Cyprus – A Few Thoughts

The confiscation of a large proportion of Cypriot bank deposits – above a €100000 threshold – as part of a financial program between Cyprus and the EU/IMF signals a new chapter in the developing crisis. Here are a few thoughts to be considered in conjunction with the comments of Dutch Finance Minister Dijsselbloem (Eurogroup head) in an interview with Reuters here:

  • The determination of EU leaders to stick with the Euro-Project has been underlined. It clarifies that the EU/ECB are prepared to utilise all sorts of measures, many of which might almost have been considered taboo until now.
  • The ECB has shown itself to have a much more stringent approach than the Anglo-Saxon central banks. The confiscation of deposits is intended to raise only a measly €5.8 billion. The ECB could easily have printed up the base money for this, but did not do so. Compare this with the massive bond-buying programs taking place in London and New York – as well as Tokyo.
  • Large depositors will from now on be regarded not as savers but as investors. That is, they will be expected to have performed due diligence regarding the financial health of the bank, and to bear a part of the losses should things turn out not as well as forecast.
  • Large depositors will become understandably much more skittish with regard to leaving their money in bank accounts, particularly in the other crisis-hit countries. Although some have laid emphasis on the special nature of the Cyprus situation, it would be a foolish saver who left several hundred thousand Euros in a Greek, Spanish or Portuguese bank account from now on.
  • Interest rates available to investors in bonds or to bank account holders throughout much of the West are now below inflation rates. This effectively constitutes a form of confiscation. For example the 10-year US Treasury Bond currently yields 1.84% compared to an official CPI (inflation Rate) of around 2%, while John Williams of shadowstats estimates the real inflation rate to be about 5,5%. Rates offered by banks on savings accounts are generally below the inflation rate. Given these facts, together with the general global financial environment and the prospects going forward, anyone whose savings are in a bank account needs their head examining.
  • What these measures imply is that as determined as the ECB is to maintain the Euro’s role as a medium of exchange, it is not particularly interested in promoting the Euro as a means of saving. Historically, currencies such as the British Pound and the US Dollar have attempted to fulfill both roles – to be all things to all men.
  • The confiscation has not been sold too badly to the mass public in the EU, particularly after the decision was taken to spare accounts with less than €100000. The fact is that a large proportion of the population lives from paycheck (welfare check) to paycheck (welfare check) and has no savings to speak of. They thus do not identify with the large account holders. Added to this, the typical large account holder has been depicted as a Russian oligarch whose money is of dubious origin. This has helped the confiscation to attract support. That many of the affected savers may for example be small businessmen (restaurant owner or builder) and that the money represents the work of many years has not received the same attention.
  • The reset is getting closer.
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Higher Education – The Impact of the Internet has been underestimated

The established model of higher education is roughly as follows. A young person – typically 18 to 22 years old – dedicates a portion of their lives, usually 3 or 4 years, to the acquisition of a piece of paper, which certifies knowledge or competence in a particular field. This involves large opportunity costs, as for the duration of the course the student is usually only able to work part-time at most. In many countries (the UK and particularly the US) there are also substantial direct costs, with students taking on debt to finance their studies. Other costs in this process are:

  • Travel costs for students. Lectures, seminars etc. are held in central locations, to which students must travel.
  • Infrastructure costs, the institutions involved must dedicate substantial resources to the provision of buildings, equipment etc.
  • Personnel costs – an army of lecturers, teaching assistants and so on, many of them mediocre, together with an auxiliary army of bureaucrats to administer the whole process.

Several organisations, such as coursera.org, have begun offering university-level courses to the public via the Internet. The lectures are videos and the students have the opportunity to interact with each other and the academic staff via discussion groups etc. Although this approach is still very much in it’s infancy, the potential is clear, with not only cost savings a prospect, but also qualitative benefits. A list of advantages:

  • No necessity to travel to a central location – saves money and time.
  • Fewer infrastructure costs, mostly servers, networks etc.
  • Vastly reduced personnel costs, attained through massive reduction of bureaucracy, but also a reduced number of lecturers. With this model a good lecturer can now reach potentially millions, rather than at most several thousand.
  • Flexibility- a student can work through the study materials in his own time, at his own pace. This makes it much easier to combine study with work or with family activities. This approach also makes it much easier for people of all ages and at all stages of professional/career developement to study.
  • Since many fewer lecturers are needed, all lectures can be delivered by the minority of very good ones – improvement in the quality of the learning experience. Those who prefer to spend time on research, but who often have teaching commitments, will be freed to do so.
  • Greater control by the student of the learning experience. For example, if the student has difficulty comprehending a concept at a particular stage in the lecture, he can pause the video to think, to research the question elsewhere, or to simply review that particular part of the lecture. After understanding is reached, the video can be resumed.
  • Enhanced networking among students to facilitate learning through discussion fora etc.

It is of course neither possible nor desirable for online study to completely replace bricks-and-mortar colleges or universities. What it will do however, is revolutionise higher education by sinking costs, delivering overall a better standard of education, and shaking up the often comfortable world of academe.

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Anxious Economic Gravity

Watch this lecture at the LSE by Jon Moynihan of PA Consulting to realize that western economic decline will continue and that the central cause is the massive wage disparity between the advanced economies and developing countries. The figures he cites – from the OECD and the UN:

                                                               Labour Pool                        Average Daily Wage ($)

Advanced Economies                         500 million                          135

Developing Economies – Urban      11oo million                         12

Waiting to Urbanise (rural)            12oo million                         1-2

One can liken the advanced (western) economies and the developing economies to two large tanks of water directly adjacent to each other, separated by a sealed partition, with the volumes of the tanks representing the sizes of their respective labour pools and the water levels in each tank analogous to average wages. As long as these tanks are hermetically sealed, then each will have it’s own water level.  Should the partition between them be removed, creating in effect one larger tank, then over time a common water level will be reached. This common level will be determined by the volumes of water in the tanks in relation to each other (size of labour pool) together with the starting level in each tank (average wages). The globalisation of the past 20 years has been the removal of this partition. Moynihan suggests that, depending on various factors, the average global wage could come out at around $60/day after several decades.

Moynihan thinks that the West, if it makes certain responses to this situation, can manage the process ‘in a much more clever way’. Otherwise he says catastrophe will result. He sees these measures, such as more investment in education or the curbing of excess banking profits, only as a means of smoothing the decline. However, his own presentation makes clear that the chances of managing the decline effectively are small, given that the suggested measures are all too little, too late, or face too great a resistance.

So if you are living in the West, what are you to do? Given that there can be no effective societal response, the only answers are individual ones. Raise your game by developing your skill set and acquiring new knowledge, instead of resting on what you have already achieved. Save instead of going into debt, develop several streams of income, consider migration. Perhaps above all, avoid looking to the state or society for solutions.

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Waiting for the Reset

Since the collapse of Lehman Bros. in September 2008 the global financial system has been on life support. The insolvent banking system was rescued at the cost of a greatly increased sovereign debt burden. To support the financing of this debt burden, interest rates have been driven down to practically nothing. In the US and the UK this has been achieved by so-called quantitative easing (QE) – basically a fancy name for printing money, as it is almost impossible to envisage how the Fed or the Bank of England could unwind these positions. The Fed is now buying about $85billion in assets every month, while the Bank of England as of July 2012 had purchased about $500billion worth of assets. In the process savers have been punished, with meagre savings rates mostly failing to even compensate for the massaged official price inflation numbers (see www.shadowstats.com). Despite this, the real economies in the US, UK, Europe and Japan refuse to convincingly rise from the sickbed.

One way of looking at this situation globally is to realize that the volume of financial assets – bonds, cash, stocks and others – which have come into existence over the last several decades is a number of orders of magnitude greater than can ever be plausibly covered through the actual production and delivery of goods and services. At some point, or over a period of time, there will have to be a reconciliation. This will take the form either of hyperinflation or of a global currency reform, or perhaps some combination of the two. The US Dollar, as the lynchpin of the global financial system since 1944, will be at the epicentre of this transformation.

The present International Financial and Monetary System ($IMFS) can be considered as an organism. As such, it resists with all it’s remaining strength the inevitability of it’s own death. The ramifications of it’s inevitable demise for the savings of billions of people, and thus the whole political and economic structure, are such that it will not ‘go gentle into that good night’.

The end of the $IMFS has been predicted with increasing frequency since 2008. Unfortunately, seeing the inevitable end is one thing, the exact route to that end is much more difficult to discern and timing is next to impossible. After the transition to a new monetary order, it is probable that one will be able to look back and see the whole train of events as inevitable.

Just as a heart attack is preceded by certain medical phenomena and just as an earthquake is foreshadowed by particular geological and other signs, so this transition will not occur unheralded. Indeed there have been a number of such indications so far:

  • QE as mentioned above, together with rock-bottom interest rates. Effectively, this constitutes dispossession of savers. The purchasing power of savings declines over time as a result of interest rates being below the rate of inflation. For how long savers will allow themselves to be so conned is a crucial question. This position is clearly unsustainable.
  • Central Bank buying of gold. In the last several years these entities have turned net buyers of the yellow metal for the first time in several decades. This clearly signals their own preparation for the transition, gold being the wealth reserve that always survives transition from one monetary system to another. China and Russia, in particular, are stacking gold.
  • Western governments seem to be preparing for civil disorder. Legislation dealing with such emergencies has been refurbished in a number of countries within the past several years – e.g. the NDAA in the United States.
  • ‘Currency Wars’ – In the last several months the new Japanese government has been open in it’s – successful so far – attempt to devalue the Yen. Venezuela carried through a 32% devaluation of the Bolivar – against the US Dollar ten days ago. These are attempts to gain market share, but of course this is a zero sum situation, it being impossible for all countries to gain market share at the same time. We can view these measures as being a transitional stage on the way to devaluation of all currencies against the universe of physical goods – hyperinflation.

These are all sure indications that massive change is on the monetary horizon. When exactly this will be we do not know. It is almost certain that central bankers are well aware of the situation and would prefer the relative order of a currency reform to the chaos of hyperinflation. The instinct of politicians, on the other hand, is to delay difficult decisions as long as possible. What is sure is that the longer it takes until what we may call the reset of the world monetary system, the greater the cost will be.

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Demography is Destiny

The recent news that the Japanese diaper market for old folks is now larger than that for babies caught a lot of attention. Japan is at the leading edge of a demographic change that is now impacting on all the rich countries (and others). This consists of massive growth in the number of elderly combined with a collapse in the birth rate. Germany’s fertility rate for example is now in the region of 1.3 to 1.4 children per woman, well below the replacement rate of about 2.1. This is not a new realization of course, but has existed in public consciousness for a number of years. We have all seen it coming, but only now is it beginning to exert its effects. In this post I’m going to take a look at just one half of the equation – the collapsed birth rate – and assess its causes and the chances of a reversal.

  • Technology – the arrival of the Pill in the mid-60s brought a reliable and convenient contraceptive for the first time, importantly this was also within the control of women. 
  • Women’s education together with increased participation of women in the workforce. This increases the opportunity costs of having children – earnings foregone. The better-paid the job, the greater the opportunity costs.
  • The socialisation of pension provision. In earlier societies and in a number of societies in poorer countries until the present day, children served/serve as security for old age. In the West a large proportion of a worker’s income is appropriated by the state (taxes, social security contributions) and is thus not available to support the worker’s parents. Instead the state or its proxies functions as a middleman, with current pensioners being paid out of current contributions under the typical pay-as-you-go system. What this means is that whereas previously children were an investment, today they are consumption – potential parents decide to have children for reasons of self-fulfillment. As such, children compete with all the other ways of striving for personal fulfillment/consumption, of which there are many.
  • Job/Income uncertainty. The decision to have a child is a decision which will impact spending for many years to come. In recent decades changes in Western labour markets have caused both job uncertainty and income uncertainty to increase, compared with the years from 1950 to 1980. It is reasonable to expect this to have deterred family formation.
  • Relationship uncertainty. The massive rise in divorce rates, particularly since about 1970 – due to no-fault divorce – has meant a concomitant increase in the instability of family life. Not only does this impact the material resources available to raise children – see previous point – it also means that one parent can no longer rely on the other being present in the medium to long-term, in order to logistically and emotionally contribute to raising the child.
  • Culture. All societies have their sets of norms with regard to how individuals are expected to live and develop their lives. Up to several decades ago this included having children. This is no longer the case. Instead individuals can choose from a menu of lifestyle possibilities.

It is plain that none of these factors are going to reverse. If anything, they will continue to develop. Prognosis – birth rates to remain low and to tend even lower.

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What is behind India’s Rape Problem?

The recent tragic death of a young Indian woman after she was gang-raped in Delhi gathered extraordinary attention around the world. However, it has been clear for quite a while to any reader of the Indian media, where cases of rape are casually reported, that India has a problem here. According to the official figures, rapes in India doubled between 1990 and 2008, outpacing population growth. It can be safely assumed, because of the intense shame in India associated with being raped, that the real numbers are much higher. What are the causes?

Many are quick to point to the skewed sex ratios among younger age groups in the country. The preference for sons in India together with – since about 1980 – the increasing use of ultrasound machines in order to determine the sex of the unborn child, has resulted in the abortion of millions of unwanted girls. The official Indian figures for sex ratio at birth in 2011 were 111 boys per 100 girls, well above the ‘normal’ rate – 105. It is estimated that by 2020 India will have a ‘surplus’ of about 30 million males in the 20-35 age group.

Whilst it is correct that skewed sex ratios in India are a large part of the problem, there are also other factors just as important. India’s urban population grew from 286 million in 2001 to 377 million in 2011, representing more than 31 % of its people. A large proportion of these are young men from rural areas seeking work.  Living in the  villages and other small communities such men, and others, are constrained in their attitudes – and resulting behaviours  – by the traditions and rhythms of rural life. The rules of religion and caste, together with the duties of family, combine to determine a relatively tightly structured existence for the individual.

Migration to urban areas, together with increased educational opportunities, weaken all of these bonds. Thrown into the relative anonymity of India’s teeming cities, the forces of family and religion and traditional structure are attenuated, migrants are confronted, more or less for the first time, with another way of life, even if they are, themselves, on the outside looking in.

This links in with a further factor. Approximately 60% of Indian households now have televisions. This is growing quickly – between 2007 and 2011 the number of Indian households with TV grew by 25%. Internet usage is growing even more quickly. From 2008 to 2010 the user base doubled from about 50 million to about 100 million. The demographic among which Internet usage is growing most quickly is of course young men. They are thus exposed to much more sexual and semi-sexual imagery than was previously the case, particularly through the medium of Internet pornography. This is occurring at a time, when Indian society generally is still dominated by conservative mores, such that opportunities for casual sex are very limited compared to the situation in the West.

Putting all these factors together would seem to account for the problem. What is the prognosis?

The most recent census in 2011 would seem to indicate a certain amount of stabilisation in the sex ratio at birth. Whatever happens now though, there will still be a deficit of women for decades to come. The penetration of the Internet will increase, particularly through the spread of smartphones, sharpening the contradiction with the values of Indian society hitherto. It can be expected that prostitution will increase and that women will have to curtail their own freedom of movement for safety reasons.

Taking a somewhat broader view, this points out one of the challenges to the much trumpeted rise of India as one of the BRICs. Men with no opportunity to form families are men with no stake in the stability and advancement of the wider society. This story will get worse before it gets better.

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Is the Rate of Innovation Slowing Down?

Technological innovation is vital to human well-being. In a world of steadily increasing population and steadily declining natural resource quality and quantity, only innovation makes it possible for us to maintain our quality of life, let alone improve it. Read this from Randall Parker. He talks about whether the proportion of innovation that must be devoted to the maintenance of civilization is increasing. In short, are we having to run faster just to stay in the same place? There is however a question at another level – whether the overall rate of innovation is slowing down?

To ask whether the rate of technological innovation is slowing down may seem absurd to those over-50s who already feel overwhelmed by the rate of change in their lives. However, if we differentiate between fundamental innovations/inventions – the last being probably the LASER in 1960 (leaving aside the question of what the military has possibly kept under wraps since then) and incremental innovation, this being the application and the extension of the fundamental innovations/inventions, then there are grounds for suspecting that this is the case. Where is the biotech revolution, the nanotechnology, the fusion energy? These things have been talked about for decades.

Some may point to the number of patents issued, so as to reassure us that all is well. Patents though, serve many purposes, often involving legal tactics or business strategy, as this piece shows. It would seem impossible to measure the rate of innovation objectively.

Let us look at the various factors, which may influence the rate of innovation, to see if we can get a feel for the balance of forces, in order that we may make at least a subjective judgement.

  1. The sheer numbers of people with at least some technical, engineering or scientific knowledge. This figure is obviously greater than it has ever been, meaning that the number of those confronted with problems requiring innovation, who at the same time have the base knowledge from which innovative solutions can come is also much higher than ever.
  2. The level of social acceptance/encouragement of innovation. Innovation often threatens the existing balance of power within societies, raising some up and casting others down. Even when the potential winners outnumber the potential losers, the gains are often spread across many, while the losses are concentrated on a few, who will be more motivated to resist change than the potential winners are to support it. When the losers are those who presently occupy top positions, then change can be very difficult/impossible. Some societies, especially the United States of the last 150 years, have been particularly receptive to innovation, so much so that I would argue that it forms part of the American character.
  3. The availability of capital is a requirement for significant innovation. It can be assumed that depth and transparency of capital markets are positive factors. On the other hand, when it is possible to make money by speculating in boom and bust financial markets  precious capital is diverted. Innovation flourishes best when capital markets reward the creation of actual value ie innovation, rather than just functioning as value transfer mechanisms from outsiders to insiders. It should be clear to all that the big winners in the capital markets in recent decades have been those who have been able to arrange significant value transfer to themselves without creating much in return.
  4. Large debts/deficits of sovereign/public borrowers are also inimical to innovation. Large amounts of capital are channeled away from innovative borrowers towards the sustenance of welfare states/bureaucracies. This is often mandated by law, with insurance companies, pension funds etc. often compelled to allot large proportions of their funds to government bonds.
  5. Time Orientation and it’s effects on savings rates. Higher savings rates mean more capital available for investment – innovation.
  6. Demography. The forces of human nature tend to make people more resistant to change as they grow older. Innovation also tends to come from younger age groups – up to 45.
  7. Education Systems. Is there a symbiosis of theory and practice? Is initiative encouraged? Or is the system dominated by credentialism and grade inflation, with ever more pieces of paper being issued to ever more people and each piece of paper meaning correspondingly less.
  8. Intelligence, those of higher IQ are not only more capable of innovation, there is also plenty of research showing high IQ individuals to be more accepting of novelty as well as having higher savings rates – see point 5 above.
  9. Is innovation rewarded. In concrete terms this means low marginal tax rates so that inventors and entrepreneurs are adequately rewarded for their endeavours. A related question though is whether innovators enjoy high social status, and whether engineers in general enjoy comparable status to say lawyers or physicians.

This is not an exhaustive list, but it does allow us to say that in the last few decades the picture has been deteriorating, Consider the situation in the West (Western Europe and North America), the drivers of the great advances of the last several hundred years. There is evidence here of falling IQ levels. Stock markets often seem more like casinos than mechanisms of rational capital allocation, middle-class tax rates have been generally rising and the state bureaucracies demand ever more scarce capital for themselves. Savings rates have fallen and debt-driven consumption has risen. Populations are aging and birth rates are falling. In many of these societies engineers rank relatively low in the pecking order, indeed software engineers are derided as ‘nerds’. Education systems in many countries seem inadequate to the task of turning out students who can effectively earn their way in the 21st century – declining proportions of students in the STEM (Science, Technology, Engineering, Mathematics) subjects. – but are instead dominated by credentialism and political correctness. It is true that western societies are still mostly very receptive to innovation, but supply is as necessary as demand.

The darkest hour is often the one before dawn. I hope to go into the reasons for optimism. in a future post.

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