International Financial Outsourcing Center

Seen at the Beijing Airport:




Maybe the 'knowledge' workers of Wall Street are more expendable than they thought.

South East Asia

As China seeks to expand its sphere of influence in the coming years, it will look first to its backyard, and come into conflict with American interests.

Some strategic considerations in South East Asia:

1) Around 80% of China's imported oil comes through the Strait of Malacca, a choke point between Sumatra and Malaysia. 15 billion barrels of oil go through the strait each day, second only to the Strait of Hormuz. Hu Jintao has called it China's "Malacca Dilemma". China is attempting to circumvent this by building relations and ports in the countries of Burma and Bangladesh. Burma, with its military government and isolation from the West, seems a likely candidate for China to build a pipeline through.
link/link/link

2) The Spratly and Paracel islands. Both areas contain large oil and gas reserves, and Exxon recently landed a contract from Vietnam for exploration off the islands. They are primarily in dispute between China and Vietnam. Total proven reserves are 7 billion barrels, with another 20 billion barrels unproven.
link

3) Hainan Island. Home to China's nuclear submarine fleet, which can be well concealed due to the islands caves. It is just north of the Paracel islands , and close to deep water.
link

4) Taiwan, well known. The island's two main political parties have drastically different views on Taiwan's future. The KMT favors a form of reconciliation with mainland China, and increased economic ties. The DPP, now out of power, favors full Taiwanese independence, and is increasingly militant about calling for that in its platform.

5) China might initiate a yuan based trade-settlement program with ASEAN members countries, all of whom are small economies that China has extensive economic relations with. My take, is that the program is a trial towards establishing a regional trading bloc, with the yuan supplanting the dollar as the dominant currency in that bloc. However, American and Western influence is especially strong in the Philippines and Thailand, and unlikely to be overturned. And Vietnam has a noted historical desire to be independent, and fought wars with both China and the U.S.

The Rise or Fall of Various Sectors in the American Economy , 1950-2008

Some surprises here for me, and some things as expected.

The decline in Manufacturing, from 31 % of payrolls to 9 %, is not a surprise. Interestingly, its representation in GDP is about double its current labor representation, which speaks to its importance for an economy, I think.

The Finance (aka F.I.R.E.) sector ticked up only slightly since 1950. Some Real Estate work is as a 2nd income - so that might not be reflected in official statistics.

Construction is steady, and did not increase much with the housing bubble, surprisingly. Though, there are many employees who are 'off the books' in this sector.

Health Care is booming as a source of employment. It represents 10 % of payrolls (of the 13 % in the Education and Health Care classification).

Government payroll trends are relatively flat. They topped out at 19.2 % in 1975, and increased slightly during the Bush years, probably due to Homeland Security related jobs. Average Hourly Earnings topped out around the same time as Government representation in the labor force. Correlation , but not causation ?

Professional and Business Services can include anything from Office Admin and Waste Services, to Management, Computer Systems Design, Legal and Architecture. Growth seems to be mostly coming in the Office Admin and Waste Services area, now at 6 % of total payroll. Computer Systems Design and Related is about 1 %, as is Engineering and Architecture. Professional consulting is also included in this muddled classification.

Not on the graph, for reasons of space, include Trade, Transportation, and Utilities (stable, at around 20% for the last 50 years), Information (2-3 %), and Mining (1%). Within Trade, Transportation, and Utilities is 'Retail Trade' which, surprisingly to me, remained within a 10-12 % range. The increase in the Leisure and Hospitality sector seems as expected.

What Goes Up , Must Come Down

While Wall Street partied for a generation, the average hourly wage stagnated or declined. The younger generation did no better, or even a little worse than their parents, on average. Families worked more hours, not less.

For the bottom 90 % of the income bracket, the economy has been slow for a long time; the average hourly wage peaked in January of 1973, and it now stands 10 % less than that peak. The S&P 500 peaked in August of 2000 with gains of 210%, relative to January of 1973. After a new top, it crashed with avengeance in 2008.


There is an economic crisis, but it's in the news because the elite have seen their wealth evaporate. Relative to the American public, the top 1 %, hold 50 % of total investment assets, and the top 10 % hold 85 %. So now, in this real crisis, Wall Street has to be bailed out - after acting like a drunk driver crossing lanes on the highway, endangering everyone else.

Their greed and hubris at the top of the bubble should not be forgotten. They celebrated a mirage, and now it's gone.

----
stats
source on wealth distribution

Bill Gates and the Internet

It's pretty well acknowledged that Bill Gates was late to the game when it came to forecasting the importance of the internet. And, that's a good thing. The internet run through a Windows type of gateway would cost more, limit choice and generally act in a monopolistic way.

Most of Microsoft's research was in the software component of the business, and they were caught flatfooted by Netscape's internet browser in the early 90's. After, and during, that lengthy legal and economic battle, their internet oriented products were never that good. MSN always had the negative aura of Windows about it, with a lot of unnecessary garbage that slowed response down. And speed was, and is, a fundamental component to enjoying the internet. Even now, it's nice to go to a clean search page, without dancing butterflies, or 'zany' news, etc.

Related stuff:

PC Genius, Internet Fool

His famous "Internet Tidal Wave" memo. He does not note the potential of internet advertising revenue in this memo.

A summary of his career at Microsoft. Mentions his "Letter to Hobbyists" from 1976.

College Tuition, Then and Now

In 1967, fees for in-state students at the University of California-Berkeley were $250. In today's money, that is around $1585.

Fees for the 2008-09 academic year, at the same university, are $8932.

This pattern is the same at public universities across the country.

Apart from the hypocrisy of politicians and business leaders refusing to maintain the education system they benefited from, and the short sightedness of bankrupting young people who want to achieve and be educated... apart from that - one has to wonder who is going to spend money in our future economy, given the kind of debt load placed on the shoulders of the next generation.

The Golden State

95 Billionaires in bankrupt California.

Jawboning China to Consume, and Consume More

It's not going to work any time soon. China already has a good-sized middle class, but as a percentage of the population, it is small compared to Western Europe, the United States and Japan. To replace long-standing export markets with domestic consumption, its massive working class will need increased wages and security.

In 2007, labor laws were passed to move down that road:

China's legislature passed a sweeping new labor law Friday that strengthened protections for workers across its booming economy, rejecting pleas from foreign investors who argued the measure would reduce China's appeal as a low-wage, business-friendly industrial base.

The new labor contract law, enacted by the Standing Committee of the National People's Congress, requires employers to provide written contracts to their workers, restricts the use of temporary laborers and helps give more employees long-term job security.

Unfortunately, the world economy melted down. And now, predictably:

"The global economic crisis threatens to derail much of the progress made by China's workers over the last few years," said labour rights group China Labour Bulletin in a recent editorial.

The Dagongzhe Migrant Workers Rights Centre in the southern boomtown of Shenzhen has also voiced concerns at pervasive "tricks" used by employers to circumvent the new laws.

These include reduced overtime pay and using doctored contracts that were either blank, incomplete or written in English to confuse and limit possible legal liabilities.
---
"A lot of factories now are using the financial crisis as a means to protect their own interests," said Ivy Yu, a coordinator with the Dagongzhe Migrant Workers Rights Centre.

In recent weeks, Guangdong's prosecutor's office issued a controversial set of guidelines, saying it wouldn't prosecute key business personnel or technical staff for minor crimes, in a bid to help businesses during the downturn.

I expect China's stimulus package to support their GDP numbers through the next year. But the economic breakdown that revealed itself in 2007-2008 will persist through this stimulus package, in my opinion.

Two aspects of this breakdown are: 1) an increasingly broke and indebted consumer in the United States and parts of Western Europe, via stagnant wages through globalization, and 2) increased capacity, via globalization, in countries whose economies are structured to sell surplus capacity back to this consumer.

What's also interesting is that 'American' companies often benefited the most from this pattern of globalization - i.e. reduced wages and costs at the point of production, and increased financing fees to the indebted consumer at the point of consumption. The U.S. dollar as a reserve currency played a key role in all of this, enabling cheap credit on the American side of the equation.

The world will be waiting indefinitely if they expect China to dramatically increase consumption. China needs to keep people employed, and massive employment is still only offered in their low-wage industries. In a weak world economy, these industries will limit job security and keep wages as low as possible.

---
Related Posts:

Global Imbalances

G20: Avoiding the Bigger Issues

The Gulf of Aden

I don't think this is just about pirates.

The U.S. Navy announced last month the formation of the new task force dedicated to combating piracy in the region.

Pirates have been seizing vessels in the Gulf of Aden, which connects Europe to Asia and the Middle East via the Suez Canal, hijacking dozens of ships last year and taking tens of millions of dollars in ransom payments...

The Combined Task Force 150, with about eight ships, includes U.S. vessels and others from Britain, Canada, Denmark, France, Germany and Pakistan.

----
Japan to deploy naval ships off Somalia.
---
Russia sent a warship.
---
December: "Chinese Ships Will Fight Pirates"

China has announced it is to send naval ships to fight rampant piracy in the Gulf of Aden off the coast of Somalia. State media suggested the force could consist of two destroyers and a supply ship, although officials did not confirm the details of the deployment.

---
November: "India Leads Fight Against Somali Pirates"
----
This is basically a who's who of major and emerging powers, all getting to practice with their expensive toys in a crucial strategic area. As the top secret website wikipedia notes:

"The Gulf of Aden is a vital waterway for shipping, especially for Persian Gulf oil, making it an integral waterway in the world economy. Approximately 11 percent of the world's seaborne petroleum passes through the Gulf of Aden on its way to the Suez Canal or to regional refineries."

There is a substantial amount of firepower in the region now.

Since Lincoln is in the News

from his State of the Union, in 1861 :

Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.

Liberty , Equity (?), Fraternity

Buzzwords are a big thing in education, and one of the biggest today is "Equity". On the faculty page of the (very respected) Stanford University Education Department, the word equity pops up over a dozen times.

Until recently, equity was mostly used in discussions about stocks, finance, or maybe actors. "Equality", or lack thereof, was used to talk about differences in opportunity, education or income. So why did equality lose the buzzword battle to equity ?

According to my handy on-line dictionary, equity can be defined as: "justice according to natural law or right ...freedom from bias or favoritism".

Equality is: "the quality or state of being equal".

A subtle distinction, but significant in ideology. Practicing the concept of equity means that, as a teacher, you are trying to give students an equal chance (an equal input) - but that ultimately there will be winners and losers (an unequal output). This manifests itself as good grades or bad grades. An honor roll certificate or no honor roll certificate. It presuppose that children practice free will and engage in rational choice, and that their choices - through an equitable presentation "free of bias or favoritism" - will lead to a meritocratic social structure. Therefore, an unequal outcome is normal, and not indicative of an unequal input. I would argue that this philosophical approach bleeds beyond the differences of individual students, into the expectations the educational system has for groups of students from different social backgrounds.

Focusing on equality as teacher, means you are not principally trying sort or stratify. Equality of output is as much a concern as equality of input. This mindset assumes that an inequality of output signifies an inequality of input - especially when measuring large numbers of students, of different social backgrounds, against each other.

Equity is a safe buzzword, while equality probably sounds too socialistic for the educational hierarchy, and those devising policy.

Lithium in Bolivia

50 % of the world's known deposits of lithium carbonate are in a Bolivian salt flat called "Salar de Uyuni". Lithium carbonate is used to make the batteries in cell phones, laptop computers, and electric cars.

Writes the BBC:

Mitsubishi, which plans to release its own electric car soon, estimates that the demand for lithium will outstrip supply in less than 10 years unless new sources are found.

"The demand for lithium won't double, but increase by five times" according to Eichi Maeyama, Mitsubishi's general manager in La Paz.

South America was once an area completely within the United States' sphere of influence. The idea began with the Monroe Doctrine of 1823, when the European powers were served notice that they would no longer call the shots in that area of the world. An infamous example of 'Yankee' influence was the CIA-backed overthrow of Chilean president Salvadore Allende's government, in the 1973.

The failed coup of elected Venezuelan president Hugo Chavez, in 2002, provided a decisive break to this history. When he was removed from office and thrown in jail, the White House, through its spokesman, gave tacit support to the coup:

"We know that the action encouraged by the Chavez government provoked this crisis. According to the best information available, the Chavez government suppressed peaceful demonstrations. The results of these events are now that President Chavez has resigned the presidency."

The New York Times cheered :

"Venezuelan democracy is no longer threatened by a would-be dictator."

It later emerged that the Bush White House had previously met with leaders of the coup, including its short-lived president Pedro Carmona, now of Miami.

Street protests, and support within the Venezuelan military, led to Chavez's reinstatement as president a few days later. This left both the White House and The New York Times with egg on their faces. Meanwhile, Latin America gained confidence, and pushed forward for greater autonomy. When the government of Evo Morales was elected, the financial support of Chavez enabled Bolivia to re-national its natural resources, without Western approval, and despite the threats of loss of aid.

Bolivia has some of the world's largest deposits of natural gas, largely in its mestizo, or Spanish-origin areas. Little of the wealth has gone to the highland areas, where the Indian majority lives. What makes the lithium deposits so important is that they are in these highland areas. However, as the Middle East knows, possessing key natural resources can be a blessing and a curse. With the lithium carbonate comes the possibility of massive corruption and destabilization within Bolivia, as powerful corporations and countries fight for access.

Luis Alberto Echazu, Bolivia's minister of mining, says :

We want to send a message to the industrialized countries and their companies - we will not repeat the historical experience since the fifteenth century: raw materials exported for the industrialization of the West that has left us poor."

Russia and the Former Soviet Bloc

With the relative decline in U.S. economic dominance over the last decade, openings exist for regional powers to assert themselves. Conflicts over 'spheres of influence' have developed, as they did in the past, over access to new markets, labor and resources, and buffer zones for security.

This is occurring now in the satellites of the former Soviet Union. The Russian invasion of Georgia marked its first pushback into a former sphere of influence. Other pushbacks include the gas shut-off in the Ukraine, and the current showdown over the U.S. military base in Kyrgyzstan. The idea of a 'sphere of influence' was promoted by the Russian President last August.

In his unabashed claim to a renewed Russian sphere of influence, Mr. Medvedev said: “Russia, like other countries in the world, has regions where it has privileged interests. These are regions where countries with which we have friendly relations are located.” Asked whether this sphere of influence would be the border states around Russia, he answered, “It is the border region, but not only.”

There is little evidence that the world recession has changed Russian strategy. Plans for a naval port in the Russian-occupied Georgian province of Abkhazia, were recently announced. This port might counteract a loss of the Sevastopol lease to Ukraine, in 2017.

The U.S. and the Euro Zone are also competing for influence. The Euro is planned for expansion into the Baltics, Czech Republic, Poland, Romania, and Hungary. The U.S. is deepening military ties and will possibly locate defense missiles in Poland and the Czech Republic. Georgia received a $1 billion dollar aid package from the U.S., after Russia's invasion last summer.

There will be quite a bit of economic, political and possibly military turmoil in this region over the next decade.

Russia, and the Former Soviet Bloc

With the relative decline in U.S. economic dominance over the last decade, openings exist for regional powers to assert themselves. Conflicts over 'spheres of influence' have developed, as they did in the past, over access to new markets, labor and resources, and buffer zones for security.

This is occurring now in the satellites of the former Soviet Union. The Russian invasion of Georgia marked its first pushback into a former sphere of influence. Other pushbacks include the gas shut-off in the Ukraine, and the current showdown over the U.S. military base in Kyrgyzstan. The idea of a 'sphere of influence' was promoted by the Russian President last August.

In his unabashed claim to a renewed Russian sphere of influence, Mr. Medvedev said: “Russia, like other countries in the world, has regions where it has privileged interests. These are regions where countries with which we have friendly relations are located.” Asked whether this sphere of influence would be the border states around Russia, he answered, “It is the border region, but not only.”

There is little evidence that the world recession has changed Russian strategy. Plans for a naval port in the Russian-occupied Georgian province of Abkhazia, were recently announced. This port might counteract a loss of the Sevastopol lease to Ukraine, in 2017.

The U.S. and the Euro Zone are also competing for influence. The Euro is planned for expansion into the Baltics, Czech Republic, Poland, Romania, and Hungary. The U.S. is deepening military ties and will possibly locate defense missiles in Poland and the Czech Republic. Georgia received a $1 billion dollar aid package from the U.S., after Russia's invasion last summer.

There will be quite a bit of economic, political and possibly military turmoil in this region over the next decade.

U.S. and World Manufacturing Relative to GDP

From 1970 until 1998, U.S. manufacturing output fell from 23.6 % to 16.6 % of total GDP. However, this type of decline was worldwide, with world manufacturing output falling from 26.5 % to 18.8 % of total world GDP. During that time, apart from the adjustments of the mid 80's, U.S. manufacturing was faring about as well as the rest of the world.

Starting around 1998, there was a sharp decline in U.S. manufacturing as compared with the world. U.S Manufacturing as a share of GDP fell 20 % (16.57-13.29) from 1998-2007 ; for the world, it fell 10 % (18.81-16.90). Bubble-nomics in the U.S. enabled the weakness in manufacturing and its support industries to be masked.

The Plaza Accord, in 1985, dealt with the last such drop in U.S. manufacturing by orderly devaluing the dollar. This is evident on the chart. After the finance implosions of 2008, it will be difficult to ignite a new bubble in the private sector. Basically, the dollar is overvalued relative to the manufacturing strength of the United States.
----

----

----

Other thoughts: China's influence is part of the story post-1998. How much that has to do with a depressed Yuan, versus productivity issues (such as wage arbitrage), is hard to say.

The dropping of the gold standard in the early 70's also acted as a type of devaluation, going into the mid-70's.

Source is here, stats here.

Naima

Have been working on this tune recently. Coltrane was always trying to break the boundaries of form and its limitations, in terms of scales linked to a harmonic progression, the cyclic chorus pattern (i.e. 32 measures, then repeat), and the confines of diatonicism (as much as is possible on a diatonic instrument like the saxophone).

Listening to his solo, one can hear a struggle against form and conformity - wrestling against those concepts; or maybe, a cue ball ricocheting against the sides of a pool table - forming interesting patterns.

But , as well, the melody to this tune is very beautiful.

Musicians: John Coltrane tenor saxophone, Elvin Jones drums, Jimmy Garrison bass and McCoy Tyner piano.

Fractures in the Plutocracy ("Buy American")

Vice-President Joe Biden (Jan 31, 2009) :

Vice President Joe Biden yesterday defended a "buy American" steel provision included in the $825 billion economic-stimulus bill that has caused concern among some US trading partners.
---
"I don't think there's anything anticompetitive or antitrade in saying when we are stimulating the US economy that the purpose is to create US jobs," he said. "The same thing's happening in Britain, the same thing's happening in Europe, the same thing's happening in China, and they're not worrying about American jobs."

President Obama (February 3rd, 2009):

"I agree that we can’t send a protectionist message,” he said in an interview with Fox TV. “I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.”

The Buy American provision in the stimulus bill has provoked a furious bit of infighting among different elements of the U.S. economy. On the one hand, are industries like steel and textiles, who are concerned about the lower wages and higher productivity of foreign competition. On the other, are companies like G.E. and Caterpillar - who are productive enough to export to other countries, especially China.

The U.S. can be understood as a plutocracy, or a government run by the wealthy. However, the political design of the country, based upon a separation of powers, lends itself to being a plutocracy which is somewhat disparate. When economic conditions deteriorate, the arguments between these disparate elements become increasingly public and visceral..and even the Vice-President and President cannot get their stories straight.

Grand Slam at the Local Diner

Yeah I was there, I'm not one to pass up a free breakfast, and it's just down the street. A lot of people, but not a mob scene, and a patient security guy running the waiting list. I often go there for a 3 am post-gig coffee anyhow.

While there may not be such a thing as a free lunch, Denny's served nearly 2 million free Grand Slam breakfasts — the chain's signature combination of two pancakes, two eggs, two sausage links and two bacon strips, which usually sells for $5.99 — from 6 a.m. and 2 p.m. at its 1,500 restaurants around the country. (link)

So that adds up to a $12 million stimulus for the working class clientele they serve. Not bad for one day, and one company - certainly more direct than whatever is going on in Washington, in between tax cheats getting confirmed or withdrawing.

Olympics Stuff (6 Months After)

I doubt many people care that Michael Phelps smokes weed occasionally, but there are still a few of the "Phelps Image as Hero Hurt by Photos" stories. Some people feel they have to pretend to be upset, for the 'sake of the children'. But, it seems there is less trivial moralizing than there would have been a few years ago, because it's so obvious we have bigger problems.
----
Also read that the "Bird's Nest' in Beijing is in disuse:

"The only confirmed event at the 91,000-seat stadium this year is Puccini's opera "Turandot," set for Aug. 8 — the one-year anniversary of the Olympics' opening ceremony. The stadium has no permanent tenant after Beijing's top football club, Guo'an, backed out of a deal to play there."

The Olympics have become a big money pit, in which countries build things they don't have much use for, at the expense of their social safety net. In Athens, host of the 2004 Olympics:

"many of the venues are still vacant ... promised parks never materialized, and new transportation infrastructure has caused problems like flooding and increased traffic... Citizens question the event's $15 billion price tag – most of it paid for by the state."

The Beijing Olympics were celebrated as a cultural milestone and, for this reason, the $ 40 billion cost was generally accepted by the mainland population. But, the U.K. population will not be so accepting for the 2012 Games, given that they are going into a major recession, and have hosted the Olympics before. Which is fine. Hopefully the Olympics will become more centered on the athlete, and less on the production value - with its resulting expense.

Does Manufacturing Matter ?

In 1970, U.S. manufacturing represented 28 % of world output, while U.S. GDP was 31 % of world output. After several peaks and valleys over the ensuing decades, by 2007, manufacturing had slumped to just under 20 %, while GDP was at 25 %.

The separation of the two outputs, relative to world production, widened dramatically starting in the mid 1990's. Manufacturing/World Manufacturing relative to GDP/World GDP was at at .894 in 1995, fell to .854 in 2000, and .786 by 2007. This 'gap' in the economy was filled in through financial speculation, grown through the watering of deregulation and easy credit. The most visible aspects of this were the equity and housing bubbles.

It remains to be seen whether the financial sector can rebound and remain durable, in an economy whose manufacturing base is dwindling. Or, if manufacturing needs to be healthy for other parts of the economy to be healthy. I would bet on the latter.


source of statistics