Saturday, June 16, 2012

It is not a financial crisis at base

The world media and people in general keep talking about this as a credit crisis.  And how to 'fix' the credit system.  And there certainly has been many measures passed to 'fix' the credit system. 
But what if the whole financial meltdown is simply the reality of the political-economic system revealing itself in financial terms.

The financial system is a representation of real wealth.  Where pieces of paper(contracts) are assigned relative values to each other, and most importantly to things in the real world.  £2 pounds can buy 12 eggs.  £20,000 pounds can buy a new car.  1,000 shares of XYZ corp is currently valued at xxx pounds.

An analogy is when the Soviet Union began failing.  Was the monetary problems in the Soviet Union during the late 1980's a failure of their credit system.  Or was the failing credit system a manifestation of the deteriorating reality of the Soviet political-economic system as a whole.  

You know the answer to that question.  You intuitively know that the Eastern European communism was failing as an economic system by the 1980's.  Drowning in an ever rising tide of bureaucracy.  Trying to compel people to do things against their own human nature.  Increasingly trapped in laws/regulations and so forth.  It became unmanagable.

I see Western European democracy as now coming to the same end game.  Never ending bureaucracy, the huge nanny state, a ruling ideology that is incompatible with human nature, never ending laws.
Russia eventually found a new system.  It cannot be admitted in the Western press, but the new Russia works.  There is actual real jobs for people, there is big opportunity, real projects are actually being carried out and completed.  I notice 'miraculously' Russia's financial system is functional.  Its banks do not need bailouts.  Are we so stupid that we believe it is because Russia has better banking regulations than us?
Isn't this idiotic worship of regulations and laws as our salvation, part of what has gotten us into this morass?

Tuesday, June 12, 2012

Why the Banks are Dead Long Term

For this explanation forget about banks that lent recklessly. Lets imagine you own a bank only lending at normal historical standards. And lets just talk about mortgages because it is the type of loan the average person is most familiar with.

At your bank you have 1,000 mortgages on the books. The downpayments are 20% of the home value. You are in a wealthier area so every borrower has a family income of £100,000 pounds a year, and all your mortgages begin as £300,000 on a £360,000 property. On the downside because you are so conservative with your loans, the spreads between what you get money at, and the rates you charge customers is small.

But change is afoot in the society. Robotics are taking jobs in factories, computers are replacing the mass cubicle workers, machinery is advancing and reducing man hours per job, foreign trade is causing factories to shut down, foreign workers are taking over jobs at home.

In Britain like clockwork the labour force is shrinking by 125,000 people a quarter. Half a million a year. Since the labour force is around 27.5 million, this 500,000 loss a year is 1.8% of the workforce disappearing a year.

So of your 1,000 mortgages, 18 a year are eventually defaulting. Now this is not a problem as long as you can seize the property and sell it for more than the 300k loan. (Hence the total focus of the UK government on keeping property price up).

There is another problem, since probably 80% of those mortgages are based on dual income, there is actually 1,800 incomes paying your 1,000 mortgages. Without both incomes they cannot maintain the loan. so 1,800*.018=32 a year who will eventually default.

There is an even bigger problem though. As a surplus of labour builds it eventually drives down the wages of those who do hold onto their jobs. So a great deal who are holding onto jobs will be facing loss of overtime, benefits cuts, even wage cuts. And if severe enough they will eventually fall into default.

Eventually with the labour force shrinking and wages falling, the prices on properties will come down. This is where you lose that cushion of the 20% down payment.

In the future if these trends continue banks will have to charge much higher rates on even safe loans. Like 8% would allow them to absorb the losses, run their organizations and still make a return on investment for their shareholders.

What screws them is they have millions and millions locked in on huge mortgages at exceptionally low rates. Going to 8% would crush the housing market, and cause mass defaults on their current mortgage pools.

I think the only option is continual bailouts and gradually rising rates the banks are charging until the business becomes viable again. Which is what we have been seeing.

Friday, February 3, 2012

Half the economy on Health Care by 2050

The next paradigms of medical technology will start going after the aging process. An interesting statistic that I read is if we cured every disease, so no one died of heart attacks, cancer, kidney failure.. etc.. we would only add 12 years to the average life expectancy. From 80 to 92. See the diminishing returns?

When you are 85 years old, even if you take something to cure your Alzheimers.. realistically something else is going to get you shortly. The whole organism if failing at that point.

And not just slowing down the aging process, but actual reversal of aging damage. The opportunity is limitless from the perspective of 2012. I believe the USA is ahead of the rest of the world as usual, and now spending near on 20% of their economy on health care. I expect it to be 50% by mid century.

The biological body is of such astonishing complexity that we are talking millions of man years of research that is needed to go and figure out how to reverse this aging damage.

Thursday, February 2, 2012

Big Pharma and diminishing returns

I've been saying for quite a few years now there is just no good drugs left to find. All the juicy oranges in the orchard have been picked already.

Big Pharma gave it a Herculean effort during the last decade.. in the face of finding fewer and fewer promising drug, they ramped research spending up to staggering amounts. However not many drugs were found.

Now Big Pharma had to admit the truth to themselves, and the completely logical thing to do is shut down most of their research. The big pharma companies will become distributors of generic drugs. Well the surviving companies which are left after they buy up the other companies. And generic drugs is a great and profitable business.

This is about the fifth paradigm of health technology that has been explored and then faced diminishing returns. Vaccines was an earlier one.. once they got vaccines for the big 5 killers of mankind, that accounted for about 99% of the deaths from contagious diseases.. there was not anywhere else to go. They have managed to make an industry out of chasing that last 1%.. but again diminishing returns.

Wednesday, February 1, 2012

If computing was like housing, thought experiment

Probably 50 million Brits own a computer.  I could set up a shop selling computers and software to any person I wanted.  Anyone is allowed to use a computer.

But imagine the 'capitalists' wanted to do to computing what they did to housing.  The government would restrict sales of computers, say to 1 million a year, instead of 10 million currently.  And only a few politically connected companies would have the rights to sell them.

Instead of 50 million Brits owning a computer, only 10 million would be allowed.  You would have to purchase a license in order to own a computer.  Only the richest people could afford to, by outbidding the other people.  The winners would be the people who had the licenses.  Which would be determined randomly at birth to start.

But then 'investors' would be allowed to purchase the licenses.  And lease them out to people who wanted to the highest bidders who wanted or needed to use a computer.  They then would make a profit when the value of the license 'appreciated'.  And of course to buy a license you would surely need to take out a bank loan.  Then through the leases you could make the monthly payment on your loan.  The banker would be a happier man.

Needless to say it would be sick to restrict computing in this way.  But that is exactly what Britain does with a basic human need.. shelter.  Actually Britain does this in most areas of life.  Computing is the exception that is useful in showing how idiotic this way of setting up your economy is.  (and why Britain has no hope in hell of competing in a global economy, when we have so many parasites sucking us down every step of the way).

Sunday, January 22, 2012

East Asians buildup of capital

Somehow I think Britain forgot what capitalism means.  Its could be free markets, but you can have a capitalist economy in regulated, restricted markets.  And its not about city speculators gambling on the futures market.  It is about the relentless buildup of industrial capital.

So I was reading in 1990 your average Japanese worker was working with 250,000$ of capital.  And your average American worker was working with 250,000$ of capital.  But by 2005 your average Japanese worker was working with 1,000,000$ in capital, while the American was still at 250,000$.  We have some capital plant in Britain like that.. like a 3 billion dollar steel mill with 3,000 steel workers at the site.  Its not a big deal to pay a worker 100,000$ a year if they are working with 1,000,000$ in capital. 

I asked a question on another thread.  Would you rather be born into a family of artists who owned successful design company.  And one day you could become the chief designer.  Or be born into a family that owned £300 million in transport ships, and one day you could own the ships.

You see when you become that chief designer there is intense competition and no barriers to entry(and you have to go into work everyday).  The chances of you continuing your parents success are slim.  Otoh when you own the ships even if you are a complete and utter moron, you simply simply hire a shipping management company to run your ships.

The East Asians are thinking the same way.  They don't want the hip automobile design firm in Milan, Italy.  They want to own like the steel mill which provides the steel for the car.

Why production still moving to Asia

Would you locate production in a country that had out of control legal system that could hit you anytime, onerous labour laws, unions, a mountain of ever changing environmental and other regulations... fat, lazy populous who is anti-business, a government which is radically anti-business.

Or in a country powering forward and who wants real industry, like your business. Who couldn't care less about things like the percentage of women in your management. All they care about is you creating real wealth in their nation.

I think even when Chinese wages surpass European levels, production will still stay there. Just like it is staying in South Korea and Japan. Actually still production is moving to South Korea and Japan in many areas like shipbuilding and aviation.

The same question was asked recently with regards to automobile production. Why was GM moving production to Korea, when Korean industrial wages are higher than American industrial wages? Well for GM it is simple, they look at the output they get per $ spent, and they simply get more

Saturday, January 14, 2012

Keeping the real value of your paper wealth

One way I look at real value is how many hours of the median workers wages does it buy.  Right now in the SE a home is basically an entire lifetime after-tax earnings of the median British worker.  35 years * 50 weeks * 40 hours per week * say £8 an hour = £560,000.  The median detached in greater London went for £850,000 last year.

Basically how do you keep that claim on other peoples labour.  Of course it gets more complex when you look at things like Bangladeshi workers competing for your money who make 1/50th what British workers do.  Now holding that labour value becomes extraordinarily powerful. 
If you owned a house free and clear in London and sold it and managed to keep that value of claim against Bangladeshi labour.. you have a claim of 50 lifetimes of labour. 

Friday, January 13, 2012

Re-rise of the deflationistas

I was one of the die hard deflationistas, predicting that we'll never see >1% base rates in any of our lifetimes again. And that the government would be printing money to battle deflation. However I did not expect the government to print hard enough to cause a 5% inflation.

I also knew there was serious systemic problems in our economy causing price inflation, besides monetary reasons. Like growing regulatory burden, cartelization, corruption, choke points, etc..

So when the 5.5% inflation came I had to back down from the deflationista argument, except I still stuck to the printing and base rate parts of it. It is not like they created inflation by having heavy consumer demand coming into the economy and bidding against each other for a limited supply of goods. This is an alarming inflation with a fall, even collapse in consumer spending.

But now I am starting to see signs of deflation re-emerging. Despite the authorities trying everything to put their beloved credit bubble, Humpty Dumpty back together again.. with falling incomes, rising unemployment, other factors are overwhelming them.

First off for younger Brits >50% of their monthly after tax income is going to housing costs. Clearly housing costs are falling. Even though the authorities are censoring any information showing declining nominal house prices. If people are unemployed no matter how much propoganda they are bombarded with they cannot pay £450,000 for a small detached house. The standoff where sellers never sell, just put the thing for sale at unrealistic prices will eventually end.

Secondly look at what is happening to the big boxes. They are seeing outright declines in yoy sales. And these are nominal numbers, so horrific/historic falls in inflation adjusted yoy sales. And they are now being underbid by super discount chains like poundland. Also immigrant merchants with low overheads are hawking imports for surprisingly low prices. The big boxes have said they are going to respond with a price war. Which they have to, because their market is starting to evaporate.

I was shopping with a lady friend of mine who doesn't have much money. And she did her shopping for under £10 at a pound store. Toilet paper for under a pound, all these brands I had never seen before in my life. I remarked to her, this is the convergence where British prices converge with Asiatic prices in the global market. Our idiot leaders wanted it both ways, they wanted British wages to converge with Asiatic wages, but for British prices like house prices to keep inflating. = profit.

This convergence can play out for years. Because right now we are still paying 10x the Asiatic price for things. Yet our workers are being forced to compete 1-1 on the global marketplace. It is so blatantly obvious where this will end.. the lowest cost producers will triumph.

The big boxes now are going to occupy the mid-level in British retail. Now that the high street died a bloody death, the ultra high end, with the new entries taking the low end.

Thirdly the interesting phenomenon of the Food Trucks. British consumers simply cannot pay for the overheads of a McDonalds. The premises, the endless management chain, advertising, middle men, etc.. Its not even a question anymore of wanting to, if you cannot afford it you cannot. Like in retail, new entrepenuers are coming in and providing a service at a cost customers can afford. Cutting out the middle men.

Tuesday, January 10, 2012

Factors in the rising unemployment

Its hard to look at one industry in isolation because even if it falls to nothing in employment, if the cost of its service is much lower, presumably people in the economy have extra money than before and spend it elsewhere. 
But if you look at the economy as a whole it is blatantly obvious that we are losing jobs in net.  About 125,000 a quarter like clockwork for the last few years. 

The question then is why are we losing jobs in net. 
-There clearly is insane over-regulation that is choking off business
-There is the effects of globalization -although here libertarians argue that it cannot have a net effect because when we buy something from China in £, the Chinamen then have pounds they have to at some point use.  Whether it is buying British products, or investing capital in Britain.
-Technological job loss - this idea is just entering mainstream thought.  Before it was simply dismissed as Luddite paranoia.
-Monetary issues - This is the idea that the western world has latched onto.  That the job loss was from a lack of credit in the economy.  There is some truth to it as well.  But Britain's experience has really called into question this theory.  We managed to get into a strong inflation of 5% and monetary theory is that it should lead to overheating in the economy, but a low unemployment rate.  Yet the net job loss still ticked along at 125k a quarter.

Friday, January 6, 2012

Incentives in our Society

I was talking to a woman and she was telling me about her back problems. Allegedly a disc pops out of alignment, and the chiropractor puts it back into alignment. But she has to go once a week for a visit to the chiropractor, or else her back starts getting sore again.

So I asked her, why does the chiropractor not push it in so it stays in alignment? Then I felt stupid because the answer to that question is obvious. If the practitioner actually cured the problem he would not be able to make a career out of it. Right now he only needs about 100 or so regular customers to have a thriving little business, that puts food on the table for his whole family and pays all his costs for a lifetime.

In my utopia this man would cure people for good. But he would not be able to make a career out of it. So there would be no professional expert to go to if you needed help. He would be stacking shelves at Tescos. Even if he somehow knew the knowledge finding out about him would be near impossible, as there would not be enough money to market it. Now back issues might not be the end of the world, but realize the same is true across all human health areas, and indeed all areas of society.

You might think well this is a problem with capitalism. Which is true. But it is also a problem with socialism. The NHS and its contractors now employ 10% of the population of Britain. With that growing every year. They rarely cure anything, only treating symptoms, that is if you keep buying drugs, getting tests, going for operations and visits on an ongoing basis. Look at all our bureaucracies they never cure anyting. If they ever did they would be out of a job.

Another of the countless examples if the housing administration in Britain, to help people afford housing. Yet everything they do is to make housing unaffordable.. which keeps them employed.

Wednesday, January 4, 2012

Young generation and house prices

On a fundamental level in Ireland, US, UK.. the future buyers are the younger generation. And at least 30% of them are unemployed with that rising every year, and another 30% at least make less than 10 pounds an hour. So at least 60% of an entire generation will not be buying a home ever.

Add in rapidly rising basic utilities and food costs. And add in declining wages and the future demand side becomes even weaker. Even at 160,000 Euros in Ireland for the median, it still seems unlikely the young generation will be able to buy those. All though we are closer now than when prices were 380,000 Euros back in 2007.

Where I could possibly see an equilibrium is when Ireland median house hits 50,000 Euros.