capitalism - is its strength and weakness.  Pure capitalism always seeks to maximize income. There is no compassion or moral compass.

The U.S. has been here before with capitalism.  The robber barons and labor exploitation required regulation and control.  Perhaps in 50 years we will recognize this was another such moment. 

 

Brazil Overtakes Britain in Economic Size

South America
Image Credit: CIA World Factbook

The CIA World Factbook tells that Brazil's economy is diverse with exports of agriculture, mining, energy, manufacturing, and services.  For much of history a debtor nation, Brazil climbed out in 2008 on the strength of energy exports. Its future is bright with large petroleum deposits discovered off its coasts, albeit at depths that will require new technology to recover.  It also exports large quantities of ethanol obtained from genetically-engineered sugar cane.

Government and industry work in collaboration, similar to Germany, which also has exhibited economic strength during the global recession.  Despite what government minimalists would prescribe, the Brazil government invests in big science such as classifying the genome of chocolate or sugar cane and genetic development of improved species. 

But there is a seamy side of Brazil - the ghettos of the large cities are lawless and desperate.  It has an annual inflation rate of over 5 percent.

Brazilian economy overtakes UK's, says CEBR explains that western economies are losing global importance as emerging nations expand.  Brazil is the new number six with Russia and India expected to depose France and Germany's rankings by 2020. 

CEBR World Economic League Table
Rank	2011	2020 (forecast)
1	US	US
2	China	China
3	Japan	Japan
4	Germany	Russia
5	France	India
6	Brazil	Brazil
7	UK	Germany
8	Italy	UK
9	Russia	France
10	India	Italy

The global economic future predicted above from the BBC explains why Germany and France are such fierce advocates for the European Union.  Together, the EU is relevant.  As independent nations, they become irrelevant and lose complete control of their destiny. 

Mmm.  We used to believe the future would be one of boutiques, very different from today where everything seems to be dominated by two primary suppliers.  Instead of many small businesses, we have monopolies and at best duopolies.  I believe that is because of the tremendous pressure for efficiencies and economy of scale.  (Today's buzzword in business is scalability.)  Otherwise the world cannot support its current population.

 

Prosperity's Bloom is Seldom Long

Drilling rig in Colorado
Image Credit: Jessica K Robertson, USGS

Do you remember the opening video for the Beverly Hillbillies?  Where Jed Clampett shoots at a rabbit, misses, but causes oil to start seeping out.  That isn't likely in North Dakota where the oil is two miles deep.

The Bakken formation is a rock unit covering portions of Montana, North Dakota, and Saskatchewan.  The guesses vary on how much oil lies between an impermeable shale layer and 'tight' sandstone.  The recoverable reserves could be anywhere between 4 billion and 18 billion barrels.  Rock fracturing technology first available in 2008 is now allowing drillers to force down a combination of water and other fluids under high pressure to coerce the petroleum to leave its deep underground sandwich. 

The petroleum is not Texas crude - it is heavy and contains benzenes and other impurities which make the future energy toxic.  (This is one of the arguments against the Keystone Pipeline - that the transported petroleum would be much worse than conventional crude.)  The fracking chemicals used in production are receiving considerable scrutiny and criticism - environmentalists want them discontinued.  And they have been successful on the East Coast and in Europe.

Bakken fields becoming biggest oil play in U.S. tells that $1.5B a month is being spent each month drilling in the Bakken field.  A typical well costs $7M to dig, and there are many more unproductive wells than lucrative ones.  With that much money being tossed around, things have changed in towns such as Williston and Sidney.  Two-bedroom homes are renting for $3K a month, and temporary housing is non-existent.  Mobile homes are selling for $149K.  Think tents - where winter temperatures may drop to 50 degrees below zero. To borrow a phrase from Home for the Holidays, "the traffic is terrific." 

North Dakota has a $1B state budget surplus and and a 3 percent unemployment rate. Nationally some writers have been speculating that North Dakota could make the U.S. energy independent. 

The Oil Drum has a provocative article on the boom in North Dakota.  It compares the California Gold Rush, Yukon Gold Rush, and the Prudoe Bay Oil Rush.  History shows that such bubbles deflate rapidly four years after their peak.  Traditional oil wells produce upwards of 40,000 barrels a day, but only a few Bakken Field wills produce 800 barrels a day.  More troubling though, is the production decline in Alaska's North Slope.  It will take 700 new Bakken field wells each year to balance the loss from Alaska production. 

Mmm.  It would be fun to be at the beginning of a boom, wouldn't it?

 

The 21st Century Needs 20th Century Industrialists

Train crossing the San Andreas Fault at Cajon Pass, CA
Image Credit: Don Becker , U.S. Geological Survey

I must confess.  I was bummed by Albert Pujols' decision to leave St. Louis in the rear-view mirror.  (For those that don't pay attention to professional sports, the former first baseman for the St. Louis Cardinals decided that he needed a $254M contract in Los Angeles instead of remaining in St. Louis where he was beloved.)  How much money is enough? Unabashed greed by professional athletes, bankers, and corporate executives depresses me.

I have been re-reading Henry Ford's My Life and Work. (Yes, it is a free book on Kindle.)  First in response to Albert Pujols' decision, I quote Ford, "Good-will is one of the few really important assets of life.  A determined man can win almost anything that he goes after, but unless, in getting he gains good will he has not profited much."  I wish decisions such as Pujols' would be criticized in the media, so that we change expectations and lift our moral tide.

In his autobiography, Ford writes at length about the need for work.  Noteworthy is, "Work is our sanity, our self-respect, our salvation.  So far from being a curse, work is the greatest blessing.  Exact social justice flows only out of honest work."  He also writes, "For the day's work is a great thing - a very great thing!  It is at the very foundation of the world; it is the basis of our self-respect."

The great industrialist would be appalled at the high unemployment within the U.S., and indeed most of the western world.  He would argue that something needs to be done - that it is the breeding ground of behavior and futures that the world should avoid.

As I read his philosophy, I am troubled by the contrast with today's industrialists and 21st century financiers.  He writes, "What good is industry if it be so unskillfully managed to return a living to everyone concerned?  No question is more important than that of wages - most of the people of the country live on wages."  Henry Ford believed that industrialists, and even everyone, should be servants of each other and that we should provide real service and value to others, not setting prices to maximize profits.  "So it has been my policy to force the price of the car down as fast as production would permit, and give the benefits to users and labourers with resulting surprising benefits to ourselves."

He also writes at length about expectations for employers.  "If it at any time became a question between lowering wages or abolishing dividends, I would abolish dividends.  ... It is bad financial policy to reduce wages because it also reduces buying power."  Note this is very different from today's executives which believe their only responsibility is to their stockholders.  In my review of Bill Clinton's Back to Work: Why We Need Smart Government for a Strong Economy, I observed Clinton argues that corporations have stakeholders such as employees and communities that should be considered in all decisions.

Henry Ford was not a saint.  He was also not a socialist, yet he believed that people should serve each other and assist one another.  He would be dismayed with increasing gap between the haves and have-nots. 

 

 

Book Review of Bill Clinton's Back to Work: Why We Need Smart Government for a Strong Economy

Cover
Image Credit: Amazon

I have taken a couple of weeks to read and re-read Bill Clinton's Back to Work: Why We Need Smart Government for a Strong Economy.  I wanted to pass along my perspective.

First a growl.  Why can I get a hardbound version of the text shipped in two days for $14.37, but the version I download to my Kindle is $11.99?  Amazon explains the price was set by the publisher.   My heartburn is with the publisher because it maximized profit rather than providing a fair price to the consumer.

The ex-President expends considerable pages in defending his administration's economic policies instead of launching into the discussion of how we got here and how we can extract ourselves from this sorry mess.  To be fair, he was the last President who achieved a balanced budget, but I confess I grew weary of the political discussions. I will also add that I believe he is honestly passionate about wanting to get America back to a strong economy.

He convincingly explains the political climate has changed.  Once we had idealists but today we have ideologues who are committed to a specific perspective even when the data changes. 

He also writes, "In the 1980s, Wall Street and many large corporations embraced what was then a new idea - that publicly traded companies' first and overwhelming obligation is to their shareholders.  Until that time, most people thought that a corporation, which receives limited liability and other privileges under the law, owed an obligation to all its stakeholders, including shareholders, employees, customers and the communities of which they are a part."

This change in perspective has resulted in fiscal quarter-by-quarter microscopic focus on profit, exorbitant executive compensation, and decreased research and development, not to mention, almost disregard for employees and their communities.

The former President meticulously reviews multiple metrics such as college enrollment, economic mobility, quality of life, etc, which indicate America has slipped from the 70s and 80s while other countries have improved. 

His prescription to economic health is rather complex and lengthy, but I would argue far more substantive than the complete austerity measures being deployed in Europe.  First, we need to resolve the mortgage crisis.  Somehow the government and the banks must share a write-down and get the housing market out of the tank.  Second, the banks need to be encouraged to lend.  He suggests that the banks be charged a parking fee for funds placed in the Federal Reserve.  Change corporate taxing and tax the shareholders appropriately so the companies have reason to bring international profits back into the USA instead of investing where the corporate rates are lower.  Fix our dependency upon foreign oil with green energy research.  There is a lot more - as I said, it is a complete list, and way too lengthy to pass through our political process.

So what do I think?  I think he could do it.  He did it before.  Since our current constitution forbids him to run for a third term, I think we need to somehow use his considerable intellect and experience to better national advantage. 

The book is not an easy read - but he has changed my perspective on some of his recommendations.  I recommend the book because America needs informed voices participating in the economic debates.  We must avoid the problems Europe is experiencing.

Cyberspace Worm

After a relatively quiet summer, the cyber criminals have hit hard recently.  If you recall, Stuxnet was surprise upon the world, targeting industrial controls.  The worm is over 1/2 MB in size, and written in multiple programming languages, including C++, which is unusual for a worm.  It was also digitally signed by two certificates stolen from certification authorities.  It also exploited 4 separate zero-day Window vulnerabilities.

It changed the rotation speed of motors such as the centrifuges being used by Iran in their nuclear weapons program.  Because of the destruction and havoc created by the worm, Iran's weapons program was likely set back three years.

There is a new threat, named Duqu.  It was named after the prefix 'DQ' on all of its files.  Symantec explains it is likely a precursor to a future attack, because it only gathers intelligence and then uninstalls itself after 36 days.  A previously unknown vulnerability in Microsoft Word is one installation path.  It has the ability to spread to computers in secure zones.  It appears to log keystrokes and digital certificates to use for some future attack.  The worm appears to reuse substantial portions of the Stuxnet code.  However, instead of a payload for maliciously manipulating industrial control systems, this seems to be a general purpose 'spy'. 

Once installed upon an organization's computer, the worm will reach into the internal network and then infect additional computers.  Speculation is that Duqu is collecting data to launch a catastrophic attack against critical infrastructure such as power grids and gas pipelines.

 

 

Unbelievable Ships

EMMA MÆRSK is the world's largest container vessel, measuring 397 metres long, 56 metres wide and able to carry 11,000 TEU.
Image Credit: Maersk Line

More than anything else, it is the large container ships that enable global trade.  Just short of a quarter-mile in length, the Maersk E-series of ships (there are eight of them) are currently the largest container ships ploughing through the seas.  The Emma Maersk on the left can carry 15,000 containers. (Which are 20 feet long.)  When she docks at Long Beach, up to six or seven cranes are required to unload the gargantuan ship.

If you are interested, you check on the current position of the Emma Maersk, or any any other cargo ship.  When I checked, she was in the China Sea, destined for Hong Kong.  The Emma has 109,000 horsepower main engine, with an additional 40,000 horsepower coming from five Caterpillar engines.  Her cruise speed is 31 miles per hour.

Extreme Shipping provides a short description of an Economist's writer's trip.  He tells that on his trip they were ferrying 1850 tonnes of New Year's fireworks for Europe, along with countless Asian goods destined to be European Christmas gifts.  There were also 28 containers filled with plastic cigarette lighters. 

It is the efficiency of these beasts that literally propel global trade.  The ship consumes just 3 grams of fuel per tonne per nautical mile.  If I did the math right, that is 0.0009 gallons of fuel per tonne per nautical mile.  Astonishing!  (I should have saved the Mathematica notebook, because I'm sure someone is going to challenge it.)  Even better - they can sail the seas with a crew of 13.

Jobs' Thermonuclear War Against Android Illustrates Something Needs to Change

The technology and consumer worlds are buzzing with Steve Jobs Wanted Android Destroyed.  It is important to understand the trigger was not Android, but Windows.  The Macintosh, introduced on January 24, 1984, changed the computing and consumer worlds forever.  The leap from the IBM PC to the Macintosh was larger than the leap from Blackberry to the iPhone.  Computer historians or us older technologists know that Apple did not invent the graphical interface or mouse - it was Xerox.  Steve Jobs and all those engineers whose signatures are inside the first Macintoshes generated a product that freed the users from the details of computer operating systems.  But the underlying ideas were not their own.

Macintosh users paid a premium - their hardware and software was priced at least 50 percent higher than IBM-compatible products.  But because of the improved productivity and quality of their products, Apple was favored among both engineers and creative arts.  Bill Gates of Microsoft subsequently began steering its products toward the graphical interface.  Windows 1.0 was released in November 1985, but it was not until Windows 3.0 in 1990 that the IBM/Windows products could attract serious interest. 

Windows 95 in August 1995 essentially caught up with Apple and layoffs began at the California-based company.  Never again would Apple have the market share in personal and enterprise computers it once enjoyed because of its graphical interface and intuitive software. 

Steve Jobs returned to Apple in 1997 and began steering the Apple brand from computers to consumer products.  Of course it was the iPod in 2001 that ushered in today's consumer-oriented Apple.  It is my belief that Jobs was determined to never again tolerate someone to catch up with a product like the Macintosh that resulted in his hatred for the Android.

Jobs continued to innovate with the iPhone, but his chief attack against the Android was patent litigation.  As the world's leading consumer products company (remember when it was Sony?), Apple doesn't need the money it is making from patent litigation, but it is to protect the package it introduced in 2007. 

This illustrates the tension that today's world faces with intellectual property.  Back in the halcyon days of computers with IBM, Data General, Hewlett Packard, Digital Equipment Company, etc, it required more than an idea to be successful.  It also required manufacturing, sales, and support.  Today, all of those are a commodity.  I'm continually amazed at Apple's stock cap of $364B.  Because unlike the General Motors, General Electric, and IBM of yesterday, it does not have hard assets that even approach a single-digit percentage of its stock evaluation.

Long before the iPhone was introduced, you had probably noticed that your laptop computer's touchpad could respond to something other than a tap.  Two decades ago, we had created touchscreens with LED arrays and photodetectors around the bezel of a CRT that allowed you to interact with a graphical interface without a keyboard or mouse.  The technology was much cruder, but the idea was already there. 

As a Blackberry user, you had also probably had several ideas about how to make a better phone before the iPhone was introduced.  Quite possibly the iPhone featured some of the ideas you had conceived.  So why does Apple obtain a world monopoly on an idea that you might have had earlier? And further, does 'first' even count, if you were not born yet and came up with the idea independently?  Chances are that a court might agree with you, but you also understand the legal party with the deepest pockets usually prevails.

On the other side, with today's Asian manufacturing engines and American-style merchandising, no company is willing to design a product if a Taiwan or Chinese manufacturer can under price it within six months of market introduction.  We have reached a milestone in civilization when we need a different form of protection for inventors, designers, manufacturers, and consumers.  I'm not certain what it is, but I don't believe ideas alone should be protected.  Ideas belong to civilization. 

 

Do We Want Efficient Markets?

Oil Well With Head Connections
Image Credit: Department of Energy

Efficiency is everything, right?  Producing products at the cheapest cost should be the ultimate goal of the global economy, right? 

Anecdotal experience from the Great Recession and Japan's Lost Decade has sent economists back to the blackboards and chalk, in search of something that can explain the global financial situation.

Nouriel Roubini: Karl Marx Was Right is not a left-leaning treatise, advocating socialism.  Instead, he is a market-oriented economist who has determined that

"Karl Marx had it right. At some point capitalism can self-destroy itself because you cannot keep on shifting income from labour to capital without not having excess capacity and a lack of aggregate demand, and that's what's happening."

Note he isn't talking about greed or incentive, or any of the long-running comparisons of socialism to capitalism.  Instead, he is warning that if the market becomes too efficient, it can destroy an economy because there are no remaining workers with jobs to purchase the products.  Although Henry Ford did not have a college degree, he understood the importance of creating a tide to raise everyone's boat, and promoted high pay for his workers.  It also generated new customers for the Ford Motor Company.

Nobel's Newbie: Don't Blame Economists for the Economy further tells that economic theorists are shying away from emphasis on efficient markets.  The high unemployment rate and increasing wealth inequality are convincing more and more economists there can be too much of a good thing.

Interested in some further theories?  Checkout the Center for Equitable Growth - University of California Berkeley. 

Do Western Economies Need an Industrial Policy?

Homestead Steel Works, Homestead, Pa.
Image Credit: Library of Congress

Wikipedia explains that an industrial policy is a strategic plan by a nation to develop and manage a particular product folio.  Alexander Hamilton was one of the first advocates of industrial policy,but there have been equally famous opponents. 

Imagine a soccer game where the white team wears shin guards, but the gold team cannot.  Occasionally the gold team will be slightly more agile because they do not have the protection, but over time, they are going to get injured. 

This is a simplification of the global economy game, where the western world, with the exception of Germany, is playing without protection.  Emerging nations such as Brazil and China are providing their players with substantial protection.  Little wonder we have developed unprecedented global trade imbalances. 

Tinker, Tailor agrees that Chinese rules requiring a substantial portion of intermediate goods has resulted in the great China success.  The trick though, is deft application of rules or protection.  Too much, and domestic companies become complacent and uncompetitive, costing consumers and creating a long-term problem. 

Protectionsim beckons as leaders push world into depression predicts that the United States is already in a transition into industrial policy.  Listening to the voters, Congress will implement a pro-growth bloc behind tariff walls with the Americas eventually joining.  The U.S. will recover behind the wall, while Europe continues to spiral downward following the fallacy of free trade.  China will be confronted with a great awakening.

Mmm.  Interesting