The Daily Reckoning - Productive Destruction (Jim Davidson)

verfasst von Firmian, 10.10.2003, 17:28

-->Productive Destruction

The Daily Reckoning

Granada, Nicaragua

Thursday, 9 October 2003

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*** Big numbers Richard Russell doesn't like...

*** Big numbers John Snow shouldn't like...

*** Big numbers communist agitators on the streets of
Grenada, Nicaragua don't like... and more...

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"I don't like the numbers," says veteran market forecaster
Richard Russell.

We have never met Russell, but we rarely read a comment from
him with which we disagree.

The numbers Russell doesn't like are the very same numbers
that the rest of the world seems to find so appealing. While
others are pleased to see consumers continuing to spend and
borrow... Russell worries about when they will have to stop
spending and pay back the money. While others are happy to
see investors rushing to buy stocks at high prices... Russell
looks ahead to the day when they will have to sell them at
low prices. While most people delight in low mortgage rates,
rising house prices and the refinancing boom... Russell warns
that the day will come when the housing industry goes bust
and homeowners will be stuck owing more on their houses than
their houses are worth.

And behind all these numbers are still more numbers Russell
doesn't like. He points out that a new researcher on Wall
Street costs as much as $150,000. A similarly trained
researcher in India can be had for only $35,000.

No wonder jobs are moving overseas.

We mentioned earlier this week that jobs would continue to
migrate abroad until the dollar falls. Why? Because there's
too much of a gap between labor costs. Americans earn too
much and foreigners - especially in Asia - earn too little.
This has been the case for a very long time, but never
before has there been such a globalized economy. And never
before has there been so much cash and credit available to
foreign producers... and so much demand from American
consumers. These things are the peculiar fruit of the Dollar
Standard System that, since the early '70s, has permitted
Americans to spend money they really didn't have... and to
keep spending.

Before the Dollar Standard, Americans would have been forced
to pay up - to settle their worldwide debts in gold. This
would have forced them to cut back on spending. It would
also have reduced the flow of cash and credit overseas.
Instead, Americans were able to send more and more dollars
overseas... dollars that were used to build factories, train
people, and, ultimately, compete with U.S. producers.

Never having to settle the accounts with real money - gold
or foreign currency - meant never having to buckle down,
save money, and get to work. As we point out in our book,
Financial Reckoning Day, Americans now work more hours than
anyone in the world. But they don't produce enough to pay
for the lifestyle to which they've become accustomed; each
year, they're about $500 billion short. That is another
number Richard Russell doesn't like - the difference between
what the U.S. imports from overseas and what it sells to
foreigners.

A falling dollar will take care of some of the problem; it
will make Americans poorer. We don't know how far or how
fast the dollar will fall. Nor do we know exactly what tears
and travails it will bring to pass. But we suspect Americans
will see a lot of numbers they don't especially like.

More news from Addison below...

--------------

Addison Wiggin in Paris...

- Debt.

- We continue our theme from yesterday. Not because we want
to, but having dwelled on it for so long, like a bubble-
headed teeny-bopper with a pop-song stuck in her mind, we
seem only to be able to hummmm that singular tune as we view
the day's market news.

- Yesterday we learned that in August, American consumers
borrowed their way to 20% of the nation's GDP on an
annualized basis. That tune will surely rise to the top of
the charts... but it may never reach #1. For today comes word
from the Treasury Department that through the second quarter
of 2003, U.S."gross external debt" topped $6 trillion
dollars. That's sure to be a chart-buster.

- The Treasury report, which, according to Reuters, was
issued in an attempt to comply with new 'transparency' rules
established by the IMF, shows that the U.S. government now
owes nearly 59% of the nation's GDP to foreign governments,
central banks, private banks and other investors. In the
next three months alone, $1.2 trillion in principal, and
another 53 billion in interest, will come due. With tax
receipts of only $2 trillion per annum... argh... why bother?
Don't they distribute calculators among the pocket-protected
policy wonks in Washington?

- Better yet, how do you suppose John Snow gets any sleep at
night? As we have made abundantly clear, most of America is
juggling debt payments: mortgages, car loans, skyrocketing
tuitions, credit card debt etc., etc., etc. But what must it
be like to have to come up with $1.2 trillion in principal
in the next three months? Come to think of it, John Snow
must sleep well at night, after all - it's not his money!

- The market shrugged the Treasury report off like an aging
professor's wife sweeping dandruff flakes off her husband's
lapels before he heads off for the lecture hall. The Dow
lost ground, but only by 23 points. The old lady of Wall
Street closed her doors at 9,630... a full 2,453 points
higher than its 52-week low, reached tomorrow a year ago.
The S&P 500 closed down 5 to 1033... it, too, is well ahead
of its 52-week low. The S&P also bottomed out a year ago
tomorrow... 265 points lower than yesterday.

- John Snow is not the only hapless politician blowing hot
air at the world currency system. Vladimir Putin yesterday
said he wouldn't rule out suggestions by German Prime
Minister Gerhard Schroeder that Russia begin pricing its oil
in euros rather than dollars.

- Russia is the number-two oil exporter behind Saudi Arabia,
so the change could further threaten the stability of the
dollar... or at least, that's the way the conventional wisdom
has begun to emerge. Remember? At the outset of the
Occupation of Iraq, reports swirled around accusing the U.S.
of a thinly veiled attempt to force Iraq to conclude
contracts under the oil for food program in euros - right. A
short paragraph at the end of the NY Times piece on Putin's
press conference reveals the whole show is just that - a
show. Most Russian oil companies are privately owned and the
Russian government has little influence over their
activities. If they want to trade in dollars... they will.

- The Pao Mo bubble in China got another breath of hot air
itself, yesterday. At the conclusion of the Asean trade
block meeting in Bali, Indonesia, China extended its
involvement in the 1976 Treaty of Amity and Co-operation.
The BBC reports that under deals signed by China and Asean,
"a vast free-trade area of 1.7 billion people is envisaged
by 2010." During the summit, Japan and India jumped into the
fray and are said to be negotiating their own deals with
Asean countries. Adding the Japanese and Indian populations
to mix would bring nearly half the world's population into
one free trade block by 2020.

- Such a move, perhaps, might present the appropriate
opportunity for the Chinese apparatchiks to de-peg their
currency from the buck. And why not? If current trends
continue, by 2020 the dollar will be all but worthless,
anyway. New research from the World Currency Research Unit
at Everbank.com shows that"since the June 1986 creation of
the Dollar Index - a basket made up of the currencies of six
major trading partners - the data clearly shows the value of
the U.S. dollar eroding by a fairly steady rate of 1% a
year."

- Specifically, between June 1986 and September of this
year, the dollar has declined by over 18.5% versus both
strong and weak currencies in the index. Had an investor
left his money stashed in assets backed by the
'traditionally well-managed' Swiss franc, the report
indicates, he would have kept nearly 65% more in value by
virtue of 'purchasing power' than the same assets
denominated in U.S. dollars.

- Canuck and Aussie dollars have each put in multi-year
highs against this week v. those of the Yank genre.

--------------

Bill Bonner, back in Granada...

***"Well, here's another bubble..."

We walked the streets of Granada, Nicaragua, yesterday. By
some quirky trick of happenstance, we come here often and
have gotten to like the place. Yesterday, we looked for a
house in town.

The typical property is about 50,000 sq. feet, surrounded by
thick walls. There tend to be beautiful exposed woodwork and
ancient clay tile roofs around tropical interior courtyards.
There also tends to be little else... almost everything needs
to be rebuilt, renovated or restored. Locals live among the
ruins of once-grand houses like barbarians in Rome. Chickens
scratch around the ornamental fountains... trash collects in
the corners.

Yet the prices for these broken-down houses near the town
square are about the same as you would pay for a habitable
house in the U.S.. Driven up by gringo buyers, you will have
to pay about $200,000 for one with potential. Then, you may
spend another $200,000 bringing it up to an acceptable
standard. The result, though, will be a house with far more
grace and style than in the typical yanqui casa.

We found one we liked and made an offer. It had been shown
to us by two separate agents, who had to negotiate with each
other to split the commission.

While this was going on, we marveled at how the world has
changed. For while one agent held a cellphone to his ear, in
a frantic attempt to sell a ruined house to a dim-witted
gringo, a remarkable scene developed in the town square. A
large crowd had gathered, egged on by a man with a loud
voice and a megaphone.

"What's going on," we wondered."Are we going to see another
revolution?"

We had caught only a few words:

'Gringo'... 'corrupción'... 'Sandinista'... and some lament
about the poor and downtrodden. It was probably as pathetic
as any other stump speech, but it seemed to go over well
with the crowd on the square.

Curiously, none of the world-improvers seemed to notice the
fat woman on the corner. She had smeared something red on
her face and stood there in a filthy brassiere and a torn
skirt. Except for the fact that she was nearly obese, she
looked as though she might have been a desert island
castaway ready for rescue. Clearly, she had lost her mind
and could have used a little help to find it.

But the crowd paid no attention. Neither did the police, nor
any of the group gathered under the"Christ is the only way"
banner. Nor did any of those men whose job seemed to be to
whip the bony horses... nor those hundreds more who seemed to
do nothing but hang out on park benches all day.

"What the hell is he talking about," asked another gringo,
referring to the political fulminator.

"I don't know," replied our local partner."But it's not
good for business. What are the tourists going to think?
They're going to go home and tell their friends that
Nicaragua isn't safe....that the country is on the verge of
rebellion or something."

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The Daily Reckoning PRESENTS: Jim Davidson takes issue with
the 'jobless recovery' and suggests an alternative way to
view the recession that wasn't.


PRODUCTIVE DESTRUCTION
by Jim Davidson

Much has been made of the claim that 3 million manufacturing
jobs (actually 2.7 million) have disappeared,
notwithstanding the 'recovery' we're experiencing. Many of
these jobs may never be refilled, because productivity has
increased so much in recent years that fewer workers are
required to make the same real goods.

The mainstream press also maintains that the good life in
America is threatened by free and open international
competition. You are told that the living standards of
middle-class Americans are doomed to sink to the level of
Haiti or Liberia because increasing numbers of well-paid
jobs of all kinds will be exported to India and China.

Hence, the widely decried 'jobless recovery.' It has become
a main theme of the emerging presidential campaign, as
Democrats lash President George W. Bush and wax eloquent
over the fantasy of 'protecting good jobs.' Opposition to
productivity-enhancing job reduction and outsourcing has
begun to take on an increasingly anti-capitalist tone. The
media, who as a rule are blissfully ignorant of economics,
seem to believe that prosperity can be insured by keeping
labor costs high, if necessary, by thwarting the growth of
productivity.

But no one is particularly informed about, much less excited
over, the increment to higher living standards that will be
achieved in the future by improving productivity today.
Understanding of and interest in the workings of the free
market is meager and diffuse. In the simplest terms, it
seldom pays for anyone to advocate free market principles,
because they benefit everyone, but no one in particular.

On the other hand, political demands for exceptions to free
market policies almost always entail concentrated benefits
to a distinct group of people, a special interest that is
readily identified. Hence, there is a robust demand for
rationalization for departures from free market principles,
much of which is promoted by politicians trolling for votes.
This is the driving force behind the Bush administration's
misguided push to 'protect good jobs.'

Paying artificially high wages means paying more for less.
It can no more make the economy richer than could systematic
featherbedding. Just as hiring four people to do a job that
one person can do is a recipe for falling living standards,
so is paying one person four times more than necessary to do
the same task that someone else will do as capably for less.

It is difficult to even begin to sort out the confusions
surrounding outsourcing, innovation and economic progress.
You are repeatedly told that America has lost its
manufacturing base, that the U.S. economy has been 'hollowed
out,' and that just as auto jobs and jobs in other high-
paying manufacturing sectors were lost, so now high-paying
service jobs are being outsourced. This is a logical
fallacy. America is producing more real goods as a
percentage of GDP in 2003 than in the peak years of the
1950s and '60s.

But this doesn't answer the critics, because they are not
concerned with dynamic tendencies in the economy. What they
really want to do is not improve economic prospects, as they
pretend, but dampen them. They want to slow the rate of
change and keep the economy much as it is. Their model for
economic policy is a 'freeze frame' photograph, to make
people 'safe' from the disruptions implied by rapidly
improving productivity.

Technology consultant Gartner Inc. has forecast that one of
every 10 jobs in information technology will move offshore
by the end of 2004. Kathleen Madigan, the excitable Business
Outlook editor at Business Week, laments:

"This is no longer about a few low-wage or manufacturing
jobs. Now, one out of three jobs is at risk....Outsourcing
is hitting skilled jobs that were once thought 'safe' across
a far wider swath of white collar America. What's more, the
new outsourcing is occurring at a breathtaking pace....From
just-in-time inventories to nanosecond technologies,
business practices now turn on a dime. As soon as work can
be made routine - whether it's reading an X-ray or creating
blue prints - the job can potentially be outsourced. That
promises big, and often disquieting, changes ahead for many.
It means the career you studied for - and spent oodles of
tuition money on - in college probably won't sustain you for
your working life. Someone in India or China will be able to
do it far more cheaply."

Far from being bad news, this is exciting and encouraging.
It is evidence that many types of service jobs long thought
to be immune to productivity gains may finally be
susceptible to greater efficiencies. Among other things,
this implies that the cost of government, which has risen so
remorselessly while the costs of real goods have generally
fallen, may actually be subject to downward pressure from
technology, though perhaps not enough to cancel the upward
pressure for spending arising from constituents worried
about saving their jobs.

Theory aside, the Bush administration seems to have accepted
the policy imperative of being seen to be working to curtail
the disappearance of jobs. Recently, the administration has
made a show of trying to browbeat the Chinese into devaluing
the yuan, allegedly to protect American jobs. This has
undermined our prospect of getting Chinese help in disarming
North Korea, while doing nothing to enhance the economic
benefit to U.S. firms for hiring more high-priced labor.

The ill-advised steel tariff imposed by Bush to court voters
in Pennsylvania and other steel-producing states represented
an earlier case of pandering to special interests at the
expense of consumers and manufacturers who use steel to
produce products. A reasonable estimate is that three times
more jobs were lost in steel-using industries because of the
higher cost of steel as an input than were 'saved' in steel
production.

I say this to show that 'job saving' seldom tallies as a
rational endeavor, even in its own terms. More
fundamentally, the whole enterprise of tallying 'jobs'
created or saved runs counter to economic logic. Seen in
economic terms, trying to 'save jobs' from cheaper
substitutes is a concession to stupidity. It is an
enterprise that reduces living standards.

Seen in the light of economic logic, the politician who
could accelerate productivity growth and make more jobs
redundant would be doing the most to raise living standards
for his constituents. Jobs are a cost of production. You are
better off when you reduce your costs. Hence a truly
'jobless recovery' would be a great thing. Too bad this
isn't one.

Unhappily, nothing is more vain than expecting politicians
to confront the illogical or irrational beliefs of their
constituents. In a system of popular government, the people
tend to get the policies they ask for, if not the wonderful
results they pretend will follow.

The fear of"creative destruction," which, as Joseph
Shumpeter told us, is the driving engine of capitalism,
probably intensifies as progress accelerates and life
expectancy increases. Two centuries ago, about 80% of
Americans were farmers. Today, scarcely 2% of the work force
are farmers, and many of them are hobbyists, or part-time
farmers who work second jobs at Wal-Mart to make ends meet.

If you had asked a divine genius in 1800 to explain what
activities people would take up two centuries or more hence
when they no longer earned their bread by tilling the soil
(the Labor Department lists 400,000 job categories), you
would have drawn a blank. Forward vision about innovation is
dim, at best, and most people have little capacity to
imagine how change will transpire. But the fact that future
growth in living standards based on new economic
arrangements is difficult to envision doesn't mean its
impact is minimal.

In 1800, Haiti was richer than the United States on a per-
capita basis. Indeed, as researcher Kenneth Sokoloff
reports,"Haiti was likely the richest society in the world
on a per-capita basis in 1790." In 1800, living standards in
Cuba were 12% higher than those in the United States.

Today, Haiti is no longer the richest economy on Earth. It
may be the poorest. Indeed, many Haitians are still living
much as their ancestors did in 1800. And Cubans, far from
enjoying living standards 12% higher than the United States,
are lucky to live 1/12th the level. Since 1800, U.S. per
capita annual income has soared from $807 per year (in 1985
dollars) to $20,230 per year (as of 1997). In other words,
income has multiplied at least 25-fold in six or seven
working generations. And this really understates the payoff
to you from productivity growth.

Yale University's William Nordhaus looked at the price of
light and concluded it has fallen from 40 cents per 1,000
lumen hours in 1800 to a tenth of a cent today, a decline of
99%. But the statistical measures economists employ miss
most of that dramatic gain. Inflation accounting shows a
180% increase in the price of light bulbs and fixtures over
the years. But this underestimates the growth of living
standards. Remember, the total impact of economic innovation
has been to slash your cost of light by 99%. Because of this
you can afford to stay up at night and read, as well as
perform all sorts of other activities in hours when natural
daylight is unavailable. Your actual standard of living is
probably more than a hundred times higher than Americans
enjoyed in 1800.

This is entirely due to the fact that Americans were quicker
to depart from the low productivity activities they were
doing in 1800 to take up new roles with higher productivity.
In other words, it is precisely the fact that Thomas
Jefferson did not institute a comprehensive program to
"preserve yeoman farming" that permitted the United States
to be first and fastest to adopt productivity-enhancing farm
technology, like the McCormick reaper, which drove up the
productivity of agriculture, while driving most farmers to
find other occupations. This accounts for the fact that you
and yours can live better today than Haitians and others who
were reluctant to move ahead with innovation.

Except for a small measure contributed by population
composition, the key to a better life is precisely the fact
that rising productivity displaces people from familiar work
and obliges them to find new occupations.

Improvements in standards of living and material
productivity that used to take millennia to accomplish now
pass us by between youth and middle age. The past six
generations of modern economic growth mark the greatest
advance in human technological capabilities and material
living standards since humans moved beyond hunting and
gathering 10,000 years ago. And there is every reason to
believe that we are poised on the threshold of even more
astonishing productivity advances.

If politicians don't mess things up by 'trying to save
jobs,' you can expect to enjoy an even more plush 'free
ride' from productivity-enhancing technological advances in
the years to come. Free enterprise is the greatest welfare
system ever.


Regards,

Jim Davidson,
for the Daily Reckoning

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• The Daily Reckoning - Productive Destruction (Jim Davidson) - Firmian, 10.10.2003, 17:28