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Category Archives: Policy

Friedman: Turkey Attractive, Skeptical On India

GEORGE FRIEDMAN
Friedman: Turkey Attractive, Skeptical On India
George Friedman is one of the leading geopolitical strategists of our time. He founded Strategic Forecasting Inc. (Stratfor), an intelligence and consulting firm, in 1996, and serves as the company’s CEO and chief intelligence officer. Dr. Friedman is highly sought out by various organizations from around the globe for his geopolitical analysis and advice. He is the author of “The Next 100 Years” and “The Next Decade,” both New York Times best-sellers.Dr. Friedman recently sat down with ETF.com to discuss the ongoing tensions in Asia between China, Japan and Vietnam, and highlights which Southeast Asian nations are poised for a growth spurt. He also spells out what a Modi-led election win in India means for its market, how fracking will impact geopolitics in the future, and tells us which country he favors the most economically in the coming decade.
ETF.com: Last quarter, you said the markets were overreacting to the situation in Ukraine. Has anything surprised you regarding the renewed tensions between the West and Russia since?
George Friedman: Nothing like the Cold War where there were really massive tensions. And the markets weren’t necessarily affected by much of what went on in the Cold War. We had massive rallies. We had busts. We had the entire range of things.So from the standpoint of the international system, what’s happening in Ukraine is causing a realignment of the West. It’s very complicated. The Russians are still being extremely cautious. But its impact on the markets is dubious; it’s just not that significant on that level.
ETF.com: Do you also hold that view with Eastern European peripheral nations?
Friedman: That has a different dimension. When you take a look at these countries—Poland, Slovakia, Hungary, Romania, Bulgaria, but particularly Poland and Romania, which has taken a leading position with the Americans—this is simply another fracture point in the European Union.We already have the fracture point in the European Union between southern Europe and northern Europe. We have a fracture point developing between France and Germany. We have fracture points developing politically, as we saw with the right wing success during the European parliamentary elections.Now we have another one, which is where Poland and Romania and these other countries have a vested interest in what happens in Ukraine. Portugal and Italy and even Germany have much lower stakes, where the effect is not where you might expect it. It is in another dimension of disunification of Europe, and a much stronger presence of the United States in western and central Europe in its alignment with the Poles and Romanians.

So when everything was done here—and these countries in the eastern frontier certainly had concerns about what Russia was going to do—it wasn’t the European Union, it wasn’t the European countries that took a leading position, it was President Obama going to Poland, Vice President Biden going to Romania, endless diplomacy going back and forth that was key.

ETF.com: Last quarter, you referred to the friction between Japan and China as saber rattling. China is now having territorial disputes with Vietnam, causing a plunge in Vietnamese equities. There’s a sense of increased nationalism throughout Asia. Do you see confrontations in Asia escalating? How will that impact economic growth in the region?
Friedman: Divide them between two parts, between those where the confrontation has to be naval, such as between Japan and China. Those are less likely to happen simply because of the limits on the navies in the region. It takes a lot to have a naval confrontation.

Vietnam is a special case because it borders China. Although China went to war with Vietnam in the 1970s, and was pretty badly defeated by the Vietnamese, there’s always the possibility of it escalating to a conflict.

In this particular case, the Chinese are really not itching to have another go at the Vietnamese. They badly miscalculated last time, and in many ways, the Vietnamese are as strong as they were then. The Vietnamese are certainly not looking for a battle with the Chinese.

So my argument is that the Vietnamese/Chinese relationship is qualitatively different from the Chinese/Japanese relationship at this point in time, because one is a ground conflict between two countries and borders, and the other is a naval conflict that neither is in a position to engage in.

ETF.com: Are you optimistic about Vietnam’s economic growth prospects?

Friedman: Vietnam has had a growth spurt. If it’s unlucky, it’ll grow like China and wind up in an impossible situation. If it’s lucky, it’ll slow down, consolidate, have a business cycle, cull the inefficient businesses and move forward. So my view of potential growth is that it’s probably the worst thing a country can have, because eventually, as with Japan in 1991, that ends, and ends badly.

So my argument is that Vietnam should have a cyclical downturn; it’s probably having one. But there are other countries emerging in Southeast Asia—including Laos, Cambodia, Myanmar, the eastern parts of southeast Asia, the Philippines—that are also due, at least some of them, to have a growth spurt.

Ecologically, there are only so many low-wage, high-growth countries that can fit into the box. Vietnam may not have made as much of its growth spurt as it could have—I rather think it has—but it could also wind up in a much more crowded atmosphere.

ETF.com: Of those Southeast Asian countries, Laos and Cambodia still only have a handful of securities listed on their exchanges. Myanmar is currently working on creating a stock exchange. Are there any investable markets in Southeast Asia in which you share that same optimism?

Friedman: First of all, all these markets are sketchy in some ways, including the Chinese, I might add. These are debt-driven, not equity-driven economies. That is, if you want to start a business, you don’t normally go do an IPO; you normally go to a bank and do a financing and the bank president sits on your board, and so on.

Looking at these countries’ level of economic development in terms of the viability of the equities market is kind of a mismatch. Their equity market grows far later than their economies do.

So what you do here is, when you make investments, you can’t treat it as a Western equity-driven country. You go in—as many have done very successfully—and you actually invest in various projects and companies. It’s a direct investment play at this point. Most Western investors aren’t comfortable doing that, so they miss on the first major growth spurt—except for those who do make this investment; they come out quite happy to have participated.

So in these countries in Asia, given their structure, the very fact that they’re beginning to grow but there’s no equity market is the opportunity. But it’s a harder opportunity to take.

ETF.com: What do you make of Abe and his political agenda? Will his attempts to rewrite Article 9 of the Constitution and rebuild Japan’s military, hinder alliances in the region, possibly affecting the country’s growth?

Friedman: Japan is the third-largest economy in Asia, if you buy the Chinese numbers. It is also a country, unlike China, without a billion impoverished people. It’s highly unified. It has disregarded Article 9 of the Constitution for decades, having a military of substantial size, having a naval force and an air force, designating it all as a Self Defense Force and twisting it.

So Japan is already a major power, and I would argue that in East Asia, it is a far more significant major power than China, because the Chinese military, the armed ground forces—the People’s Revolutionary Army—is primarily a domestic security force, not a conventional army. Its naval power is emerging, but has not yet reached a point where it could challenge the United States, and I think would have a great deal of trouble challenging the Japanese.

Abe is not an ultranationalist, he’s a nationalist. He is coming out, as was inevitable, as unabashedly acting in the interests of Japan. Now, the Japanese always acted in the interests of Japan; they just had a little pretense that they had no national interests. But they did; everybody in Asia knew they did, and they worked in tandem with the United States.

The important question is not whether Japan is a great power; it is. Or whether it has national interests; it does. It’s about what its relationship to the United States is. Japan has chosen to shape its strategic outlook for close to 70 years based on alignment with the United States. The question to ask about Abe is, Is he prepared to simply continue this alignment, or is Japan going to go out on its own?

I think the answer is that he’s certainly not going to dramatically shift that alignment, but he is going to make clear his alignment between two equal nations—at least in principle—and that on occasion, it will pursue its own interests independent of the United States. So it’s simply an obvious thing happening. What else would the third-largest power country in the world do but act like the third-largest country?

ETF.com: Moving on to India, Indian equities have been surging for the past six months in anticipation of a BJP/Modi win. Now that he’s prime minister, have the markets gotten ahead of themselves with regard to what Modi can accomplish at the national level?

Friedman: Oh, way ahead of themselves. The markets excited themselves over Modi without realizing that in the end, as prime minister, there are limits to what he can do. First, the national government is surrounded by these states that have tremendous influence on what can be done. Second, the Indian bureaucracy is enormously inefficient, and simply shouting orders at a ship that doesn’t hear you doesn’t do much.

He said all the things that the markets wanted to hear. Markets have a strange belief that the nature of the leader can magically transform a country. There are institutional realities in India that cannot easily be overcome. Now that he’s in office, disappointment will come in very quickly.

ETF.com: Fracking and new extraction methods have unexpectedly tilted the world’s energy riches toward the U/S/ and away from the Middle East. How will this shift affect geopolitics in the coming years, and what is your view on the price of oil in the coming years?

Friedman: It’s changed the geometry of supply and demand dramatically. At the time that Europe and China are slowing and new powers have not emerged, the United States has come on the market with a source of energy nobody calculated. As that technology spreads to other countries, you will also see even more energy being produced.

There are legal limitations in some places, environmental limitations. But in the end, this technology is going to change things. It is very difficult for me to see how the price of oil is maintained at current levels. But it’s hard for me to see why they’re contained there at current levels in the first place. That shows the limits of my knowledge; I don’t pretend to be an oil trader.

But it seems to me that the pressures—particularly if the United States starts to legalize exports, which I suspect it will—that these structural shifts are going to create a very different dynamic for 20 or 30 years in energy.

ETF.com: Looking out into the coming decade, what region or country are you most optimistic about economically?

Friedman: The United States. The United States, unlike Europe, is not fragmented into tiny pieces. Unlike China, it isn’t suffering with a billion impoverished people. I see some lesser countries emerging—Poland, Turkey. I see Japan, which has done remarkably well over the past 20 years in maintaining its status as a major economic power, all of which are attractive.

But far and away, the most attractive remains the United States. It has a low population density. It has a great deal of land available. It has all the things that you’d want to see geopolitically in a country rising.

ETF.com: How does Turkey look at the moment? Is it out of the woods politically, and can it now move ahead with reforms?

Friedman: They don’t have to move onto reforms; they’ve done extremely well in the past 10 years without those reforms. They had some riots. Other countries have riots; the United States had riots in the 1960s and ’70s. There’s a tendency to see every large-scale demonstration in the country as being a major upheaval. What’s interesting is how meekly they contained it and moved on. So having just been in Turkey, this country has maintained an extraordinary growth rate, aside from 2009. It’s not an accident.

ETF.com: Thanks for your time.

ETF.com INSIGHTS
Vanguard Total Stock Market (VTI | A-100)
Looking out over the coming decade, Friedman still finds the U.S. more attractive—economically and geopolitically—than any other country on the planet. While he gives no opinion on current U.S. stock valuations, for a cheap and efficient long-term bet on the U.S. economy, it doesn’t get any better than VTI. Holding more than 3,500 companies of all sizes, the cap-weighted VTI delivers total market coverage of U.S. equities at a shockingly low 0.05% cost. Even better, the fund has phenomenal tracking history, with little to no slippage from its index, making it practically free to hold the fund. Trading more than $170 million at pennywide spreads daily, VTI is the poster child for what makes ETFs such an efficient, long-term investment vehicle.
iShares MSCI Turkey (TUR | B-99)
Friedman sees Turkey as a country well positioned for growth. For the past decade, it has been growing at a phenomenal rate—the country went from a 2002 GDP of $196 billion to a 2013 GDP of $789 billion. In regard to Turkey’s tremendous growth, Friedman notes, “It’s not an accident”—suggesting that the country has a political and economic foundation built for growth. To access this growth theme, consider TUR, which tracks a market-cap-weighted index of more than 80 Turkish companies. If Friedman proves correct about the country’s growth prospects, its equities are selling at a discount—TUR’s 11.09 P/E is a fraction of the richer valuations seen in some emerging markets.
ETF.com Alpha Think Tank ETF Tracker
Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.We implement a stop-loss of 10% from the ETF.com Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.
Ticker Fund Name ETF.com
Pick Date
TR %
(Since Pick Date)
TR %
(1 Yr)
Closing Price $ (6/12/14) Inspired By
INDA iShares MSCI India 2/24/14 25.11 29.11 30.24 Roubini
EWI iShares MSCI Italy Capped 1/27/14 15.28 44.01 17.96 Luskin
EWP iShares MSCI Spain Capped 1/27/14 15.22 49.81 43.46 Luskin
EWW iShares MSCI Mexico Capped 3/3/14 13.76 7.68 67.69 Friedman
CCXE WisdomTree Commodity Country Equity 3/14/14 12.94 17.22 32.49 Schiff
PXH PowerShares FTSE RAFI Emerging Markets 2/17/14 12.33 12.95 21.56 Arnott
AMU ETRACS Alerian MLP ETN 1/27/14 12.05 18.93 31.52 Luskin
INDA iShares MSCI India 4/9/14 11.67 29.11 30.24 Kotok
EWP iShares MSCI Spain Capped 2/24/14 9.11 49.81 43.46 Roubini
EWY iShares MSCI South Korea Capped 2/24/14 7.92 20.59 65 Roubini
GXC SPDR S&P China 2/3/14 7.91 14.61 75.03 Rogers
RSX Market Vectors Russia 2/3/14 7.70 10.15 26.29 Rogers
EWW iShares MSCI Mexico Capped 2/11/14 7.16 7.68 67.69 Fitzsimmons
EWP iShares MSCI Spain Capped 3/10/14 7.12 49.81 43.46 Dorsey
ELD WisdomTree Emerging Markets Local Debt 2/17/14 6.15 0.47 47.26 Arnott
EPOL iShares MSCI Poland Capped 3/3/14 5.86 14.90 30.52 Friedman
IEMG iShares Core MSCI Emerging Markets 4/28/14 5.62 13.27 52.1 Luskin
GULF WisdomTree Middle East Dividend 3/10/14 5.61 31.26 23.07 Dorsey
VCLT Vanguard Long-Term Corporate Bond 3/17/14 5.25 8.90 89.28 Yardeni
NKY Maxis Nikkei 225 2/3/14 4.95 9.15 17.39 Rogers
FXA CurrencyShares Australian Dollar 3/14/14 4.83 1.35 94.27 Schiff
MCHI iShares MSCI China 4/15/14 4.58 12.03 46.79 Faber
GMF SPDR S&P Emerging Asia Pacific 4/9/14 4.19 14.94 82.455 Kotok
EWJ iShares MSCI Japan 3/3/14 3.79 8.74 11.77 Friedman
VTI Vanguard Total Stock Market 4/28/14 3.72 22.74 100.29 Luskin
RSP Guggenheim S&P 500 Equal Weight 3/10/14 3.10 24.65 75.36 Dorsey
BKF iShares MSCI BRIC 5/22/14 2.76 12.93 39.09 Arnott
BAB PowerShares Build America Bond 4/9/14 2.63 7.24 29.3 Kotok
FXC CurrencyShares Canadian Dollar Trust 3/14/14 2.28 -5.69 91.6 Schiff
ERUS iShares MSCI Russia Capped 5/22/14 2.23 7.15 20.16 Arnott
GDX Market Vectors Gold Miners 3/31/14 1.80 -14.44 24.03 Merk
DBGR db X-trackers MSCI Germany Hedged Equity 2/24/14 1.70 21.72 26.58 Roubini
EWS iShares MSCI Singapore 5/5/14 1.47 10.32 13.81 Bremmer
FXY CurrencyShares Japanese Yen Trust 3/31/14 1.46 -5.94 95.91 Merk
DBC PowerShares DB Commodity Tracking 3/14/14 1.38 1.42 26.39 Schiff
EWH iShares MSCI Hong Kong 4/15/14 1.34 15.94 21.1 Faber
DBC PowerShares DB Commodity Tracking 3/31/14 1.03 1.42 26.39 Merk
DBB PowerShares DB Base Metals 5/8/14 1.01 -4.57 16.08 Gartman
XLU Utilities Select SPDR 4/9/14 0.93 17.68 42.28 Kotok
SCPB SPDR Barclays Short Term Corporate Bond 3/17/14 0.41 1.57 30.79 Yardeni
ITA iShares U.S. Aerospace & Defense 5/5/14 0.34 39.41 110.72 Bremmer
KOL Market Vectors Coal 5/8/14 -0.11 -0.86 18.5 Gartman
USDU WisdomTree Bloomberg US Dollar Bullish 4/15/14 -0.12 N/A 24.771 Faber
VNM Market Vectors Vietnam 4/15/14 -0.17 5.58 20.7 Faber
ROBO Robo-Stox Global Robotics and Automation 3/3/14 -0.18 N/A 26.91 Friedman
AFK Market Vectors Africa 5/5/14 -0.79 18.15 32.86 Bremmer
CHIQ Global X China Consumer 3/17/14 -1.40 2.41 14.04 Yardeni
FXE CurrencyShares Euro 3/31/14 -1.58 1.37 133.88 Merk
XRT SPDR S&P Retail 3/17/14 -1.99 10.71 84.41 Yardeni
EIDO iShares MSCI Indonesia 5/28/14 -3.82 -8.51 27.22 Fitzsimmons
CHIQ Global X China Consumer 2/11/14 -5.20 2.41 14.04 Fitzsimmons
PEJ PowerShares Dynamic Leisure and Entertainment 3/17/14 -5.98 19.66 33.19 Yardeni
IAU iShares Gold Trust 3/14/14 -7.84 -8.45 12.35 Schiff
Data as of 6/12/14
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Video

Sustainability as an Investment Class

 

Energy And Water Are Fundamentally Intertwined – Our Policy should reflect that

This commentary, authored by Kate Zerrenner, originally appeared on EDF’s Energy Exchange blog.

When I tell people that the best way to conserve energy is to conserve water, I am often faced with a confused response. I’m not surprised really. Energy and water policies are rarely discussed in the same forum. For a long time, we’ve overlooked the inextricable relationship between water and energy use. Coal, nuclear and natural gas plants use enormous amounts of steam to create electricity. Producing all of that steam requires 190,000 million gallons of water per day, or 39% of all freshwater withdrawals in the nation.

Connection between energy and water

The longstanding division between energy and water considerations is particularly evident in the case of energy and water management. These resources are fundamentally intertwined: Energy is used to secure, deliver, treat and distribute water, while water is used (and often degraded) to develop, process and deliver energy. Despite the inherent connection between the two sectors, energy and water planners routinely make decisions that impact one another without adequately understanding the scientific or policy complexities of the other sector. This miscommunication often hides joint opportunities for conservation to the detriment of budgets, efficiency, the environment and public health, and inhibits both sectors from fully accounting for the financial, environmental or social effects they have on each other.

This lack of collaboration between energy and water planners is especially dire considering Texas is in midst of an energy shortage that is exacerbated by the multi-year drought. Without adequate planning, we could someday have to choose between keeping our lights on and turning on the faucet.

Need for efficiency

Source: NY Times

 

Energy and water infrastructure upgrades are expensive, and this reality continues to stifle the transition to a more water and energy efficient system. Energy and water policies at both the federal and state levels were developed to support existing electricity generation and water technology, but conditions have changed dramatically and the policies haven’t kept up.

Competitive markets, new technologies, resource constraints and increasing greenhouse gas emissions are all part of the new planning reality, but are not adequately addressed when energy and water planning are carried out in siloes. At the most basic level, even the language between the two sectors does not match up, making it difficult for energy and water planners to speak to each other effectively. But don’t think this lets regulators and policymakers off the hook.

Policy

There have been calls for joint water and energy resource management. In 2011, the U.S. Energy and Water Research Integration Act was formulated “to ensure consideration of water intensity in the Department of Energy’s energy research, development, and demonstration programs to help guarantee efficient, reliable, and sustainable delivery of energy and water resources.” Although it was not enacted into law, this bill put the energy-water nexus on the national stage. Later, in the 2013 Texas legislative session, Senator Kirk Watson nearly passed a bill (Senate Bill 199) that would have required electricity generators to report their water use and needs annually. While some lawmakers have a clear vision to address energy and water needs together, we lack a consensus and broad understanding among stakeholders to make that vision a reality.

To compound the problem, energy and water resources are managed at multiple levels—local, regional, statewide and national. Having these different planning and regulatory levels means more opportunities for miscommunication or misalignment of policy goals from each sector. Addressing energy and water on a more coordinated basis could help overcome language barriers between the two and ensure that each resource is more adequately protected.

Energy and water management is too crucial to be upheld by disjointed decision making that doesn’t look at the whole picture. While it may be difficult to breakdown the longstanding separation between energy and water management, doing so will reveal novel conservation strategies to ensure Texans – or anyone else for that matter – never have to choose between keeping our lights on or running water to meet our daily needs.

This is one of a group of posts that examines the energy-water nexus, Texas’ current approach to energy and water policy and what Texans can learn from other places to better manage its vital resources.

 

WEF Impact Investing Report

wef-impact-investing-thumbOver the last few years, much excitement has been generated around the term “impact investing” – an investment approach that intentionally seeks to create both financial return and measurable positive social or environmental impact. Despite the buzz, there is limited consensus among mainstream investors and specialized niche players on what impact investing is, what asset classes are most relevant, how the ecosystem is structured and what constraints the sector faces. As a result, there is widespread confusion regarding what impact investing promises and ultimately delivers.

This report is a result of engaging over 150 mainstream investors, business executives, philanthropic leaders and policy-makers through interviews, workshops and conference calls. The overall objective of the Mainstreaming Impact Investing initiative is to provide an initial assessment of the sector and identify the factors constraining the acceleration of capital into the field of impact investing.

Download the report (PDF)

 

Commodities and geopolitics: regarding the likelihood and risks of escalation of military conflicts

Commodity prices have always been sensitive to geopolitics, but this has particularly been true over the last few weeks and months as the Western powers very nearly got involved in yet another costly military conflict in the Middle East. They may yet do so in the near future, sending the prices of oil and precious metals considerably higher. Today’s post examines the economic phenomenon of deflationary gap which is at the heart of the growing militarism of the western powers and their increasing propensity to resort to war as the key foreign policy tool.

Over the past few weeks we’ve witnessed a disconcerting spectacle of geopolitical maneuvering around the ongoing Syrian conflict. The escalation of military confrontation could have grave and unpredictable consequences. One of the more perplexing aspects of this crisis is the keen appetite for war displayed by the western leaders, particularly those of the US, UK and France. Regardless of the merits of their case, most of us who have grown up in the west were raised to believe in certain values where the political leaders are meant to respect the will of their constituents, where law – including the international law – is upheld whether this is convenient or not, and where war is always the solution of last resort, engaged only in the event of national defense or in response to a clear and present threat. Now, for some reason this has all been turned upside-down. Western leaders seem indifferent to their constituents’ will, international law is routinely and casually ignored, and war is used as the main tool of international policy. Suddenly, the democratic west is rushing headlong to intervene militarily around North Africa and the Middle East with barely any debate about these costly adventures.

The systemic causes of the growing militarism in the west

Following the day-to-day events, the rationale for war is always apparent to a casual observer. Colonel Gaddafi was a bad guy oppressing his own people, so we had to go and help the Libyans. Al Qaeda terrorists were about to take over in Mali and we had to go there and free the people. Now Bashar Al- Assad is killing his own people so we must go and help the Syrians. But while we can always come up with an immediate reason to wage war, what if there was a deeper, more systemic cause that inclines western nations toward armed conflict?

In meticulously tracing the events leading to last century’s two world wars, Carrol Quigley devotes much space in his book “Tragedy and Hope” to an economic phenomenon called the deflationary gap. Quigley considers the deflationary gap as “the key to twentieth century economic crisis and one of the three central cores of the whole tragedy of the twentieth century”.

To explain this phenomenon, and how it can give rise to militarism, we have to go back to economics for a moment. The subject of analysis is a closed economic system in which the sum total of goods and services appearing in the market equals the income of the system and the aggregate cost of producing the goods and services. The sums expended by the businesses on wages, rents, salaries, raw materials, interest, lawyers’ fees, and so on, represent income to those who receive them. The profits are entrepreneur’s income and his incentive to produce the wealth in question. The goods are offered for sale at a price which is equal to the sum of all costs and profits. On the whole, aggregate costs, aggregate incomes and aggregate prices are the same, since they represent the opposite sides of the same expenditures.

However, the purchasing power available in the system is reduced by the amount of savings. If there are any savings, the available purchasing power will be less than the aggregate asking prices by the amount of the savings, and all the goods and services produced cannot be sold as long as savings are held back. In order for all the goods to be sold, savings must reappear in the market as purchasing power. Normally, this is done through investment. But whenever investment is less than savings, purchasing power will fall short of the amount needed to buy the goods being offered. This shortfall of purchasing power in the system, the excess of savings over investment, is the deflationary gap.

Methods of bridging the deflationary gap

Deflationary gap can be closed either by lowering the supply of goods or by raising the supply of purchasing power, or by a combination of both methods.

The first solution will stabilize the economic system on a low level of economic activity. The second will stabilize it on a high level of economic activity. Left to itself, a modern economic system would adopt the former alternative, resulting in a deflationary spiral: the deflationary gap would lead to falling prices, declining economic activity, rising unemployment, and a fall of national income. In turn, this would cause a decline in the volume of savings, until savings reached the level of investment, at which point the economy becomes stabilized at a low level of activity.

This process was not allowed to unfold in any industrialized country during the great depression of 1929-1934 because the disparity in the distribution of income between the rich and the poor was so great that it would cause a considerable portion of the population to be driven to absolute poverty before the savings of the richer segment of the population could decline to the level of investment. Moreover, as the depression deepened, the level of investment declined even more rapidly than the level of savings. To avert social uprisings, governments of all industrial nations attempted to generate a recovery through two kinds of measures: (a) those which destroy goods and (b) those which produce goods which do not enter the market.

Averting depression through destruction of goods

The destruction of goods will close the deflationary gap by reducing the supply of unsold goods. While this is not generally recognized, this method is one of the chief ways in which the gap is closed in a normal business cycle. In such a cycle, goods are destroyed by the simple expedient of underutilizing the system’s production capacities. The failure to use the economic system at the 1929 level of output during the years 1930-1934 represented a loss of goods worth $100,000,000,000 in the United States, Britain, and Germany alone. This loss was equivalent to the destruction of such goods.

Destruction of goods by failure to gather the harvest because the selling price is too low is a common phenomenon under modern conditions, especially in respect to fruit and vegetable crops. While the outright destruction of goods already produced is not common, it has occurred in the depression years 1930-1934: stores of coffee, sugar, and bananas were destroyed, corn was plowed under, and young livestock was slaughtered to reduce the supply on the market. The destruction of goods in warfare is another example of this method of overcoming deflationary conditions in the economic system.

Producing goods that don’t enter the market The second method of bridging the deflationary gap, by producing goods which do not enter the market, supplies purchasing power in the market (the costs of production of such goods enter the market as purchasing power), while the goods themselves do not drain funds from the system, as they are not offered for sale. New investment would be the natural means to accomplish this, but modern economic systems in depression do not function this way. Rather, private investment tends to decline considerably. Alternatively, purchasing power must be supplied to the system through government spending. Unfortunately, any program of public spending quickly leads to the problem of public debt and inflation, which tends to compound the problems rather than solving them.

War: the irresistible solution

Approaches to public spending as a method of financing an economic recovery can vary depending on its objectives. Spending for destruction of goods or for restriction of output, as under the early New Deal agricultural program is hard to implement in a democratic country, because it obviously results in a decline in national income and living standards. Spending for nonproductive monuments or prestige projects like space programs is somewhat easier to justify but is not a long-term solution. The best approach, obviously is investing in productive capital goods, since it leads to an increase in national wealth and standards of living and constitutes a long-run solution.

Unfortunately, this approach runs into ideological head-winds in modern economies as it constitutes a permanent departure from the system of private capitalism. As such, it is easily attacked in a country with a capitalistic ideology and a private banking system. Instead, developed nations tend to favor the most dangerous method of bridging the deflationary gap: spending on armaments and national defense.

The appeal of this method is always rooted in political and ideological grounds. Military spending tends to help heavy industry directly and immediately. Heavy industry suffers earliest and most drastically in a depression, which absorbs manpower most readily (thus reducing unemployment). This tends to make it very influential in most countries. Defense-related spending is also easily justified to the public on grounds of national security. But increasing defense spending enhances the political clout of the military-industrial complex and tends to increase a nation’s reliance on the military in the conduct of its foreign policy and an escalation of conflict which leads to further increases in military spending. The vicious cycle ultimately results in the emergence of fascism: the adoption by the vested interests in a society of an authoritarian form of government in order to maintain their vested interests and prevent the reform of the society.

In the last century in Europe, the vested interests usually sought to prevent the reform of the economic system (a reform whose need was made evident by the long-drawn depression) by adopting an economic program whose chief element was the effort to fill the deflationary gap by rearmament.

Quigley’s analysis, based on the historical developments in the aftermath of the economic depression of the early 1930’s closely parallels today’s events. The economic crises which germinated from the same systemic feature present in the modern economic system followed a similar pattern in economic and political developments that we are witnessing today.

To avert a deflationary depression, US Government ramped up military spending

In the last 100 years, we have seen similar developments lead to two world wars, the second of which included the use of nuclear weapons. Today, as we seem to be sliding in the same direction, the question is whether we can extricate ourselves from this destructive path. If the day-to-day events are shaping the outcomes, then no one can tell. But if they are shaped by systemic attributes inherent to our socio-economic system, then we should expect further expansion and escalation of military conflicts around the world in the following years.

Escalation of military conflict and investor risks

Sadly, we have to consider this problem from investor point of view as well – and here, while the outcomes are unpredictable, the key risks to investors are rather clear, and they include:

  • sharp rises in commodity prices
  • high inflation
  • sustained rise in interest rates
  • deepening economic recession, and
  • increasing asset price volatility
 

A Nation On Fire: Climate Change And The Burning of America

A Nation On Fire: Climate Change And The Burning of America

http://www.globalfundexchange.com/blog/2013/07/31/a-nation-on-fire-climate-change-and-the-burning-of-america/

June 20, 2013: Wildfires fires approach the town of South Fork, Colorado (Credit: AP)

 

Huge, explosive fires are becoming commonplace, say many experts, because climate change is setting the stage — bringing higher temperatures, widespread drought, earlier snowmelt and spring vegetation growth, and expanded insect and disease infestations.


Scientists and fire experts speaking on a recent conference call organized by the Union of Concerned Scientists say the nation is moving into an era when massive and destructive wildfires of the kind that occurred only sporadically over the last century will now be a regular occurrence. “Within the next few decades we anticipate these [forest] systems being as dry on a regular basis as the major fire years of the last century,” said Anthony Westerling of the University of California, Merced.

“We are now completely certain that there is a climate signal in the observed fire activity,” added Dave Cleaves, climate adviser to the head of the U.S. Forest Service. “Fire, insects, disease and moisture stress are all being linked more closely by climate change.”

Wildfire statistics compiled by the National Interagency Fire Center in Boise, Idaho, offer sobering confirmation. The seven largest fire years since 1960 have all occurred since 2000. In 2006, 2007, and last year, the toll exceeded 9 million acres, an area roughly equivalent to Maryland and Rhode Island combined.

This year’s fire season, while running behind 2012 in terms of acreage lost thus far, is proving particularly destructive and tragic in some places. A year after the Waldo Canyon fire set a new standard for destructiveness in Colorado by burning nearly 350 homes in 2012, this June the Black Forest Firedestroyed more than 500 just a few miles away. And the June 30 Yarnell Hill fire in Arizona killed 19 members of a Hot Shot firefighting crew when they were overrun by flames, the deadliest wildfire in 80 years.

There is no single reason for the recent transition to more frequent and explosive fires, says Oltrogge. For one, too many people are “deciding to build communities where there will be big scary wildfires.” And there is too much fuel built up in forests where frequent low-intensity fires once thinned out underbrush but where decades of man suppressing natural fires has resulted in overcrowded stands of trees now vulnerable to catastrophic fires. Plus, emphasizes Oltrogge, “I can tell you as a matter of fact that climate change is a key contributor to what we’ve been dealing with the last 10 to 12 years.”

That’s hardly an outlier opinion. In congressional testimony two years ago, Thomas Tidwell, the head of the U.S. Forest Service, told lawmakers that his agency faces conditions of higher temperatures, earlier mountain snowmelt, and much longer fire seasons, which “our scientists believe … is due to a change in climate.”

Wildfires-02Tidwell again delivered that message yet again to Congress last month. Large fires in excess of 10,000 acres are seven times more common today than four decades ago, Tidwell said. The fire season is two months longer. In 2012, he said, “over 9.3 million acres burned in the United States. The fires of 2012 were massive in size, with 51 fires exceeding 40,000 acres. Of these large fires, 14 exceeded 100,000 acres.”

And that comes with a huge price tag.

The cost of federal firefighting efforts, borne largely by the Forest Service and the Interior Department’s Bureau of Land Management, has also risen dramatically. At the Forest Service, firefighting now often eats up 40 percent of the agency’s annual budget. In a little more than a decade, fire staffing at the Forest Service has more than doubled. During the decade of the 1990s, federal firefighting costs averaged less than $1 billion a year; since 2002, the annual cost has averaged more than $3 billion.

There is little prospect of those costs declining. In fact, a report released last month by Headwaters Economics concluded, “These changes will all contribute to escalating wildfire protection costs for all levels of government.”

Federal efforts to reduce fire risks — through thinning of small trees and underbrush and by setting what are known as ‘prescribed fires’ to cut down on those small fuels that can lead to large catastrophic fires — were accelerated around the year 2000, when spending on what is known as the hazardous fuels reduction program run by the Forest Service and Department of Interior tripled. But spending on fuels reduction since 2011 has declined, and in its budget request this year, the Obama administration has sought a cut of more than 30 percent, the third year in a row it has proposed substantial reductions to Congress. The administration’s request for hazardous fuels reduction for next year is just $297 million.

Wildfire preparedness has taken another hit as a result of automatic budget cuts under sequestration, which cut spending from $500 million last year to $419 million this year. A report released this spring by House Appropriation Committee Democrats found that sequestration would mean the Forest Service would have 500 fewer firefighters this season, and 50-70 fewer fire engines and two fewer aircraft.

Increasingly, lawmakers are calling on the Forest Service and Interior Department to spend more on preventive measures in order to eventually reduce firefighting costs. “You can spend more modest amounts on the front end, with preventive kinds of efforts, or you can spend your time investing substantially more money trying to play catch-up as these infernos rip their way through the West,” said Sen. Ron Wyden (D-Oregon) last month.

Even with stronger financial support, the job of treating forests to reduce wildfire is enormous. The federal government is currently treating about 3 million acres a year, but Tidwell, the chief of the Forest Service, told Congress in June that between 65 and 82 million acres of Forest Service lands “are in need of fuels and forest health treatments — up to 42 percent of the entire system.”

Across all federal land holdings, 231 million acres are at moderate to high risk of damage from wildfires, according to a 2011 Congressional Research Service report. “Since many ecosystems need to be treated on a 10-35 year cycle … current treatment rates are insufficient to address the problem,” the report found.

Attacking the escalating expense of fighting fires is a difficult problem.

This is due in large part to the fact that the federal government, which shoulders most of the firefighting expense, has little power to control Americans’ urge to move into the woods because land use decisions are a local and state responsibility.

A key reason that wildfires have become more destructive, and fighting them more expensive, is that millions of Americans have made a conscious decision to move close to wildlands that are susceptible to fire — known by the infelicitous phrase the wildland-urban interface, or WUI.

“The number of housing units within half a mile of a national forest grew from 484,000 in 1940 to 1.8 million in 2000,” Tidwell testified to Congress last month. Another 1.2 million live within national forest boundaries, a nearly four-fold increase from 1940. Even with all that development near and in the forest, only about one-sixth of the WUI is developed, leaving plenty of room to make the situation worse.

Protecting those structures during fires has become the de facto number two priority of federal firefighting efforts, after protecting human life. According to Headwaters Economics’ recent report, “in a survey of [Forest Service] land managers, some estimated that 50 to 95 percent of firefighting costs were attributable to protection of private property.”

Further complicating the matter is the fact that knowing that federal firefighters will make valiant efforts to save homes “removes incentives for landowners moving into the WUI to take responsibility for their own protection and ensure their homes are constructed and landscaped in ways that reduce wildfire risks” according to a report by the Department of Agriculture’s Inspector General.

Ray Rasker, executive director of Headwaters Economics, said in an interview that a huge part of the problem is the fact that “there is no cost accountability for those who build in the WUI,” whether its individual homeowners or the local government bodies who make the development decisions about sewers, police coverage, roads and other issues.

“There are a lot of questions they ask about okaying a new development,” says Rasker. “But they don’t ask, ‘when we get a bill from the feds are we going to be able to afford our share of the firefighting costs?’” That’s because in most cases, they don’t have to share those fire costs. If they did, said Rasker, it would be much easier for local government to say no to development in the WUI.

“Eighty four percent of this land is still not developed,” Rasker says. “If you think it’s expensive now, you’re in for a big surprise. Fires are twice as big, they are burning twice as long. That’s the cost trajectory we are on.”

Climate change is altering the fundamentals in the West, bringing higher temperatures, earlier snowmelt that extends the fire season, severe and prolonged drought, and insect infestations that kill millions of acres of trees. Combined with scant evidence that policymakers at all levels of government are attacking the problems of fuels and population shifts into the WUI, there seems to be little prospect that the growing extent of wildfires will be stemmed.

paper released last December by the Forest Service, part of the government’s National Climate Assessment, looked at the effects of climate change on U.S. forest ecosystems. On the subject of fire, it presented a stark and sobering conclusion: by mid-century, wildland fires will be burning twice as much acreage as they do now.

Andrew Breiner contributed the graphics for this piece.

by anric

 

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Aside

By Michael Snyder

A fundamental shift is taking place in the U.S. economy.  In fact, this transition is rapidly picking up momentum and is in danger of becoming an avalanche.  The percentage of full-time jobs in our economy is steadily declining and the percentage of part-time jobs is steadily increasing.  This is not a recent phenomenon, but now there are several factors which are accelerating this trend.  One of them is Obamacare.  The truth is that Obamacare actually gives business owners incentive to cut hours and turn full-time workers into part-time workers, and according to the Wall Street Journal and other prominent publications this is already happening all over the United States.  Perhaps this is part of the reasons why the U.S. economy actually lost 240,000 full-time jobs last month.

In a recent article entitled “Restaurant Shift: Sorry, Just Part-Time“, the Wall Street Journal explained the choices that employers are faced with thanks to Obamacare…

The Affordable Care Act requires employers with 50 or more full-time equivalent workers to offer affordable insurance to employees working 30 or more hours a week or face fines. Some companies have said the requirement could increase their costs significantly, although others have played down the potential hit.

The cost for small firms to comply with the health law will depend largely on the number of additional full-time employees that sign up for employer-sponsored coverage. Average annual premiums for employer-sponsored health insurance in 2012 were $5,615 for single coverage and $15,745 for family coverage, according to the Kaiser Family Foundation. That is up from $3,083 and $8,003, respectively, in 2002.

Thankfully the implementation of this aspect of Obamacare was recently delayed, but a lot of employers are saying that it won’t make a difference.  They know that it is coming at some point, and so they are already making the changes that they feel they will need to make in order to comply with the law…

Restaurant owners who have already begun shifting to part-time workers say they will continue that pattern.

“Does the delay change anything for us? Absolutely not,” Mr. Adams of Subway said, explaining that whether his health-care costs go up next year or in 2015, he will have to comply with the law. “We won’t start hiring full-time people.”

This is very sad, because we have already been witnessing a steady erosion of “breadwinner jobs” in this country.

It is very, very difficult to support a family if you just have a part-time job or a temp job.  But those are the jobs that our economy is producing these days.

In fact, if you can believe it, the second largest employer in the United States is now a temp agency.  Kelly Services is actually the second largest employer in the country after Wal-Mart.

Isn’t that crazy?

And full-time employment continues to lag far, far behind part-time employment.  The number of part-time workers in the United States recently hit a brand new all-time record high, but the number of full-time workers remains nearly 6 million below the old record that was set back in 2007.

For much more on this, please see my previous article entitled “15 Signs That The Quality Of Jobs In America Is Going Downhill Really Fast“.

At this point, employees are increasingly considered to be expendable “liabilities” that can be dumped the moment that their usefulness is over.

For example, employees at one restaurant down in Florida were recently fired by text message

It’s bad enough losing your job, but more than a dozen angry employees say they were fired from a central Florida restaurant via text message.

Employees at Barducci’s Italian Bistro said they lost their jobs without notice after the restaurant suddenly closed and are still waiting for their paychecks.

This shift that we are witnessing is fundamentally changing the relationship between employers and employees in the United States.  The balance of power has moved very much toward the employers.

Most employers realize that there is intense competition for most jobs these days.  If you get tired of your job, your employer can easily go out and find a whole bunch of other people who would be thrilled to fill it.

So why has the balance of power shifted so dramatically?

Well, for one thing we have allowed millions upon millions of good paying jobs to be shipped out of the country.  Now American workers literally have to compete for jobs with workers on the other side of the planet that live in nations where it is legal to pay slave labor wages.

This should have never happened, but voters in both major political parties kept voting for politicians that were doing this to us.

Now we all pay the price.

Another factor is the rapid advancement of technology.

These days, businesses are trying use machines, computers and robots to automate just about everything that they can.  The following example comes from a recentBusiness Insider article

On a windy morning in California’s Salinas Valley, a tractor pulled a wheeled, metal contraption over rows of budding iceberg lettuce plants. Engineers from Silicon Valley tinkered with the software on a laptop to ensure the machine was eliminating the right leafy buds.

The engineers were testing the Lettuce Bot, a machine that can “thin” a field of lettuce in the time it takes about 20 workers to do the job by hand.

The thinner is part of a new generation of machines that target the last frontier of agricultural mechanization — fruits and vegetables destined for the fresh market, not processing, which have thus far resisted mechanization because they’re sensitive to bruising.

So what happens when the big corporations that dominate our economy are able to automate everything?

What will the rest of us do?

How will the middle class survive if they don’t need us to work for them?

Over the past couple of centuries, we have witnessed several fundamental shifts in our economy.

Once upon a time, a very high percentage of Americans worked for themselves.  There were millions of farmers, ranchers, small store owners, etc.

But then the industrial revolution kicked in to high gear and big corporations started to gain more power.  Millions of Americans went to work for these big corporations, but it was okay because they paid us good wages to work in their factories and the middle class thrived.

Unfortunately, the big corporations have realized that things have changed and that they don’t really need us anymore.  They can replace us with technology or with super cheap labor overseas.

So that leaves the rest of us in quite a quandry.  Very few of us own our own businesses.  In fact, the percentage of self-employed workers in the United States is atan all-time record low.  And the number of us that are needed by the monolithic corporations that dominate our system is dropping by the day.

All of this is very bad news for the middle class.  The only thing that most of us have to offer is our labor, and the value of our labor is continually declining.

Unless something dramatic happens, the future of the middle class looks very bleak.

Original article

Goodbye Full-Time Jobs, Hello Part-Time Jobs, R.I.P. Middle Class

 
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Posted by on July 16, 2013 in Investments, Policy

 
 
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