Olivier Blanchard, Chief Economist of the International Monetary Fund says , ‘We don’t have a clue of what financial stability is’.

The war on terror is permanent, the government is hopelessly divided, and the financial ‘crisis’ shows no sign of coming to a close. And where national government should be investing in the future, they are cutting core public services: infrastructure, education, environment, meat inspectors. Welcome to the postnormal.

Eduardo Porter, Solutions Remain Elusive After Financial Crisis

One lesson from the crisis — first learned in the 1930s and corroborated in several contemporary analyses — is that when interest rates lose their power to stimulate the economy, additional government spending can help generate real growth. Still, the fear of “excessive” debt has led many governments to cut spending even in the face of economic stagnation.

Countries like Ireland and Spain have pretty much lost their ability to raise money in financial markets. They are now struggling to reduce debt with little success: cutting public spending in the midst of severe downturns only makes economic performance worse, adding to the debt burden.

Yet even in Britain or the United States, which can still borrow at near-record-low interest rates, governments have taken to cutting public spending at the expense of growth and jobs.

Perhaps this is natural. After all, the crisis upended a consensus. Economists and policy makers bred to think that all that was needed to run a prosperous economy was to keep inflation low, strive for fiscal balance and deregulate have found themselves in a more complex world. In this world, financial bubbles matter, capital flows are of dubious merit, low interest rates fail to stimulate growth and government spending becomes the only tool with real traction to spur economic activity.

And there is reason to be cautious. With total government debt in the rich world stuck at around 100 percent of its combined economic output, there is a legitimate fear that a rise in interest rates could tip off a financial death spiral. Moreover, if countries with debt levels well under 50 percent of G.D.P. were so devastated by the crisis, it is hard to imagine what might happen to them if another were to hit them.

Still, the argument against debt is often overstated. Disagreement and uncertainty among economists have given the political systems in Europe and the United States ample license to engage in austerity policies that frankly are proving counterproductive — making recovery more difficult and painful.

In his assessment at the end of the conference, Mr. [George] Akerlof [a Nobel-winning economist from Berkeley] argued that the response in the United States had been reasonable. From the bank bailout to the fiscal stimulus to zero short-term interest rates, “the economic policies postrecovery have been close to what a good, sensible economist doctor would have ordered” for the stranded cat.

But other economists were not quite as sanguine. Indeed, one take-away from the economic conclave is that it may be a fantasy to think that the world’s economies can be steeled to withstand a shock like those the financial system can provide. If so, the urgent task is what kind of limits should be imposed on banking and the rest of finance to temper its propensity to careen toward disaster.

Financial regulation is being tightened around the world. Banks are being required to raise more capital than before. Bigger banks face tougher rules. Still, there is no consensus on which new institutions might be needed to monitor and temper finance, or how tough the rules should be.

What good does the modern financial system do, for the rest of us? What determines financial fluctuations and shocks? How do they affect the broader economy? What can governments do to make them less disruptive? Economists have few answers.

“We don’t have a clue of what financial stability actually means,” Mr. Blanchard confessed.

Oh, great.

The leading economist have no clue what sort of ‘stability’ they are attempting to achieve, or how to achieve it. 

This will not end well.

24 April 2013 17 Permalink

The West Is Returning To Grassland

The great drought is making ‘ranching’ beef cattle unaffordable. I put ‘ranching’ in quotes because it sounds old-timey, and conceals the fact that it’s industrial agriculture, based on low-cost oil, abundant water, cheap fertilizer, cheap grain, and the beneficence of the US Department of Agriculture. And now that water is getting scarce — and likely to remain scarce for decades — the system is falling apart.

However, some ranchers are doing pretty well, principally because the reverted to native grasses in the fields, and are raising grass-fed, not grain-fed, beeves:

Stephanie Strom, A Long Drought Tests Texas Cattle Ranchers’ Patience and Creativity

[…] the Prices have had to buy hay to feed their cows during only two weeks in the last three years. Their animals graze the “bunch grasses” that were native throughout the prairie when the buffalo roamed and that Mr. Price reintroduced on his ranch after admiring their resilience on a small patch of virgin prairie left on his property.

Those grasses, which grow to five or six feet tall, have long roots that can tap into water far underground. Though they live a long time, when such grasses die, the roots deteriorate, helping to aerate the land for better water penetration. The thicker, taller grasses also create a kind of webbing that slows runoff, keeps sediment out of lakes and tanks, and creates shade that protects lower growing grasses and helps the ground retain water.

At times, Mr. Price rotates his cattle twice a day to give the grasses a chance to recover. He has not had to cull his herd, maintaining about 200 head throughout the drought, though he has not replaced cows as quickly as he would have if rainfall patterns were more normal.

He also has developed another source of revenue: hunters from Dallas and Fort Worth who pay to shoot the quail that like to nest in the bunch grasses on his land.

The Prices have won several awards for their land management practices. “I believe this is the best way to do it, not just for profit but also for sustainability,” Mr. Price said. “But every ranch is a specific entity with its own resources — its own shade, its own water.”

Asked whether he thought the Texas cattle industry would ever recover its former glory, Mr. Price thought for a moment. “We’re all very concerned about the decline in cattle numbers and also about the losses of infrastructure, feedlots and slaughtering facilities,” he said.

Reminds me of Joel Salatin of Polyface Farm in Virginia, who has been advocating grass-fed cattle for decades as the best way to convert sunlight into protein. It requires more human interaction — moving the cattle from one field to another to allow the grasses to recover — but less of all other artificial inputs. 

The recovery of the grouse speaks volumes about the recovery of the grasslands. In a few years, the only ranchers left in the dry lands will be the ones that fall back on tending the grasses, and using the cattle to fertilize them, with a valuable by-product: beef.

6 April 2013 33 Permalink

The Arab Spring And Climate Change

Anne-Marie Slaughter, Caitlin Werrell, and Francesco Femia have released The Arab Spring and Climate Change, but they stop short of saying that drought in the region and climate events elsewhere caused the Arab Spring:

“The Arab Spring and Climate Change” does not argue that climate change caused the revolutions that have shaken the Arab world over the past two years. But the essays collected in this slim volume make a compelling case that the consequences of climate change are stressors that can ignite a volatile mix of underlying causes that erupt into revolution.

This is a giant hedge, and when examined closely, as is the case in the collected essays, the evidence for a causal linkage is pretty solid.

All of these authors [the contributors to the report] are admirably cautious in acknowledging the complexity of the events they are analyzing and the difficulty of drawing precise causal arrows. But consider the following statements:

• “A once-in-a-century winter drought in China contributed to global wheat shortages and skyrocketing bread prices in Egypt, the world’s largest wheat importer.” (Sternberg, p. 7)
• “Of the world’s major wheat-importing companies per capita, “the top nine importers are all in the Middle East; seven had political protests resulting in civilian deaths in 2011.” (Sternberg, p. 12)
• “The world is entering a period of ‘agflation,’ or inflation driven by rising prices for agricultural commodities.” (Johnstone and Mazo, p. 21)
• “Drought and desertification across much of the Sahel—northern Nigeria, for example, is losing 1,350 square miles a year to desertification—have undermined agricultural and pastoral livelihoods,” contributing  to urbanization and massive flows of migrants. (Werz and Hoffman, p. 37)
• “As the region’s population continues to climb, water availability per capita is projected to plummet. … Rapid urban expansion across the Arab world increasingly risks overburdening existing infrastructure and outpacing local capacities to expand service.” (Michel and Yacoubian, p. 45)
• “We have reached the point where a regional climate event can have a global extent.” (Sternberg, p. 10)

In September 2011, I wrote here, 

Youthful hope may soon change into embittered and obdurate anger, unless structural changes in the economy take place, not just a series of political coups unseating pharaonic despots.The Arab Spring has been mythologized into a renaissance of suppressed people, catalyzed by the agency of social media. An uplifting passion play, suitable for several upcoming major motion pictures, I am sure. But for those that are looking closely into the drivers of the unrest there, you will find deep unemployment caused by rising food prices tied to long-term drought in the entire region and food production problems elsewhere. The transition of power that will follow won’t turn Libya and Egypt into Spain and Portugal, after the fall of their fascist regimes. Tunis and Cairo won’t morph into Westernism with something like parliamentary democracies, closely integrated into a neoliberal world, the way that Madrid and Lisbon managed to do. So I suggest that the heated rhetoric about those countries be cooled for a bit, until we can see the shape of what emerges. Most importantly, the drought, high food prices, and endemic unemployment and lack of opportunity for the youth of the Arab world has not been banished with Mubarak and Gaddafi. They will be with us for a long time to come. And youthful hope may soon change into embittered and obdurate anger, unless structural changes in the economy take place, not just a series of political coups unseating pharaonic despots.

It’s increasingly clear that the drought is continuing, perhaps even worsening, and climate-related agriculture problems in other places — like the worsening droughts in the US and China — are leading to a rise in food prices worldwide, which will continue food price pressures in the Arab world and elsewhere.

3 March 2013 6 Permalink

Welcome To The Postnormal: Globalization In Decline?

In a recent McKinsey report, Financial globalization: Retreat or reset?, we can see that cross-border capital flows have collapsed since 2008, and remain more than 60% below the 2007 peak.

As the report states:

Western Europe accounts for some 70 percent of this drop, as the continent’s financial integration has gone into reverse. Eurozone banks have reduced cross-border lending and other claims by $3.7 trillion since 2007, and central banks now account for more than 50 percent of capital flows within the region.

Even beyond Europe, global banking is in flux. Cross-border lending has fallen from $5.6 trillion in 2007 to an estimated $1.7 trillion in 2012. In light of new capital and regulatory requirements, many banks are winnowing down the geographies in which they operate. Commercial banks have sold more than $722 billion in assets and operations since the start of 2007; foreign operations make up almost half of this total. Expanding the debt and equity capital markets will take on greater urgency as banks scale back their activities.

Takeaways:

Commercial banks and sovereign investors are drawing back from globalist investments, and looking closer to home for investment opportunities. Also, there is a major transition in international capital flows to old school foreign direct investment — owning all or part of foreign businesses — which is a much less volatile form of capital flow.

The authors suggest two scenarios, one which lines up with my theories of the postnormal economy we are careening into. That is a return to more domestic capital formation: glocalization, where nations and regional economies reject the high risks and volatility of globalized capital.

McKinsey is more sanguine about a second scenario, which is a lala-land ‘sustainable approach to financial-market development and global integration’ which would support high growth but sidestep the excesses of the past. Yeah, sure.

We should expect a continued disintegration of the globalist money machine, as distrust and discord divide even the advanced economies of the West. The message to us in business is clear, perhaps even stark: the high flying globalism of the late postmodern era — from the ’70s to the ’00s — has crashed. We’ve seen peak globalism, and the world is becoming a more divided place.

2 March 2013 23 Permalink

Time To Rebuild The US Infrastructure For The 21st Century

I hate when economic issues are hashed over without hard numbers. There is a strong incentive for the US to upgrade its aging infrastructure, which was estimated in 2010 as needing $1.6 trillion by the American Society of Civil Engineers: this is dams, bridges, the interstates, the railroads, and our ports. It’s likely to be much higher now, since the Great Recession led to cuts in spending so maintenance has fallen off. And of course, the longer you wait to fix these these, the more they age and fall apart, causing even more expense.

Eduardo Porter, In a Shovel, a Cure for Our Stunted Economic Growth

“We’re almost there in terms of fiscal adjustment,” said Simon Johnson, a former chief economist of the I.M.F. who is now at the Massachusetts Institute of Technology and the Peterson Institute for International Economics. “If we don’t do it now,” he asked, “when will we?” […]

But there is another way to look at our policy options. It just requires analyzing more closely the potential return on public investment over the long term.

Mr. Summers points out that there are many profitable investment opportunities for the government to improve the nation’s physical infrastructure, opportunities that would yield much more than a dollar in economic output for each dollar spent. There is also plenty of idle capacity in the construction industry — unemployed workers, unused machinery. And the government can borrow for 15 years at negative real interest rates.

While he argues that we also need commitments now to reduce future budget deficits, not borrowing the money now to make the investments would be unconscionable. Some of them may even pay for themselves.

Putting fallow resources to work — which also means employing men and women who are becoming obsolete — will, he suggests, bolster growth more than people expect. “It’s not like we’re never going to fix our infrastructure,” Mr. Summers said. “Not doing it now burdens future generations just as surely as more debt does.”

The US has the lowest lending rate available now: it’s actually negative. So President Obama should move as aggressively as possible to attack this grave and growing problem.

And of course, he should use the opportunity to create a much faster nationwide Internet, in partnership with corporations like AT&T and Google, or better yet, to nationalize it, like we did with the highway system. This should also include high speed train between major US cities, to decrease the costs and CO2 of airplanes to the greatest extent possible.

It is your time to lead us in the future, Mr. President.

13 February 2013 30 Permalink