Eric Janszen Interview: CNBC Jan. 25, 2008

[jk]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Bubbles can only last as long as the bubble machine that creates them To say fiat money can be created forever would be false...as history has already proven. I find it odd that people will question where the next bubble will be? By asking such a question, one is assuming they are transferring money from one asset class or service to another. But the root problem is not the re-allocation of money...it's the value of the money itself.

The next bubble could well be tulips for all we know (I jest, of course) but the number of wheel barrels of paper dollars required to buy a tulip will grow exponentially as the hidden M3 continues its skyward trajectory. It will all have to come back to the most simplistic of transactions. You have something of value I need. I have something of value you need. We will have a mutual agreement as to how we can best conduct this transaction. A paper note is made from 75% virgin cotton 25% linen blend of paper, and
industrial oil based ink is used to produce the coloring on the paper. Real value...maybe 2 or 3 cents? But when this piece of paper is backed by a huge military machine, the largest consumer nation in the world and a history of wellness, it has a value that is perceived to be much larger. But more and more people are aware of whats behind Mr. Wizard of Oz's curtain and are calling his bluff.

My point is, perhaps it is time to stop looking for bubbles....because in the end they are what they are...full of air and not much else...and the bubble machine is getting weaker by the day. Perhaps its time to forget about bubbles and tulips...and get back to the fair trade of what they need and what we need. At least that's something that is both tangible and of intrinsic value.

{

crow, welcome. you will find plenty of threads here that deal with inflation. this just happens not to be one of them. it is about how a particular aspect of the inflationary process will unfold, how it will affect industrial development, and how it will affect financial markets along the way.

[dcarrigg]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

The problem that you do not address and raise is the whole issue of interest - particularly compound interest -- which requires indefinite growth to service debt. This is the issue that Michael Hudson raises -- and I have raised the issue before -- and nobody wishes to directly address it.

This problem has been discussed by others -- in particular Margrit Kennedy

Rajiv, it seems to me that there are five results to the problem you present. Either:

A) Indefinite Growth
B) Overvalue assets and create bubbles to simulate growth
C) Inflation to temper periods of slow/no/negative growth
D) Debt forgiveness packages (when push comes to shove policy squashes economics).
E) Theft of wealth (a la conventional or economic warfare. Chiquita anyone?)

These might qualify as "transfer of wealth" to Hudson, as well they should, but there are a few options open.

I like to think of this problem like recess:

-You owe a fellow student $5 which you do not have...what do you do?

A)Go out and earn $5
B)Trade him some "expensive" POGs (CDOs/whatever...it was a kid bubble)
to forgive the debt
C)Trade him $5 of McDonald's gift certificates and hope he doesn't realized
that they've expired
D)Cry to your teacher/parents and beg for a handout
E)Beat up the small kid who happens to have $5 or a good lunch.

Given these choices, different personalities follow different patterns. Choice A actually requires adding value to the system, but it clearly takes more time and effort than the other choices (free lunch). Who cares if the other choices are dishonest/annoying/wrong? So long as they present themselves as viable solutions, there will be those that choose to use them. This is especially true when there is not five dollars to be made (No allowance this week). And when push comes to shove, there's always good old option E.

The FIRE economy is perhaps more aptly named than people realize. Nothing like handing Johnny an M-16 and Rosie the rivet gun to fuel up the machine.

But I haven't come across anybody addressing the conundrum posed by Michael Hudson in his paper "The Mathematical Economics of Compound Interest" (Part One) (Part Two)



The following poem - along with its explanation is quite good.

[raja]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Unless all the laborers are illegals, then the workers doing the labor of building will get paid, and what do people in America do with their paychecks? According the the datum you quote, spend 70% of it on consumption.

Right now we have 5% unemployment.
If a new bubble in infrastructure is created, laborers will be needed to build the bridges, dig the sewers, etc. Where will these laborers come from?

IIRC, in the Depression the economy, there was massive unemployment, THEN the New Deal was enacted and people were put to work. Is that the way it will have to happen this time?

In the real estate bubble, the wealth was created by people buying and selling houses. As the value of homes surged, there was more money to spend as people drew from their home equity. Yes, there were new jobs created in the housing industry, but I wonder how much of consumer spending money was due to those jobs, and how much was due to increase in asset value of existing homes?

So, to restate my questions:

1) Will we have to have economic collapse and massive unemployment BEFORE the next bubble can take off?

2) Would the labor force displaced by the collapse of the housing bubble be adequate to fill the labor needs of the new infrastructure bubble?

3) Would the increase in jobs produced by the infrastructure bubble be able to create the same wealth effect and level of consumer spending as the asset inflation of the housing bubble?

[Rajiv]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Basically, what you are suggesting is a transfer of wealth from those who produce to those who consume

Option A is not possible in a closed system with limited resources -- so we rape the planet until its productive capacity collapses -- See the work of Jared Diamond and William Catton

My take on the problem is that monetary reform has to take place -- in a manner suggested by Margrit Kennedy and Tom Greco -- before this problem can be resolved.

[GRG55]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Right now we have 5% unemployment.
If a new bubble in infrastructure is created, laborers will be needed to build the bridges, dig the sewers, etc. Where will these laborers come from?

IIRC, in the Depression the economy, there was massive unemployment, THEN the New Deal was enacted and people were put to work. Is that the way it will have to happen this time?

In the real estate bubble, the wealth was created by people buying and selling houses. As the value of homes surged, there was more money to spend as people drew from their home equity. Yes, there were new jobs created in the housing industry, but I wonder how much of consumer spending money was due to those jobs, and how much was due to increase in asset value of existing homes?

So, to restate my questions:

1) Will we have to have economic collapse and massive unemployment BEFORE the next bubble can take off?

2) Would the labor force displaced by the collapse of the housing bubble be adequate to fill the labor needs of the new infrastructure bubble?

3) Would the increase in jobs produced by the infrastructure bubble be able to create the same wealth effect and level of consumer spending as the asset inflation of the housing bubble?

Here's an alternate view on the outlook for US labour and infrastructure bubbles:

• US unemployment remains persistently below historical norms;
• There are shortages of labour, particularly skilled labour, in many domestic industries - particularly those out-of-favour industries that saw corporate & labour shrinkage during the '80's & '90's financial sector boom (try to find a mining engineer, petroleum drill push or even an experienced coal shovel operator right now);
• Excluding immigration the population of the US is aging with the boomer bulge on the eve of initiating a retiree bulge (starts in 2 years time);
• There is a growing political backlash against illegal immigrants, and this has a strong possibility of spilling over into an "anti-immigration" (of any sort) sentiment, particularly as the recession advances and unemployment continues to tick-up in an election year;
• Security and terrorism concerns further discourage entry into the USA (I've seen quite a change crossing the Cdn/US land border in the past couple of years, and I go out of my way to avoid connecting flight transits through US territory, it's become such a pain in the azz);
• These trends in concert will result in measurable labour shortages, labour cost increases, and impair the pace of development of (and risks prematurely aborting) the predicted alt energy/infrastructure bubble in the USA. :eek:

Then again, maybe all the creative "brain work" for the next bubble happens in California and Massachusetts, and all the component manufacturing gets done in Chindia... :p ... and everyone else is flipping burgers or driving an ethanol-grain harvestor.

[raja]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

• These trends in concert will result in measurable labour shortages, labour cost increases, and impair the pace of development of (and risks prematurely aborting) the predicted alt energy/infrastructure bubble in the USA. :eek:

Then again, maybe all the creative "brain work" for the next bubble happens in California and Massachusetts, and all the component manufacturing gets done in Chindia... :p ... and everyone else is flipping burgers or driving an ethanol-grain harvestor.

Yes . . . .

And how much consumer spending will result from paychecks for flipping burgers?

According to a recent post by Rajiv, one expert said, "People have been drawing home equity out of the houses at a rate of $700bn or $800bn a year. It's been a huge boost to consumption . . ."

Is it realistic to think that an infrastructure bubble will occur, or if it occurs, that it will keep the economy going like the housing bubble? I haven't seen enough to make me a believer . . . .

[c1ue]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Then again, maybe all the creative "brain work" for the next bubble happens in California and Massachusetts, and all the component manufacturing gets done in Chindia... :p ... and everyone else is flipping burgers or driving an ethanol-grain harvestor.

GRG,

Sorry to burst your bubble, but in fact a large number - if not a majority - of said 'creative brains' are Chinese and/or Indian.

There has been an undocumented trend in the past 5 years where these Chinese/Indian engineers are offered packages in China or India duplicating their after tax savings in dollars, but otherwise offering pay in rupees and/or RMB in the country in question.

Overall savings between taxes and subsidized what-not is over 50% of salary, more like 60%+ for parts of India.

Thus I see no reason whatsoever why said 'creative brains' must remain in the United States at all, much less California.

In fact, I'll come right out and say that Palo Alto is for engineering what Manhattan is for financials.

[dcarrigg]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Basically, what you are suggesting is a transfer of wealth from those who produce to those who consume

Option A is not possible in a closed system with limited resources -- so we rape the planet until its productive capacity collapses -- See the work of Jared Diamond and William Catton

My take on the problem is that monetary reform has to take place -- in a manner suggested by Margrit Kennedy and Tom Greco -- before this problem can be resolved.

____
Long story short, yes. A carefully planed forced transfer of wealth from producers (not at the top of the food chain) to consumers (where power, albeit waning, resides) must occur. So long as the balance of power (the ability to control systemic processes [economic, political, administrative, power projection via military) lies with the consumers.

You are probably right about option A. It just goes against what any intro microecon textbook will tell you about how the game is not zero sum. The fact that this contradicts the "island earth" passages in any intro ecology textbook is seldom, if ever, mentioned.

So far as Margrit Kennedy goes, I just cannot see this happening. Imagine you are the government of a sovereign state...are you really going to give up your right to central banking privileges just to have a better worldwide monetary system? Where's the incentive? Dies wird nie innerhalb die Vereinigten Staaten funktionieren.

Vested interests (rich people) and powers that be (rich people + government) would seem to gain nothing by this...particularly a government that was in control of a reserve currency. The rentier class of modern capitalists would be distraught to say the least. Even a rouge leader pushing such a thing would do well to double down on the secret service detail.

[Rajiv]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

You are probably right about option A. It just goes against what any intro microecon textbook will tell you about how the game is not zero sum. The fact that this contradicts the "island earth" passages in any intro ecology textbook is seldom, if ever, mentioned.

From the 3rd Chapter of Catton's book

The growth and progress upon which we looked back with such pride had committed mankind to living on a scale that exceeds the sustainable carrying capacity of this finite planet, and the leaders of nations continued to devote far more effort toward attempting to prolong overshoot than toward undoing it. Reluctance to face facts was driving us to make bad matters worse. The faster the present generation draws down the fossil energy legacy upon which persistently exuberant lifestyles now depend, the less opportunity posterity will have to live in anything like the same way or the same numbers. Yet most contemporary political proposals for solving problems of economic stagnation or inequity amount to plans for speeding up the rate of drawdown of non-renewable resources. <6>

Invisible Acreage

The truth of these statements is implicit in the concept of "ghost acreage". Georg Borgstrom, a food scientist at Michigan State University, devoted a whole chapter of his 1965 book, The Hungry Planet, to this subject. A number of nations have seemed to get away with exceeding the human carrying capacity of their own land, but Borgstrom pointed out that they had only been able to do so by drawing upon carrying capacity that was "invisible" - that is, located elsewhere on the planet. The food required by such a nation's population comes only partly from the harvest of "visible acreage" - farm and pasture land within the nation's borders. A very substantial fraction comes from net imports of food. Not all the imports come from other countries; some are obtained from the sea. Borgstrom therefore subdivided "ghost acreage" into two components, "trade acreage" and "fish acreage". By each phrase he simply expressed, in terms of land area, the additional farming that would have been needed to provide from internal sources the net portion of a nation's sustenance actually derived from sources outside its boundaries and in excess of its own carrying capacity. As we shall see, a third component must be recognized if we are to understand fully the part played by ghost acreage in the life of modern man.

To see the importance of Borgstrom's two components, trade and fish acreage, let us consider two examples: Great Britain, a national ancestor of the United States, and Japan, a booming industrial giant in the Far East. By 1965 more than half of Britain's sustenance was coming from ghost acreage. <7> If food could not be obtained from the sea (6.5%) or from other nations (48%), more than half of Britain would have faced starvation, or all British people would have been less than half nourished. Likewise, if Japan could not have drawn upon fisheries all around the globe and upon trade with other nations, two-thirds of her people would have been starving, or every Japanese citizen would have been two-thirds undernourished <8> (which presumably means that nearly all might have died). Yet this was the most prosperous nation in the Orient, the one whose low birth rate supposedly exemplified Asia's hope of averting overpopulation.

These densely populated nations had continued to exist and prosper only because, on top of their own intensive agriculture, they could harvest the oceans and could export non-agricultural products in ex-change for food from countries with agricultural surpluses. Accordingly, ghost-acreage-dependent countries like these were vulnerable to foreign efforts to manipulate their policies (such as the Arab oil embargo). They were also threatened by population growth in the food-exporting countries, for such growth would stem the flow of food exports they needed in order to survive.

When there ceased to be agricultural surpluses anywhere, and when all nations became dependent on oceanic ghost acreage, population densities of a British or Japanese magnitude would be more obviously non-viable. In the meantime, Americans, Canadians, Australians, et al, habitually pointed to their own wheat surpluses and reassured themselves that they were a long way from being overpopulated. "Look at Japan", said their people, blinded still by the old pre-ecological paradigm: "much more heavily populated than we are, yet prospering".

Space Age accomplishments at last brought some recognition that the earth must be considered as a unit. It is man's one habitat. This planet is an island, more absolutely than Japan or Britain. When Homo sapiens in the 1960s became able to "export" a few manufactured items from earth to the moon, to Mars, to Venus, et cetera, only new knowledge came back in exchange - there were no imports of foodstuffs. The knowledge increments were magnificent achievements, well worth pursuing; still, the terms of the exchange by which they were accomplished began to underscore the fact that mankind as a whole could not disregard overpopulation, as some component countries had continued to do when they outgrew the carrying capacities of their own territories. There was no "trade acreage" in outer space.

"Fish acreage", if considered globally, could also be seen to provide only a shrinking reserve for the world's family of nations to fall back on. The earth's oceans are finite. In the 1970s the fish, whales, and other edible marine creatures were already being harvested in greater quantities than would permit a sustained yield. <9> From over-fishing and from pollution, the seas were dying. <10> Accordingly, various nations were becoming more overtly competitive in their use of this reserve. Some were compelled by circumstances to express such competitiveness in the form of territoriality. Human societies thus turned out to behave much in the manner of communal groups of other mammal species, when one group begins to suffer from encroachments by others upon resources it needs in order to sustain itself. A typical animal response to population pressure is to assert territorial claims and to exclude competitors from the claimed area. <11> A number of nations unilaterally extended their claims to exclusive fishing. The original "three-mile limit" of national sovereignty over the seas became a "twelve-mile limit", and then various nations went on to extend their fishing claims out to fifty miles, or a hundred, or two hundred. <12>

The so-called Cod War between Britain and Iceland, and similar friction between the United States and Peru, were territorialist responses to the end of exuberance. These territorialist responses were becoming so universal that they compelled the United Nations to begin rewriting the law of the sea to institutionalize such marine claim-staking. Meanwhile, the United States unilaterally proclaimed a 200-mile fishing limit effective March 1 1977, and this severely pinched fish acreage-dependent Japan. On a November day in 1976, when talks began that were intended to lead to a bilateral North Pacific fisheries agreement between Japan and the US, thousands of banner-carrying Japanese took to the streets of Tokyo in protest. In a newspaper ad, the Japan Fisheries Association said the 200-mile limit off American shores could seriously restrict Japanese protein consumption, curtailing by as much as 44 percent the amount of fish that would be eaten in Japan. <13>

Importing from the Past

The onetime American shibboleth, "Freedom of the seas", had been an idea born in the Age of Exuberance. Post-exuberant overload was now depleting the world's resources and requiring even the United States to take such steps as fencing off a private fishing domain. But the predicament was global. Without knowing it, Homo sapiens faced a plight much like that of Japan when confronted with fish-depleted oceans. As an island in space, the world could not rely on imports from elsewhere; nevertheless, it was already heavily dependent upon imports from elsewhen. That we were importing from the past becomes clear when we logically extend Borgstrom's ghost acreage concept to include a third component. Technological progress had made mankind heavily dependent upon imports of energy from prehistoric sources. Man's use of fossil fuels has been another instance of reliance on phantom carrying capacity.

The energy we obtain from coal, petroleum, and natural gas can be expressed as "fossil acreage" - the number of additional acres of farmland that would have been needed to grow organic fuels with equivalent energy content. Mankind originally did rely on organic fuels, chiefly wood. Wood was a renewable resource, though even in the world's once vast forests it grew in limited quantity. Access to vast but non-renewable deposits of coal and petroleum came to be mistaken by peoples and nations as an opportunity for permanently transcending limits set by the finite supplies of organic fuel.

You wrote:

So far as Margrit Kennedy goes, I just cannot see this happening. Imagine you are the government of a sovereign state...are you really going to give up your right to central banking privileges just to have a better worldwide monetary system? Where's the incentive? Dies wird nie innerhalb die Vereinigten Staaten funktionieren.

Vested interests (rich people) and powers that be (rich people + government) would seem to gain nothing by this...particularly a government that was in control of a reserve currency. The rentier class of modern capitalists would be distraught to say the least. Even a rouge leader pushing such a thing would do well to double down on the secret service detail.

This may change in the not too distant future - as finally populations begin to collapse - when the resource crunches start hitting -- and it is discovered that merely printing money does not add any additional wealth.

[GRG55]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

GRG,

Sorry to burst your bubble, but in fact a large number - if not a majority - of said 'creative brains' are Chinese and/or Indian.

There has been an undocumented trend in the past 5 years where these Chinese/Indian engineers are offered packages in China or India duplicating their after tax savings in dollars, but otherwise offering pay in rupees and/or RMB in the country in question.

Overall savings between taxes and subsidized what-not is over 50% of salary, more like 60%+ for parts of India.

Thus I see no reason whatsoever why said 'creative brains' must remain in the United States at all, much less California.

In fact, I'll come right out and say that Palo Alto is for engineering what Manhattan is for financials.

My one and only visit to Silicon Valley was to HP Labs in Palo Alto in 1977 when I was an engineering student. At that time there was an modified HP logo in the reception lobby; it said "Have Pride".

HP was then riding high more than 20 years before the tech boom blow-off. As we know it subsequently fell into the abyss and perhaps now is going to work its way back up to the canyon rim. Maybe Palo Alto will go through a similar pattern. Maybe not.

But I am quite certain that if immigration to the USA declines materially, relative US labour costs will increase (and US unemployment rates will surprise everyone with how low they remain), and the economy will be even more hooked on currency depreciation to remain internationally competitive.

[c1ue]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Actually the primary point I was aiming at is that Palo Alto will survive as a tech company corporate headquarters, but the 90% non general management/GM entourage jobs in a typical tech company will move elsewhere.

Much as in Manhattan, where the top knobs have offices; there are some central HQ type stuff, but otherwise jobs leak off to other regions.

[BiscayneSunrise]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Don't forget,too that when the Chinese/Indian talent are offered attractive packages to remain in their home countries, an added benefit is exactly that: they get to remain in their home country, close to family, friends, the culture they know in a country that is getting increasingly comfortable.

I'm also waiting for the day when US shareholders begin demanding that US corporations move their headquarters to countries where costs are lower including executive packages.

[Jim Nickerson]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Don't forget,too that when the Chinese/Indian talent are offered attractive packages to remain in their home countries, an added benefit is exactly that: they get to remain in their home country, close to family, friends, the culture they know in a country that is getting increasingly comfortable.

I'm also waiting for the day when US shareholders begin demanding that US corporations move their headquarters to countries where costs are lower including executive packages.

Is it Greg? Greg, I hope your genes are exquisitely tuned for longevity.

[GRG55]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Don't forget,too that when the Chinese/Indian talent are offered attractive packages to remain in their home countries, an added benefit is exactly that: they get to remain in their home country, close to family, friends, the culture they know in a country that is getting increasingly comfortable.

I'm also waiting for the day when US shareholders begin demanding that US corporations move their headquarters to countries where costs are lower including executive packages.

On a global basis the depreciation of the US$ has already made the USA incredibly cheap in many, many respects compared to only a few short years ago. Some Indian companies, Infosys is one example, are relocating some of their US client business outside of India (back to the USA or Mexico) because they can't compete for US$ contracts given the rise in the Rupee and the escalating costs of office space, salaries, etc in their home base.

I really get the impression that many analysts are underestimating how powerful that currency depreciation effect is going to be, once the usual lag time is worked off. GE is one of three world scale manufacturers of large power generators and control systems for power utilities. The other two are France's Alstom and Germany's Siemens AG. Imagine what the Euro/US$ exchange rate has done to them in the last 7 years.

As the yuan/US$ rate changes in favour of the dollar, manufacturers like CAT, that still have plants in the USA, are going to smack competitors like Komatsu, who lowered their costs by moving manufacturing from Japan to China. Before this is over we are going to get lots of reports of Asian and European manufacturers investing in production capacity in the USA.

Coming out of this recession, many parts of the US economy are going to be formidably competitive, especially if the US$ continues to decline compared to European and Asian currencies, as many expect. Yes, that means that the purchasing power of US salaries and wages will decline, perhaps along with relative standards of living, but it's not going to be a disaster.

Edit Added: No argument that executive compensation has become excessive, especially when those that fail are rewarded even more than those that lead corporations to success. However, their compensation is like airline pilot pay - it's a relatively small part of the total cost structure, the enterprise (apparently) can't operate without them, and therefore they have excessive bargaining power compared to other labour.

[BiscayneSunrise]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Is it Greg? Greg, I hope your genes are exquisitely tuned for longevity.

Jim, LOL! You are exactly right. Expecting those foxes on compensation committees to guard the henhouse is unrealistic, I know.

Perhaps the reason why executive compensation is climbing so fast is it is their way to keep up with dollar devaluation (and then some)

Greg