Miscellaneous from Recent Periodicals

I blogged reports of China's Real Estate Boom and land buggle. Many Chinese State owned companies are winning auctions for land on which they are building luxury residences and retail outlets. In 2008, 59% of land auctions was won by state-owned companies -- up to 82%. 90 of 125 state-owned firms have real estate divisions. Land prices jumped 750 per cent. State owned banks made 1.4 trillion loans, double the previuos numbers. Municipalities are part of the problem. They are forbidden from buying real estate directly. But they do borrow money to build infrastructure on land they already own. They hope to sell the land at greatly increased prices. (Page A1, A5, "State-Owned Bidders Fuel China's Land Boom", David Barboza) New York Times, Monday August Second 2010 Volume CLIX NO 55,120

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Paul Krugman has advocated in his blog increasing the money supply, monetary stimulus to overcome the inflatiohn. One in six Americans rates are v are unemployed or underemployed and the average length of joblessness is thirty-five weeks. Apparently, policy makers are defining our expectations downard accepting that. Foreign investors are still buying foreign bonds and federal interest. And he said that we should increase inflation to stimulate the economy. He suggests that we might allow inflation to reduce unemloyments. Dr. Krugman is concerned that in the near future, the government will declare the high unemployment structural, the long-term unemployed will lose their skills and social capital, making a self-fulfulling prophesy. An alternative is targetting spending.

Paul Krugman, "Defining Prosperity Down" Page A15 New York Times, Monday August Second 2010 Volume CLIX NO 55,120

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I reported earlier the Marmot study of WhiteHall employees, as people rose up the hierarchy, they had better health, even though all enjoyed job security and the same National Health Service. This argued against hierarchies, and possibly reporting to sortition juries rather than "a boss" is better for one's health. Wired reported that hierarchies in baboon's led to increased stress hormones and bad health. Dr. Elizabeth Gould showed that stresses reduces dramatically the birth of new neurons in the brain. Epidemiologic studies with humans, that showed that having control over one's job demands improves health, but having to follow orders is detrimental.

"Under Pressure" by Jonah Lehrer Wired, August 2010, 18.08, page 130 to 146.

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Factoid: The Average American House is 2,438 square feet. Page 074, Wired, August 2010, 18.08

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A Wired reader suggested that passengers in an airplane might collectively brainstorm to solve the world's problems as "they all just sitting there." They should collectively serve as the sortition jury, say on taxes that a person or business should pay or help choose a tax code. And the real source for crowdsourcing should be mass transit; mass transit takes longer than driving with starts and stops and not being able to take the most direct route. Of course, there is enough time outside travelling time and Participatory democracy can occupy the unemployed.

Wired, August 2010, 18.08 , Page 017

Sovereign debt defaults

GMO has a wonderfully written piece on sovereign debt, an issue I touched upon here. Both I and other bloggers say his paper is a must read.

For those who don't have time to find it ont he net, here are the points that caught my eye. Many people point to debt to GNP ratio in their concerns

1. Russia defaulted in 1998 when goernment debt was 12.5 percent of GDP.
2. Japan has a debt of twice its GDP and its government bonds yield from 0.13 percent to 1.81 percent depending whether one looks at three months or three decades.
3. Adam Smith and David Hume were very concerned about the real growth of English debt after the Napoleanic wars. Here debt was 250 percent of GNP and the percentage was similar in the interwar years and after woerld war II. During the first run up, the electorate, which was a small percentage of the demos, voted for deflation so their government debt holdings increased in value. And the debt went down from Napoleonic levels.
4. In the depression, there were major defaults; 90% of foreign bonds sold in 1929 subsequently defaulted.
5. There have been cycles of international ledning and default goign back to the 1820's. Often a bank panic in London or New York precipitates the wave of defaults.
6. In 1820's, Greogor MacGregor posed as the rule of a fictitious Latin American country and got a loan from a London bank.
7. Latin American countries defaulted several times. This started in 1820--shortly after their independence.j
8. In 1557, Emperor Philip II of Spain defaulted--and they still had their colonies producing gold. The "first international credit crisis" Short-dated debt was 3.5 times revenues. Just before this default, he was paying fifty percent annual interest.
9. Dudley Baxter in the 1800's said that governments in sourthern Europe were spendthrift. Spain defaulted thirteen times since 1800. Portugal defaulted five times.
10. When countries were able to reduce their debt to GDP ratio, they did it by strong real growth as England did with the industrial revolution and its empire and the Scandinavians did.
11. Public finance is a Ponzi scheme--people keep buying the debt of these countries, which money is used to roll over (i. e. payoff) earlier purchases of debt.

Henry T. C. Hu talked about GMO in his article in Business Lawyer. Richard Cheney, Senator John Kerrey and Harvard University use Gratham, Mayo, Van Otterloo and Company for asset allocaton and it regularly posts history and predictions thereto.

I will talk about this article later on portfolio asset class returns, "The New Portfolio Society, SEC Mutual Fund Disclosure, and the Public Corporation Model, August 2005, 60(4), page 1303.

For Future Thoughtful Thursdays

1. Walter Bagetot The Danger of Lending to Semi-civilized Countries 1867
2. Max Winkler foreign bonds: An Autopsy 1933
3. Ilse Mintz, Deterioration in the Quality of Foreign Bonds Issued in the United States 1820 to 1830, 1951.
4. Carmen Reinhart and Ken Rogoff, This Time is Different 2009.

Pointer to a wonder ful article

John Mauldin published an excellent article on financial engineering in the collateralized debt offerings that were associated to the forest. It echoes the division of an income stream into the most reliable and the least reliable that I talked about from John Edmund's book , last week's thoughtful Thursday post.

He also says that many governments are having rapidly rising debt to GDP ratios. And now Japan is the only country with a two to one ratio--all of its citizen's investment is funding public debt. Other nations are likely to hit these ratios.

However, as interest this is scary, twenty percent of a nation's GDP to paying interest in the public debt. However a one to one or two-to-one share economy. this number goes down to one or two percent.

debt and the deficit, thoughtful Thursday

Robert Heilbroner and Peter Bernstein, The Debt and the Deficit 1989, WW. Norton, New York

Arguments over our debt being too big are not new! As our book pointed out, when Kennedy proposed a ten billion deficit to deal with what we would now consider a mild recession, people were aghast. In 1988, a poll of the American People said that the deficit was the number one issue (by fourty-four percent to the next closest, "protecting jobs from foreign competition.)

At the time of the book, the deficit was 2.6 trillion or ten thousand dollars for every man, women and child. Now, the United States household debt (including mortgages and credit card balances) is 13.5 trillion and the federal government debt is about seven trillion (1) or about 20 trillion. That works out to $43,874 and $30,000 per United States Resident. Or more realistically, as some people are not working, about $60,000.00 per worker for the public debt and $30,000.00 for private debt. The average student graduates with about $23,000.00 student loans outstanding.

Drs. Heilbroner and Bernstein also pointed out:

1. If we adjusted for inflation, the debt owned by the U.S. government itself, the fact that some of the debt goes into productive assets, which would be a capital budget if the government were a corporation, and that the states have a surplus, as a whole the United States governments, local and federal, have a net surplus
2. Debt as a whole is increasing. Even though mortgages are generally paid off, the total mortgage debt increases as people take out new mortgages, either to buy existing houses under mortgage or new constructed houses. Between 1970 and 1988, home mortgage debt increased seven times Corporate debt went from $363 billion to two trillion and major corporations never pay off their debt. IBM and EXXON debt went up by a factor of nine as well.
3. There is no correlation between how much a country increases its debt and its real interest rate--government borrowing does not "crowd out" private borrowing

(Dr. Krugman, and noble laureate and excellent blogger, showed a graph of borrowing for Britain and Britain twice had very high ratios of deficit spending (250% of GNP)--in 1830 and 1950.) And Mr. Souza of Brasilia, Brazil, in a comment on same, quoted extensively from Lord Macauley. David Hume declared that Britain's National Debt would be its ruin and earlier, Adam Smith made similar warnings about a bankrupt society. But Lord Macauley cited the many signs of progress in Britain at the same time as the debt was reaching unprecedented levels, at these times.

Also, they observed that perhaps the trade deficit caused the federal deficit. Note that in the late nineties when we had a balanced Federal budget, there was still a bad trade deficit. Table Eleven ranked the major economies on the basis of government debt and on their trade deficit. The United States was six out of seven on the federal deficit size and the worst on the trade deficit.

And, of course, the United States is by no means the highest on the list of countries, when ranked by public debt as a percentage of GNP. Japan is the highest at 198 per cent (excluding Zimbabwe). My University college of business and Technology ethics day had a talk on sovereign debt. They pointed out that although Japan had a very high public debt, 90% of this was held by Japanese. The United States was at 61.5 percent and is comparable to countries such as Canada, Germany, France.

Scary Numbers!

But what if we converted our debt to a share economy, dividing that figure by five per cent. And make it a share of income. Average income is $30,000.00 in the United States. Assume that this income is for the next twenty years. Or we are left with about a ten percent share. That means the United States worker would be free of all debts and worries, The median Salary in the United States for men is $45,000 and $35,000 for women. They would just pay about ten percent of their income.

Dr. Krugman looks at the federal deficit differently. Currently, the Federal Government pays 1.5 percent on ten-year debt. Even if our total debt was equal to our gross domestic product, then the cost per individual is 1.5%--probably not even noticable. Paul Krugman pointed out the danger of relying on short term debt and a commentor pointed out the folly of relying on ten year bonds--what happens in ten years? We may not be able to renew the debt. This is why the share economy calls for the end of arbitrary time restrictions on contracts. We saw what happens to reliable companies when debt becomes due at some arbitrary time that has no relation to the real world.

Whichever percentage and way one looks at, the debt holder would be in about the same position. There is no interest but assuming wages or income rises with inflation, the debt holder would not be damaged by inflation. And the debt holder also benefits from the natural growth of the economy, improvement in productivity, assuming same are reflected in the wages.

Reference

Mark Whitehouse, "Americans Pare Down Debt" Wall Street Journal March 12 2010, Page S1 , CCLV no 58. Note, the article said that reason debt fell 1.7 per cent in 2009--people cleared their debt by declaring bankruptcy, giving them a fresh start in life, but creating problems for our financial system.