The Ghost Fleet

From the Daily Mail:

The biggest and most secretive gathering of ships in maritime history lies at anchor east of Singapore. Never before photographed, it is bigger than the U.S. and British navies combined but has no crew, no cargo and no destination – and is why your Christmas stocking may be on the light side this year.

Amazing. A huge part of the world’s commercial shipping fleet lies idle off Singapore. This is transport capacity that is no longer needed thus giving evidence of the collapse in world trade.
The Daily Mail article is a must read.  Click here.

The Lesson of the Kobayashi Maru Test

In an interesting article John Hampton of Bronte Capital compares the banking crises of Japan and (South) Korea, by comparing the structure of their economies, their financial sectors and the outcome of the two crises.

In short, he describes the crisis in Japan as (highlighting by me)

1).  The bank[s] made lots of bad loans – firstly to heavy industrial companies and secondly to real estate related companies (golf courses, department stores etc).

2).  The loans could not be repaid.

3).  The system was never short of funding because the Japanese housewives (the legendary Mrs Watanabe) saved and saved and saved – and the banks were thus awash with deposit funding.

4).  The savings of Mrs Watanabe went on – indeed continued to grow – with zero rates.

5).  Zero rates and vast excess funding at the banks made it unnecessary for the banks to call the property holders and (especially) the industrial giants to account for their borrowings.  Everything was just rolled.

6).  Employment in the industrial giants of Japan thus never shrank (Toshiba alone employs a quarter of a million people).  The economy continued to sink its productive labour force into dinosaur industries and dinosaur department store chains.

7).  The economy stagnated – but without collapse of any of the major banks and without huge subsidies to the banking system.  [The number of banks – mostly regional banks – that failed during the crisis was not large given the depth of the crisis.]

He goes on to compare this with the crisis in South Korea, whose economy was organized in a very similar way to the Japanese’, with one crucial difference: The Korean housewives did not save as much as the Japanese. This, according to John, is why many South Korean banks ended up as government property and many of the industrial conglomerates (chaebols) did not survive, whereas their Japanese counterparts (keiretsus) did.

So the Japanese version of capitalism worked only because the Japanese banks were funded cheaply with billions of Yen from the savings of Japanese housewives put in them basically for free. This money was then put back into the keiretsus, who were not really profitable, but didn’t have to worry about having their credit lines canceled, or having to pay the principals back – the debt was just rolled over. In turn the keiretsus kept people at work (I guess mostly the husbands) to spend their time in the office, without doing anything really useful, but at least they had a salary which their housewives could then put into the bank account again.
I think we are to assume that the Japanese economy still works that way, however, they are now losing something more: Their overseas markets. I don’t think the story ends where John wants it to end.

In Korea, the chaebols ran out of cheap capital and failed, because South Korean housewives were not saving as much as their Japanese counterparts.
This is much closer to the result that you’d expect in a market economy. You make mistakes, you pay the price, if you can’t pay your bills you risk bankruptcy. This is, at least in theory keeps market efficient.

According to John, the recession that followed were different in both countries, but so was the recovery:

Korea had a much worse recession than Japan.  Vastly worse.  Japan was just low growth for a very long time.  By contrast the Korean economy crashed and burned.  But it also recovered very fast and at one point (1999-2000) the Korean Stock market was 1932 Great Depression cheap.  It bounced.

As far as I know the US and Western European economy are not organized in chaebols or keiretsus, or is it? It is then not immediately clear, why the Japanese or Korean banking crises would provide an example or even a lesson that can be used to resolve the current crisis. I seem to remember clearly that the Swedish model to deal with their banking crisis was discarded with the argument that ‘we are different from Sweden, we don’t work that way here,’ and yet the Japanese model was accepted and embraced without discussion of any kind. It looks we are running into the NIH syndrome.
The current thinking in Washington is, that they must look to Asia and specifically to Japan to learn how to resolve the banking economic crisis – any other approach is out of the question.

But having looked to Asia, they should have looked to South Korea, not Japan, because the South Korean economic model is much closer to the US, the latter still touts itself as a market economy based on economic principles and not as a highly cartellized and regulated economy of “corporatsus” – oh wait, maybe the US is indeed organized into corporatsus?

At least that would explain Geithners fixation on Japan. I first thought he is looking to Japan because he doesn’t know anything else. After all his background is a Japanese, Thai, Chinese one.

But the Administration does not even get the Japanese version of dealing with things right, after all the corporatsus are failing only the major banks are catered for. The Japanese model necessitates that people are kept at work, paid a salary that they can live on and then some – bo be able to save – and provide the banks with cheap capital in terms of deposits (until the FED nixed their rates, this was the cheapest form of capital for banks) and it necessitates that the banks care for the members of their keiretsu without regard for their own profitability. Major flaw in the thinking of Geithner, Summers, et al.
It looks like the Administration together with Wall St. is trying to run an economy without people. Of the bankers, by the bankers, for the bankers.

Which brings us to the deeper issue: Japan has had their overseas markets they could export to because somebody must consume in a consumer driven global economy. If not the Japanese, then the Americans, Europeans, etc. But that leg on which the economic order rests has been destroyed as well. No jobs, mass lay-offs already within sight or jobs with salaries that don’t allow living let alone saving.

So, the Anglo-American version of capitalism is a failure. The Japanese version doesn’t work either – or maybe it does, if you don’t expect growth (but that’s no longer capitalism, isn’t it). The South Korean model, is something in between, but is not really working either. All of them require solvent consumers.

That leaves us with the EU, China and Russia. Then again, Russia is not in a good state, as the revenues of oil and gas on which they depend have crashed, so the Russia’s version of capitalism is not working either.
China then? Not so sure. They depend to a very hight degree on exports which requires people in other countries to consume, so China’s not really a success story either. Chinese are reluctant to consume, they rather save, for several reasons. Which would be good news for the Chinese banks, as they are provided with cheap capital. But since Chinese don’t consume some one else must, but doesn’t. So that model fails as well.
That leaves us with the EU. Let’s look at what the have, at least in the western part: Social safety net, health insurance, sound public infrastructure, higher savings rate and less debt in households. Looks like they are doing something right, after all. On the other hand, much of the income for European workers is also depending on demand for industrial products in Asia. Goods that are used to produce the other goods which are then consumed in Europe. But, dogone it, now, demand in Europa starts cratering as well.
Same story here, all of them require solvent consumers to work.

This looks an awful lot like the test that cannot be solved with conventional thinking.

Basic Guaranteed Income

In a previous post I wrote about how inflation was built-in to our banking system. Since inflation is caused by having a string of different players – mostly banks – manage the currency who need to make a profit every stage of the process, we could try a bottom-up instead of the top-down approach we currently have.
Here is how it could look like: Give it to the people directly.
This is similar to what Ben Bernanke’s idea who proposed that he mount in a helicopter to distribute cash to combat deflation. We don’t want to risk a ‘Bernanke down’ before he has doled out all of the cash, so I have a better and more convenient idea.

If people were to be paid directly by the central bank in the form of a secure ‘guaranteed basic income’ that they can count on and that would cover their basic needs. The need to depend on savings, retirement accounts, social security or welfare would be done away with and so would be the costs associated with managing all that.

If I assume that the FED would pay all U.S. citizens of age 18 years and over a lifelong guaranteed ‘basic income’ of some 2800$ without any conditions, then, since there are around 230 million people over the age of 18 according to U.S. Census Bureau that would immediately create a market of some 7.8 $ trillion. This is income people could spend on services and products such as housing, food, clothing, health-care, communication, some leisure.
People without job or no other income could immediately benefit from this and stabilize their lives to be able to train themselves for a new job – as we know, that takes some time.
People without job but other income that is coming from the government, e.g. Medicaid, Medicare, can benefit as well, but will have to phased out of those programs.
People who currently still have a job can benefit as well, since this will give them additional income that they can use to pay down their debt (which will make the banks happy, since this in the end ends up with them).

The basic guaranteed income will come with no strings attached except that once you get it, that’s all you going to get from the government. You must be able to make do with that otherwise, you have to find a job that pays you an additional income.
If anyone thinks he or she needs more because she has special wishes such as holidays in the Maldives, or a really upmarket car, then she can always earn additional income by finding a job.
There is another point: The basic guaranteed income cannot be pledge as a collateral for credit, loans, etc and in cannot be garnished.

There are additional thoughts I have about the pros and cons of such a basic guaranteed income, which I will publish later on. Please note that this is part of an idea for a new economy I posted some time ago.

Where inflation comes from

Continuation of my previous post ‘Why do we invest’

There are several different theories as to the causes of inflation, for an overview see here.
I have a much simpler view of inflation and it does involve the FED, or any central bank able to print money for that matter. It goes like this.

Start with a clean slate. At the beginning there is nothing except people who want to do business with each other. They think that it would be cool to have some token to exchange their products and services among each other and that it would be much simpler if everyone were relying on the same token instead of everyone producing its own. They call this token ‘money’ or ‘currency’ and found a bank (central bank) whose task it is to print enough money so that there is no shortage of it and everyone has access to it when he needs it.
So the central bank prints some currency and stocks it in its vault. Since you need, say 100$ to do business, how do you get access to it? It requires you to have an account with the central bank into which you have to pledge some of your wealth (note: you can’t put currency in there, as at this point because you don’t have any yet), also called collateral. The central bank then ‘loans’ you this 100$. Obviously, a loan comes with an attached interest rate. In other words, you loan 100$ from the central bank and will have to give it 102.5 back (assuming a 2.5% rate per annum). Where does the additional currency come from, after all, only 100$ were printed so far which you have loaned? Well, you need to ‘take it away’ from someone else by doing business with him for at least 102.5$. And for this not to be an exercise in futility you need to make a profit yourself, so you will charge this someone 105.0 (assuming you are not greedy and are satisfied with 2.5%). Now, your business partner has to come up with at least 105$. He has loaned his 100 from the central bank as well – where else can printed money come from at this stage – and needs to give 102.5 back as you do. If he pays you 105 for your services or products and wants to make a profit for himself as well. He is now forced to do business with another some at 107.5 to be able to pay his bills and still make a profit.
The original 100$ put in circulation by the central bank have now become 107.5$. Those 7.5 $ must be printed as well or would have to be printed if everything had to be paid back. This is unlikely to be the case and here reserve requirements of fractional reserve banking come in. You cannot lend-out the full 100$ you loaned from the central bank, but only a fraction of it. See the drawing at the end of this post.
If you think this sounds like a Pyramid scheme, then you are not alone. This system will break down as soon as no new players that can be used as currency source enter into the game. Whether it is a Ponzi depends entirely on the definition of when you judge a return (or interest rate) to be unusual high.
The above makes it clear that inflation is artificially induced by the central bank and aggravated by the fact that everyone that deals with the currency, i.e. the banks, needs to make a profit in the process. In other words, inflation is a built in component of the banking system which is entirely artificial and could be avoided completely if a alternative to the way money is managed were found.


Why do We Save and Invest

One of the underlying assumption most people make is that on any investment or saving of money, there needs to be a (positive) interest rate. Why is that, why would it not be sufficient for anyone to put, say, 1000 $ in a bank savings account today and take it out after some 10 years to spend it on, for example, a new TV?

To answer that, we should look at the reasons why we do save and why do we invest at all.

Let’s tackle ‘saving’ first. You would only be able to save that amount of money that is not immediately needed to satisfy your basic needs, such as housing, food, clothing, basic health insurance, basic communication and some entertainment.
One reason to save, is to put money away into the safety of a bank account to be able to buy something in a year that you normally would not be able to afford (we leave credit aside for this discussion). Another reason to save is that to ‘insure’ yourself against rainy days, such as a job loss, salary decrease or retirement. The saved money serves, in other words, as a financial cushion to provide you with the standard of leaving you are used to. Savings in a bank account usually isn’t risky at all if you bank is FDIC insured. In that case, your savings up to 250,000$. Since savings accounts are not risky at all, they do not pay much interest.

If you are sure that you are saving enough to cover your future acquisitions or rainy days and still have money left, then you would be able to ‘invest’ that money. Investing is risky, that’s why there is in general a higher interest rate being paid for investments than for savings. Saying investments are more risky, is just another way of saying that you can lose all or part of the money you invested. It follows, that investment money should be seen as play money that you can afford to lose. If you are lucky you can put the additional money you make into your savings account to increase the size of your cushion.

We can now already see that interest rate on savings does not have quite the same significance as interest rate on investments. In savings accounts, there is no risk hence no or not much interest is being paid. In investments, there is risk. The higher the risk, the higher the interest rate.
Why then would you not be satisfied with zero interest rate on your savings since it is absolutely risk-free?
The answer is ‘inflation’. Prices, and thus the costs of living, will tend to rise through time due to inflation. Thus the 1000$ you put away today, will not buy you as much in ten years. Unfortunately, there is much insecurity at what this inflation rate will be over the years so saving still remains a bit risky. However, since your savings money is money you almost certainly are going to need, the inflation, which eats away at the interest rate, will be more significant than inflation eating away at your investment interest rate – remember the latter is money you don’t really need and that you can afford to lose.
It follows then that the higher the inflation, the riskier your investments must be to make up for the loss, otherwise your wealth will diminish over time. However, the riskier the investments the more likely you are to lose them.
Interest then, is strictly only necessary because of two factors, which are inflation and risk. We need to take a closer look at how inflation comes about.
I’ll do that in my next post.

Idea for a New Economy

Our economic system is called Capitalism (for a good overview of the term Capitalism see wikipedia). It is equally clear that in the financial sector with all its deregulation and non-interference by regulators, we have seen Capitalism at its worst. If anyone needed proof that laissez-faire à la Milton Friedman is baloney then you are seeing the results of this before you.
With all the wealth that has been destroyed and which still we destroyed, it should have become clear that the current economic system does not work and that a new approach to doing things is needed.

To come up with a new solution, it seems in order to do a analysis of the problems caused by our current economic system.

Financial Issues

To live (and I mean that literally) you need money. To get that money most people have to find a job that pages wages they can live on. This is becoming more and more difficult and with the current economic downturn, I would say, it is an illusion form many people to find a job, or a job that they can live on.

Health Issues

Our way of living leads to people becoming sick. The lifestyle is based on consumption of goods. Consumption is a stress reliever. The stress is being artificially induced in the working place, where people work as wage slaves just to pay their mortgages, leasings, student credits and consumer credits.
Many health-issues today are caused by this setup. Many of them may just disappear once the stress is eliminated.

Resource issues

Natural resources are for the most part non-renewable. This is true for many metals needed in high-tech stuff like your PC, plasma screen, iPhone etc. It is also true for oil from which many plastics, drugs, etc are made. Without those things, there is no modern society, you will have to go back living as in the 18th century.

Environmental Issues

Our way of living produces too much waste and too much pollution and too much. Those in turn hurt our ecosystem. This affects not only the habitat of wild animals, but also the habitat of humanity. Today, the ecological footprint of many humans, especially in the countries that have embraced the capitalistic system, is way too great. This must be changed.
Environmental issues are also created by the way this work is organized. The commuting to and from the workplace not only takes hours, it also puts a stress on people and on the environment.

With the above, it is easy to see that we are in a vicious cycle with factors that do reinforce themselves and make it increasingly difficult to keep it working. In fact, we may have reached the breaking-point of the system. Once past that, there is no way it can be « fixed », more and more resources would be needed to keep it working. The only solution is to stop that madness, step outside this destructive logic and come up with something new. Here is a first idea of what could be done.

Possible Solution

(1) Reform social security. Scrap different programs for people in need and Medicaid and pay every US Citizen a monthly “basic income” of USD 2800, which will cover basic needs for housing, food, clothing. This way people will no longer have to work to make a living. The basic income will not be taxed;
(2) people may earn an “additional income” by working on their terms and as much as they want, depending on their needs. This “additional income” will be taxed, but only lightly until it reaches USD 250,000 , see (6);
(3) Freeze all mortgages for primary homes in trouble and restructure them, so people can afford them, there will be no need for foreclosure;
(4) Set the maximum interest rate for debt that can be charged to 15% p.a., define maximum allowable charges;
(5) Tax consummation through VAT,tax Carbon (di)oxide emissions, tax transactions (wiretransfers, stock-exchanges, etc);
(6) Tax additional incomes (see 2) from 33,600 to 250,000 will be taxed lightly, starting at 4% ending at 12%. Incomes above 250,000 will be taxed progressively starting at 12% reaching 79.9% at 5mln. Higher incomes will be taxed at 99.9%;
(7) Tax large fortunes – above 100mln – progressively the higher the income, the higher the tax, starting at 35% and reaching 79.9% at 2bln;
(8) Tax large heritages progressively starting at 35% reaching 79.9% at 2bln. Limit amount that can be inherited to 200mln;
(9) Ban lobbying by corporations in any legal shape or form. Corporations were not meant to benefit from any right guaranteed in the bill of rights. They are neither “natural persons”, nor do they belong to “the People”. Therefore they cannot “petition the Government”.