2011: Trends and Observations

What will historians write about 2011?

In the U.S. and Europe the merger of globalization and the Information Technology revolution are putting a crunch on the middle-class while in the Middle East and Africa it’s reversing centuries of authoritarian rule. 

That’s a bit of an oversimplification, but it’s the best I could do to put it into one sentence.  

What’s Happened This Year?

1.  Activists protest and burn sections of London.

2. The Arab Spring produces popular rebellions against dictators across the Arab world. To varying degrees Tunisia, Egypt, Libya, Syria, Yemen, Bahrain, Algeria, Iraq, Israel, Jordan, Kuwait, Morocco, Oman and Saudi Arabia have all experienced unusual amounts of protest.  Former Egyptian President Honsi Mubarak, former Libyan President Muammar Gaddafi and former President Zine El Abidine Ben Ali of Tunisia were all driven out of power.  Combined they had had ruled their countries for 96 years.

3.  The Israeli Summer brings 250,000 Israelis into the streets, protesting the lack of affordable housing and the way their country is now dominated by an oligopoly of crony capitalists.

4.  Cities in Greece, Italy, Spain, Ireland and Latvia are overrun by young people protesting against unemployment and increasing economic inequality.   

5.  The Tea Party continues to control the dynamic of American politics by using leverage on the debt ceiling debate, resulting in an unprecedented S&P downgrade of U.S. credit.   
The Eurozone nearly collapses amid worries that Greece and Italy will default.  There are talks of Germany bailing these countries out, but only if a significant fiscal union can be established to ensure this doesn’t happen again. 

That’s enough isn’t it?  I didn’t even mention all the drama with Lindsay Lohan…  Just kidding.

Clearly, it’s been a busy year.  After all, Time Magazine’s Person of the Year was the “Protestor”.  That’s rather unusual.  So, how has the merger of globalization and the Information Technology revolution created the context for these events to occur?  Consider the recent advances in communications technology:  cloud computing, robotics, 4G wireless connectivity, Skype, Facebook, Google, LinkedIn, Twitter, the iPad, and cheap Internet-enabled smartphones.  Together these technologies have allowed more people around the world to get their hands on a piece of the pie. Therefore, to get into the middle class now, you have to study harder, work smarter and adapt quicker than ever before. All this technology and globalization are eliminating more and more “routine” work — the sort of work that once sustained a lot of middle-class lifestyles. This includes the famed manufacturing jobs that were once abundant in America.  Decades ago, you could secure one of these jobs with a high school diploma and they’d provide the means for the American Dream:  a house, wife that stayed home, a couple of kids, a dog, money to pay for your children’s education and a decent retirement.  Not the case anymore.  Even if these sorts of jobs did come back to our country, they wouldn’t pay enough to attain these desirables

Tom Friedman writes that the merger of globalization and I.T. is producing gargantuan profits, which is a bit ironic since we did just escape “The Great Recession” (have we really escaped though?) . He writes that “employers are finding it easier, cheaper and more necessary than ever to replace labor with machines, computers, robots and talented foreign workers. It used to be that only cheap foreign manual labor was easily available; now cheap foreign genius is easily available. This explains why corporations are getting richer and middle-skilled workers poorer. Good jobs do exist, but they require more education or technical skills. Unemployment today still remains relatively low for people with college degrees. But to get one of those degrees and to leverage it for a good job requires everyone to raise their game. It’s hard.”  He’s entirely correct.  The stakes have been raised. 

Take Grinnell College, a rural Iowa college with 1,600 students.  New York Times columnist Jacques Steinber writes that at little Grinnell College in rural Iowa, “nearly one of every 10 applicants being considered for the class of 2015 is from China.” The article noted that dozens of other American colleges and universities are seeing a similar surge as well. And the article added this fact: Half the “applicants from China this year have perfect scores of 800 on the math portion of the SAT.”  Read the full article here.

That’s remarkable. 

Friedman sums up this trend quite nicely:  “We are increasingly taking easy credit, routine work and government jobs and entitlements away from the middle class — at a time when it takes more skill to get and hold a decent job, at a time when citizens have more access to media to organize, protest and challenge authority and at a time when this same merger of globalization and I.T. is creating huge wages for people with global skills (or for those who learn to game the system and get access to money, monopolies or government contracts by being close to those in power) — thus widening income gaps and fueling resentments even more.”

I can’t wait to see what “2012: A Year in Review” will look like.

On a personal note, I’d like to thank anyone who’s reading this post.  Writing this blog has been intellectually and even emotionally satisfying. It’s allowed to me put to paper (wait, that phrase probably won’t exist in 50 years…) what’s been running through my head.  Or should I say “going on in my little grey cells”.   Thanks-

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The Takeaway: There’s no arguing that 2011 wasn’t a historically significant year.  I’m fascinated to see what next year will bring. 

"America Will End in 2011"

Screen shot of video "End of America 2011"

A video widely advertized on TV and circulated on the internet claims the biggest economic crisis in American history will hit within a year, drastically altering American life as we know it. Is there any truth to this?

This video, titled “End of America” was created by Porter Stansberry the founder of Stansberry & Associates Investment Research and editor of Porter Stansberry's Investment Advisory.  You can watch the full video 77 minute video here.  First, I’ll explain his credibility, and then deconstruct a few of his reasons for the “looming economic” disaster. 

Credibility: 

Porter Stansberry begins the video by building his credibility.  He claims that – to his knowledge – he was the only financial advisor to correctly predict the 2008 financial crises.  That “prediction” includes the bankruptcy of Fannie & Freddie and General Motors.  If this is true, he certainly sounds like some sort of guru. However, he did fail to mention that in 2007, he and his investment firm, then called "Pirate Investor," were ordered by a US District Court to pay $1.5 million in restitution and civil penalties, the court stating "Stansberry's conduct undoubtedly involved deliberate fraud, making statements that he knew to be false."  So, it seems that Stansberry has a history of deliberately misleading people, presumably to turn a profit.  Not that this completely discounts any credibility he might have, but it is worth noting.

Stanberry’s Claim:

Stansberry essentially cites one significant catalyst for the inevitable economic disaster: The United States losing its hold on the reserve currency of the world. 

Most people don’t know what the “reserve currency” means, so I’ll give a quick explanation.  Since global commodities like oil and gold are sold throughout the world, it makes since to price them in one currency.  This is just for simplicity’s sake.  After World War II, the U.S. dollar became the currency that was used to price all of these global commodities. 

Therefore, when a country other than the U.S. wants to buy a global good like oil, they must first exchange their particular currency for dollars.  Then, with those newly exchanged dollars they can buy oil.   Stansberry gives an example of this in his video about Germany. If Germany wants to buy oil from Saudi Arabia, it can’t go directly to Saudi Arabia and purchase the oil with Euros, it first must exchange it for dollars.  Then, once it has the newly exchanged dollars it can purchase the oil.

Here’s the rub: When countries exchange their currency for dollars there is a transaction fee.  Most of the time, this fee is insignificant, but over time for many countries (especially smaller ones) this cost can accrue.  Conversely, the U.S. never has to pay this transaction fee.  Therefore, the U.S. can by these global commodities – most notably oil – at a relatively cheaper price than other countries.  No transaction fees for us!  Also, it allows the U.S. to borrow money (which we do a lot…) at a better rate, because there are more dollars hanging around in the world than any other kind of currency.  These are the reasons that the dollar is known as the world’s “reserve currency”.  It’s kind of a difficult concept to understand, so don’t feel bad if you don’t have your head 100% wrapped around it.  I’m not quite there yet either.

Stanberry’s Claim Revisited:

So, now that we know what it means to have the world’s reserve currency is (or at least sort of know) we can look at Stanberry’s claim that the world will give up the dollar as the reserve currency.  As with many doomsday predictors, Stanberry takes a piece of information or a possibility and extrapolates it to point that people are rioting in the streets and children starving. 

The truth is that the dollar could be renounced as the world’s reserve currency – but not in the near future.  The types of fallout that Stanberry describes in his video could happen to the United States and the rest of the world if the reserve currency was changed from the dollar.  But the world won’t get rid of the dollar any time soon for this very reason.  There are no good alternatives right now for a reserve currency.  The Euro is failing, the English pound is too closely tied to the Euro, and the Japanese Yen probably wouldn’t work.  The only other possibility would be the Chinese Yuan.  There have been rumblings in China throughout the past several years about trying to replace the dollar with the Yuan, but it seems unlikely.  China currently has $2 trillion worth of American dollar assets (that’s called a trade deficit ladies and gentlemen!), and if the dollar were to be replaced as the world’s reserve currency it would significantly hurt the U.S. economy and devalue the dollar.  The Chinese don’t want the dollar to be devalued because then their $2 trillion of American dollar assets would lose value. 

I suppose this is one positive aspect of the world economy being as connected as it is. For better or worse!

In other words, there’s no plausible situation where the U.S dollar will be replaced as the world’s reserve currency in the short term or even the medium term.  Seventy-five years from now? Perhaps.  No can know for sure.  Let’s go back seventy-five years.  In 1936, would people have been able to predict what the world would be like in 2011?  Not a chance! It’d be another three years until Poland was invaded for goodness sakes.  If you asked the most brilliant and forward thinking economists at the time what a subprime mortgage, credit swap or – gasp! – The European Union was they wouldn’t have a clue.  Today we’re in the same situation for predicting the future.  We can be sure, however, that the dollar won’t lose its status as reserve currency anytime soon.  Stansberry’s claim that this will happen by next August is hyperbole. 

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The Takeaway:  All of Stansberry’s doomsday predictions are predicated on the dollar losing its status as the world’s reserve currency.  That may happen someday, but not in the short term or medium term.  Take deep breath and let’s start investing in education, infrastructure, and research, reforming our immigration policies, and creating better rules to encourage capital investment.  This will allow the U.S. economy to thrive once again. 

Was the Iraq War Worth It?

Is it too early to answer this question?

In my mind there are really only two logical and coherent answers to this question:  No and maybe.  Let me explain both.  Those who don’t believe that the Iraq War was worthwhile have several justifications.  They include:

• Iraq had no weapons of mass destruction
• Iraq had no significant link to the 9/11 attacks
• The overwhelming cost in human lives and dollars spent
• The irreparable damage to America’s standing in the world

First, the American citizens were sold a “false bill of goods”.  That is to say weapons of mass destruction were the selling point used by the Bush Administration to convince the American people of supporting the war.  As it turned out, there were absolutely no weapons of mass destruction.  There is some controversy as to how ignorant certain members of the Bush Administration were to this point to begin with.  It’s difficult to know.  Many liberals think that the Administration’s use of weapons of mass destruction was really a red herring; that it was a conspiracy to secure more oil.  I have a hard time completely believing that.  My guess is that most people in Bush’s cabinet believed that there were weapons of mass destruction, but that if American troops didn’t find them that would be alright because there were other justifications for the war.  Just my guess. 

Second, Saddam Hussein and the country of Iraq had virtually no ties to the men the hijacked the planes on September 11^th.  The men, who were affiliated with Al-Qaeda were not from Iraq.  They were Saudi Arabian, Egyptian, Lebanese and United Arab Emirati.  In fact, Hussien’s link to Al-Qaeda was weak at best. 

Third, the cost in lives and dollars has been immense.  Nearly 4,500 Americans have died in the eight years of fighting in Iraq.  Thirty thousand Americans have been wounded.  The U.S. has spent nearly $1 trillion in Iraq since 2003.  That’s startling.  Moreover, as with many wars, senior Bush Administration officials undersold the cost of the war dramatically.  For example, in a March 16, 2003 Meet the Press interview of Vice President Dick Cheney, held less than a week before the Iraq War began, host Tim Russert reported that "every analysis said this war itself would cost about $80 billion, recovery of Baghdad, perhaps of Iraq, about $10 billion per year. We should expect as American citizens that this would cost at least $100 billion for a two-year involvement.”  History is filled with wars that have cost more than was originally thought. 

Fourth, by acting relatively unilaterally the U.S. damaged its reputation in the world.  Though much more difficult to quantify than deaths and dollars, the first decade of the twenty-first century was an extremely transformative one.  Unfortunately, many of these changes have been relative declines for the United States.  One of these is the collision of declining world opinion of the U.S. and globalization.  Now other countries don’t need to look to the U.S. for leadership (relatively speaking!) as they once did. 

With all of this being said, how could one argue that the Iraq War might be worth it?

Here’s how:  For centuries the Middle East has been relatively stable.  Don’t confuse stability with high quality of life, however.  Dictators have essentially ruled their countries without any problem from outside forces (there are obviously several exceptions) and certainly not from their own citizens.  This stability has destroyed human capital in the region and thus the conditions were right to produce terrorism.  So, the attacks on September 11^th happen, Saddam Hussein is overthrown and there are rudimentary elections in Iraq. 

Eight years after the U.S. invasion Iraq clearly has turmoil.  There’s no denying that, even if you’re the staunchest of supporters of the war.  This turmoil could lead to something worse, but possibly something better. Fifty years from now historians might see that the overthrow of Saddam Hussein in Iraq was one of the catalysts for positive change in the region.  Perhaps turmoil that was a result of overthrowing Saddam, the subsequent Iraqi elections, and getting rid of the Taliban will have helped lead to getting rid of Mubarak, Gadhafi and others.  As I mentioned earlier, this is the argument that one could make.  It’s necessary to note that the revolutions in Egypt and Libya that rid these countries of their dictators happened at a very specific point in history.  Globalization and the Information Revolution have collided to produce the perfect powder keg of conditions for these revolutions.  Those who make the argument that the Iraq might have been worth it would like to include Saddam’s overthrow as one of the ingredients that created the right historical conditions for the Arab Spring.  You can be the judge of that. 

In the end, history will have to judge if the Iraq War was worth its costs.  Right now, I think the evidence clearly shows that it wasn’t.  The lack of WMDs, Iraq’s tenuous link to Al-Qaeda, loss of American and Iraqi lives and the world’s declined opinion of the U.S. all point to this being a bad decision from the beginning.  I suppose there is the possibility that the messy and complicated turmoil that currently constitutes Iraq could resolve itself into something better than what existed prior to 2003. For our sake and the world’s I hope it does.

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The Takeaway:  No, the Iraq War probably wasn’t worth it, though I desperately hope history proves us wrong.

What's the Deal with the Payroll Tax?

One of the taxes that we pay is called a “payroll tax”.  This is a tax that goes to the federal government, funding programs like social security.  The payroll tax has recently been 6.2%.  However, the stimulus bill spearheaded by President Obama allowed for a one year “holiday” on the payroll tax.  It brought the rate down to 4.2%.  This means that for the past year on average people have gotten an extra $50 in their monthly paychecks.  That totals about $1,000 for the entire year.

Who Does the Tax Cut Apply To?

The tax cut is applied on the first $106,000 of personal income.  Thus, it’s been applied to 160 million Americans.  People making more than $106,000 haven’t gotten the tax cut. 

Did the tax cuts stimulate spending in 2011?

Economists disagree.  There are some economists that believe that the tax cut stimulated spending, especially for those who live paycheck to paycheck.  This is one of the reasons that there is bipartisan support for renewing the payroll tax cut.

The reason it hasn’t already been renewed is because Republicans and Democrats disagree on how to pay for it.  The total cost of the payroll tax cut is around $200 billion.  Republicans don’t want to raise taxes on millionaires to pay for it.  They argue that there are too many small businesses (“job creators”) who would be hurt by this.  Democrats would like to tax millionaires by approximately 2% and would like to roll back some tax breaks for oil companies.

The deadline for renewing the payroll tax comes by the end of the calendar year.  This is also when certain unemployment benefits will expire.   It’ll be interesting!

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The Takeaway:  There are rarely easy solutions in policy matters.  Personally, I think both the payroll tax and unemployment benefits should be extended.  Congress should focus on revamping the tax code to extract more revenue.