Wednesday, March 1, 2017

American Economic Development: A New (or Ancient) Model

In my last post (regarding the structure of American energy), I said that the post was the first post in a series about our energy model in conjunction with an overall American development model going forward. This post will be the second post in that series. This post will be broken into several sections:
1. Introduction
2. Development Model from World War II to the 1970's
3. Development Model from late 1970's to Today
4. New Development Model to Correct Imbalances
5. Conclusion

In order to get into this post, I'll need to begin with the structure of the old development model beginning in the late 70's and early 80's until ~2008. Then, I'll get into the development model that got us here after discussing the history. After that, I'll discuss how our current development model created the existing imbalances in the American economy. From there, I'll propose a new development model that'd systematically eliminate those aforementioned imbalances over decades.

The proposed development model lays out a set of policies specifically designed to rework the entire structural base for our economy by setting key, clear, and decisive economic development goals over the next couple decades including a diverse economy with high, value-added manufacturing that's ~15-20% of the economy within a few decades combined with a reversal of the trade deficit and sustained public investment in an economy where private investment is waiting to multiply on the benefits of public investment. Such a policy can easily achieve 4-5% economic growth rates for the American economy for the next 15-20 years.

Development Model From World War II to 1970's:
The old development model came from an economy designed for very high inflation and government control in the 50's and 60's. This model works fine in a world devastated by war wherein half the world is closed off from the rest cuz there's no risk of flight in capital. What're capitalists gonna do? Go to a place where some strongman took over, is fighting a civil war, and is actively gonna confiscate resources of everyone? If they do so, they don't deserve to manage any capital (and they won't be doing so). Are you gonna go to a war-torn place that's rebuilding? Yes, but that'll happen via capital exports and those places'll end up being net exporters as a result--which'll imply a likely trade surplus, especially in manufactures.

The structure of the financial system was explicitly geared towards creating a consumption driven economy via tight labor controls, tight wage restrictions, restrictions on corporate consolidation, restrictions on liquidation, and restrictions on finance more generally. In a rapidly connecting world on the verge of a tech revolution, these structures just didn't make sense. If they'd been kept in place, many of the innovations we saw over the past ~25-30 years would never have been seen due to the inability to develop and create financial structures over technology networks (something as simple as Google being able to network it's satellite infrastructure across its corporate networks and capital structures in order to provide a service like Google Maps across all its mobile phones would've been impossible due to "regulation").

In the 60's, there were policies designed to prevent free liquidation of assets at 50-80% discounts which could've been used to create tons of value due to "regulation". Instead, the system resolved the costs with high inflation cuz households lost out even though such trade-offs actually destroy long-term capital by removing incentives for a restructuring of financial structures. Hence, the dismantling of these regulations and the entire structure of the progressive world set up in the 20th century had begun. The result was that growth was unleashed, but that growth and all gains of productivity only went to a few at the top.

Growth Model from Late-1970's to Today:
The new growth model reversed those restrictions and allowed for an increase in value creation that all accrued to private capital. This process led to a rise in leverage among households funding a consumption boom with debt that ended up collapsing in 2008. Since 2008, there's been a rapid consolidation across private infrastructure networks which's been unseen in >100 years. What this's done is backlog economic growth by wiping out excess capacity and created huge efficiency gains along with more sound underlying financial structures linking both federal private infrastructure networks and corporate networks more generally. We're still getting ~2-3% growth with ~.5-1% growth in real GDP/capita in spite of this consolidation and the exacerbation of inequality. The use of this as a bad economy is something that is rooted in a fundamental misunderstanding of economics. There's a difference between real wealth creation and economic growth rates.

This growth model has created huge income inequality, pushed value creation into hands of a few, allowed a few to capture all productivity gains, and also forces the US to adopt persistent demand leakages through "free trade" (which really means persistent current account deficits, although they've been strictly limited since the beginning of the Obama administration). All of these factors are acting as a drag on growth in the middle of a global depression.

New Growth Model:
So an economic adjustment involves a restructuring of economic policy that'll create opposite pressure on those existing imbalances. In other words, it means that if our previous economic model resulted in persistent demand leakages, the new economic model reverses those demand leakages, reduces inequality, allows households/workers to receive gains from rising productivity, and increases wages more generally. It also means we need a redirection of resources that'd expand productivity in the private sector and spur private investment across federal networks.

In other words, we need policies to reverse our current account deficit. The US has seen rising productivity in manufacturing while running a persistent trade deficit in manufactures. Such a policy wipes out large portions of the manufacturing base. An economic correction would imply an reduction/elimination of the current account deficit while protecting development capital in domestic manufacturing. In other words, there needs to be some form of protectionism, although it mustn't be too large.

We need policies that'll reduce inequality which means we need to target high wages for workers to raise household income. Such policies involve restructuring immigration to cut off unskilled labor immigration to levels that're only absolutely necessary. It means incentivizing high wages by the creation of high, value-added jobs in both manufacturing and the service sector alongside policies designed to restructure personal debts (including student loan and household debt).

In terms of a policy to spur private investment across federal networks, we need a comprehensive infrastructure package and policy across the entire US connecting states, localities, and city-regions to one another in productive ways. For this, we need centralized financing of investment in infrastructure networks that'll create a flow of private investment to follow across the country.

So what are these policies?
(i) The first will be some kind of a destination-based cash flow tax (called a "border adjustment tax" as proposed by GOP in February 2017) combined with a restructuring of corporate taxes to bring them down. That'll cause onshoring of manufacturing which's only offshored for marginal financial factors. In doing so, such a policy would transfer resources from rent-seekers abroad towards productive, value-added manufacturing domestically while driving growth and helping bring down our trade deficit.
(ii) The second policy is increasing funds in internal investments (ex. infrastructure spending, public works, etc.). Such a policy will bring a wave of private investment to follow in behind it while also driving up growth rates and creating investments that'll pay for themselves in due time.
(iii) The third policy that needs to be resolved is immigration. Unskilled labor immigration needs to be dramatically reduced in order to create labor shortages to increase wages short-term while firms go towards automation and capital investment long-term.
(iv) The fourth policy is to reduce or restructure unsustainable debts (like student debt) across the population. Such a policy would transfer resources to those at the very bottom, redistribute resources, and reduce inequality structurally.

Those four policies from the previous combined (each in small amounts) could easily take an economy growing at 2% to one growing at 4-5% over the next 15-20 years sustainably while setting forth a massive private sector deleveraging. How so? Use public investment of ~1% of GDP to drive growth up by ~1-1.5% minimum (it'll probably be closer to ~1.5-2% or higher due to Keynesian multiplier), combine that with a border adjustment tax that'd onshore manufacturing firms and reduce trade deficit driving ~.5-1% growth annually, and we're already at 4-5% from our 2-3% today. Combine that with some debt restructuring for those truly suffering, a restructuring of immigration laws, further liberalization, and it's easy to see how we can get to even 6-7% growth for 10 years sustainably.

How does this speed up a private sector deleveraging. If the government runs 2-3% of GDP deficits while our current account deficit goes flat, it means the private sector deleveraging in nominal terms is +2-3% of GDP. When we add in 4-5% real growth with ~2% inflation, we get NGDP growing at ~7-8%. In real terms, the value of the debt could be falling by ~10% of GDP in real terms. However, this deleveraging only takes place if we adjust our growth model.

This will transition into my next post regarding the basic ideas and fundamentals of the new development model I've laid out here in regards to the future structural goals of the economy for the 21st (and 22nd) centuries. I'll talk mostly about the kind of energy, geopolitical, and financial shifts we'll need to see in economic structures and in infrastructure.

Friday, February 17, 2017

On American Energy (Including Fracking, Renewables, Big Oil, and the Whatever Else)

This post will be a little bit different from most of my posts and will be purely focused on energy. It'll be the first in a series of posts regarding the current structure of American energy. The next post(s) in the series will discuss where our energy goes from here and how it'll fit into economic development in the 21st and 22nd centuries. This post will be split up into several sections:
1. Introduction
2. American Oil Production (Fracking vs "Big Oil")
3. Geopolitics and Energy Networks of American Energy
4. Renewable Energy
5. Nuclear Energy

1. Introduction:
For most of human history, almost all energy used has either been from animals or fossil fuels. In what we consider "civilization", it's been mostly predicated on fossil fuels or wood. In global energy consumption, the biggest consumers consist of the largest economies (the US, China, Japan, Germany, France, India, etc). The largest producer and consumer of energy is the US.

In the US, the primary sources of energy are oil, natural gas, and coal. Coal in the US is primarily used in electricity production, but it's use has been rapidly falling due to the fact that it's just not profitable. The collapse in oil prices that occurred a few years ago hasn't affected American energy production negatively. Instead, American oil production has actually risen in spite of an oil price collapse--largely due to advancements in fracking.

In terms of the sources of American energy, almost all American energy comes from fossil fuels. According to the EIA, petroleum accounts for ~36%, natural gas accounts for ~26%, coal for ~16%, nuclear for ~10%, and renewable energy for ~9% as of 2016.

2. American Oil Production (Fracking vs "Big Oil):
In the 2000's, almost all American oil produced domestically came from offshore drilling that was from the "big oil" companies. Today, the US produces more oil even though almost all offshore oil production in the US has been shut down. The primary reason is due to technological advancements in hydraulic fracturing (or fracking). After the oil price crash in 2014, there was a wave of consolidation among fracking firms. The amount of active rigs FELL BY >60% even though oil production was flat.

Note that fracking isn't just used for crude oil, but for natural gas as well. In addition to the drop in the necessity for imports, natural gas has been displacing coal as the primary source for electricity production (with natural gas overtaking crude in 2016) last year. Due to the advancements in fracking, most frackers in the US are profitable at ~$50/barrel of crude. The natural gas that comes from fracking is a byproduct, so our frackers don't actively search for the natural gas. They just get it as a byproduct. One of the biggest reasons fracking has been so impactful is cuz it produces BOTH crude oil AND natural gas.

Now, notice natural gas is very different from crude. Crude oil can be put into basically any container and shipped. With natural gas, it must go from pressurized point A to pressurized point B. Hence, it requires an extensive pipeline infrastructure to carry the energy. Due to the advancements in fracking over the past ~6-8 years, we've seen a rapid buildout in natural gas pipeline infrastructure that's the most sophisticated the world has ever seen.

3. Geopolitics and Energy Networks of American Energy:
In terms of consumption of petroleum liquids as of 2016, the US consumes ~19 million barrels/day (mbpd) of petroleum liquids--as defined by the EIA. Petroleum liquids consist of crude oil, natural gas, and biofuels (there's others, but those numbers are negligible). In terms of production, the US produces ~9 mbpd of crude, ~3.5 mbpd of natural gas, and ~1 mbpd of biofuels. So the net gap between production and consumption is ~5-6 mbpd. Keep in mind that in the 2000's, the importation of crude oil alone was almost double the net gap between production and consumption of total petroleum products today.

So, what's the impact of the US producing more petroleum products with the consumption of these products staying relatively flat (or falling)? The impact is that the US needs to import much less of these products from abroad. In the 2000's, the largest American importer of petroleum products was Saudi Arabia. Today, the largest importer is Canada. Almost all energy consumed by the US economy is produced domestically or is sourced from Canada, Mexico, Venezuela, Colombia, and Saudi Arabia. To put simply, >90% of American petroleum liquids come from the Americas and are totally unreliant on supply-lines from the Middle East.

In other words, the US is no longer dependent on foreign oil outside of the Americas implies that the US can effectively retrench from its position as the "global policeman" without facing a risk of disruption in its internal energy flows. Also note that almost all of the refining is done in the US. Actually, the US is a net exporter of refined products (like gasoline, diesel, liquefied natural gas, etc). So what happens is that there's many countries (*cough* Venezuela *cough*) that export the raw materials, our refiners refine the product and ship it back to these countries--or across the world.

4. Renewable Energy:
In terms of the future of energy, fossil fuels will still be used over the next few decades. Renewable energy would seem wonderful because it can embed itself into life-cycles of ecosystems, but it requires a whole host infrastructure and other prerequisites that make it very difficult to rapidly increase energy use from renewables overnight. Renewables create several problems:
1. They don't produce all the time (solar only produces during sunlight, wind only when there's wind, etc.). So storage becomes a problem.
2. They require an energy grid that can go back and forth between different sources of energy. So you need a grid that can handle the ebbs and flows of renewable energy which can turn to fossil fuels when renewables don't produce.
3. Battery technology is nowhere near what it needs to be for energy storage to become a serious alternative. For example, there isn't even enough lithium in the world for it to store 10% of the energy needs necessary if the US were to go to renewable energy.
4. Raw materials (like silicon and lithium) need to create many of these items are environmentally damaging to extract and refine. In fact, they're so environmentally damaging that most developed countries ban their extraction and refinement on domestic soil.

In order to shift to renewable energy, building out the grid infrastructure alone would cost ~$1 trillion and take about a decade. So switching over to >50% renewables won't be feasible for another ~15-20 years. But in the mean time, what renewables can do is to supplement the structure we already have. For example, once you build a solar farm, it just generates energy on its own. You don't have to go out and extract anything or do anything more other than to capture or use the energy. So we're already developing two-tiered systems wherein solar farms or wind farms or geothermal energy is being plugged into the grid and being used whenever it's generating while fossil fuels are used the rest of the time. This process is only accelerating.

5. Nuclear Energy:
My personal favorite kind of energy is nuclear energy. With the latest technology, the issues that've plagued old power plants are issues ranging from nuclear waste to bad design that allows for flooding of the water cooling systems to a whole range of factors. Of course, more recent technology (like thorium reactors) wipes many of these risks or drastically reduces the scale of the impact of these risks.

My point with nuclear energy boils down the fact that the risks of nuclear energy are drastically reduced with more recent technologies. In other words, the most recent technology in nuclear allows for energy that's got low environmental cost and is equivalent to free energy. However, the problem is one of geography. Building nuclear power plants in areas where there's lots of earthquakes or flooding may not be wise. Similarly, nuclear waste needs to be dealt with and all of the infrastructure necessary to link the energy to the grid must be suitable for the geography.

However, there isn't that much energy the US receives from nuclear energy. Going forward, it'd be wise to expand the portion of energy consumed from nuclear energy produced domestically in the US.

Wednesday, January 11, 2017

On All Things Russia

In this post, I'll be talking about the geopolitical financial aspects of Russia alongside it's position to and relationship with the rest of the world, especially the United States. Before I get into this discussion regarding Russia's position in the world and its relationship to the world, I'll first need to get into the geopolitical financial structure of Russia.

Russia is the largest country in the world in terms of landmass, is home to ~143 million people, and has an economy whose size is ~$2 trillion. Russia's the largest producer of energy in the world, and has the second most nuclear capability in the world. The Russian geographic landscape is very sparse and it's very harsh as roughly half (probably more than half) is frozen half the year. It's geographic terrain combined with its heavy reliance on commodities, natural resources, and energy extraction/production makes it a very fragile economy that sinks very quickly when the prices of commodities and energy come under pressure. To emphasize Russian reliance on natural resources extraction and commodity exports, we'll note that 2/3rds of Russian government revenue came from oil, oil products, and oil/natural gas exports in 2013. Of course, Russia also extracts oil and other commodities that feed into aggregate demand for the Russian economy more generally.

Also notice that the sheer size and scope of the Russian landscape imply large borders that're mostly indefensible and virtually impossible to protect. In other words, Russia really has no choice but to have open borders because defending, monitoring, and policing its borders is just unrealistically costly based on sheer size alone. Hence, if we go by Donald Trump's view that you can't have a country without borders, Russia's not really a country.

Now that we've established Russia's dependence on natural resources, commodities, and extractive industries, it becomes important to note that the current international economic situation is one of depression in half the world with large asset bubbles and excess capacity (that's begun collapsing) in the other half of the world. In other words, there's supply/demand imbalances globally where supply's much larger than demand and the adjustment occurring is that aggregate supply is beginning to collapse globally, as I've written before. Of course, commodities, energy, and natural resources are all inputs to production--and hence aggregate supply. So what's the chance that, in the middle of a worldwide depression unseen in ~80 years, we see a sudden rise in the prices of energy, commodities, or natural resources? If you legitimately think high commodity prices are just around the corner, you're delusional (the only chance of this is if there's a very large price split that occurs between Brent and WTI, but even that's something which I find unlikely though it's remotely possible).

Also note that Russian demographics are downright horrible with the population already having peaked. The public health crises in Russia are numerous with alcoholism and STDs rampant across the population. When you add in Russian economic reliance on commodities, energy, and natural resources with a rapidly aging country and a falling population, you get a financial system that's built on a pile of sand. In other words, Russia's utterly incapable of maintaining defense expenditures at current levels, which's why the Kremlin's even begun to cut defense spending. These financial pressures are forcing the Russian government to slash defense spending by ~25-30% in 2016.

Essentially: Russia's barely able to maintain its current geopolitical structure while its economic difficulties will continue to persist for at least the next decade although Russia still does have a lot of nuclear weapons from the days of the USSR. Russia doesn't have the financial power to maintain its current empire for the next few decades. If we look at the current map of Russia, we'll notice that the current borders are less than the ones agreed upon at Brest-Litovsk after Russia lost the war on the Eastern Front to Imperial Germany in World War I. In other words, after a prolonged period of peace in the region, Russia's current borders are what they were after the loss of a war ~100 years ago.

Russia's the weakest it's been--in terms of borders and military power--since before 1775, which was ~250 years ago. And this weakness isn't something that happened to Russia after the loss of a war and internal collapse like after Brest-Litovsk either. On the contrary, this weakness has occurred after decades of peacetime with the world under American hegemony. When you add in Russia's structural economic issues, it means Russia's barely able to financially survive.

From an imperial standpoint, Russia may temporarily be able to make some territorial gains and grab some loot now, but demographics make a military move even 5-10 years down the road virtually impossible. So if Russia doesn't move now, it'll won't be able to expand later. Considering that Russia's cutting defense spending while updating its nuclear capabilities, I doubt they'll even have the financial power to move forward even if they wanted to unless they're willing to risk a total revolution and likely wars on all of its borders. I can spend a lot of time going through the scenarios, but my point is very simple: it's questionable whether Russia has the financial means to maintain its current empire nevertheless expand out further.

As I stated above, Russia's the weakest it's been since the days of Catherine the Great. In today's geopolitical climate, Russia's only a regional power with serious internal difficulties. Russia's a very fragile empire being held together geopolitically by its financial system of oligarchs who're able to hold the space together via financial control over the natural resources, energy, commodities, and the supply lines to transmit all of those resources.

TO SUM UP: Russia isn't really a country. It's a gas station (by gas station, I mean energy more generally) masquerading as a country.

Russia isn't really a world power anymore. It's a regional power that only has power on the world stage because of its nuclear stockpiles from the Cold War Era in the 20th century. Russia is waning in strength and facing lots of internal difficulties. This's why Russia's now being outspent by the US, China, India, and Saudi Arabia on defense spending today. Russia's naval capabilities are virtually non-existent. Hell, the entire country has only one warm water port at Sevastopol which Russia only recently got with the annexation of Crimea.

However, there's plenty of areas of common interest in regards to the relationship between the US and Russia. It's pretty clear that the Kremlin did not want Hillary Clinton to be President and did everything possible--like using a front for the GRU (*cough* Wikileaks *cough*) to leak "hacked" emails by John Podesta--due to Putin's personal dislike of Hillary Clinton and out of fear for her foreign policy. With that being said, on places like the Middle East or in ideological battles against Jihadi Islamists, there's lots of common ground for Russia and the US to work with one another.

So while Russia has basically been reduced to a regional power, it still wields a decent amount of power globally although that's only due to its nuclear stockpiles from the Cold War. It's having difficulty keeping itself together, but it's not in the interest of the US (or any other country for that matter) to fragment the Russian Federation simply because of the nuclear problem.

Wednesday, December 21, 2016

American Banking Shifts Across Financial History

This post will be about how the structure of American banking throughout the history of the United States. This post'll be split into several sections:
1. Introduction
2. Oligopoly Banking
3. "Regulated", Decentralized Banking
4. Conclusion

1. Introduction:
I'll start off by first referencing an old post that I did on the initial design of the American banking system and then move on to the two "extremes" of banking that we've had in the history of American finance. The former is what's effectively a banking oligopoly wherein financial power is centered out of a few large banks that control the entire system. The latter financial system is one of decentralized finance that's largely locally determined. Throughout most of US history, the systems have been somewhere in between.

The first extreme is closest to what the US currently has. In this instance, financial markets are relatively "deregulated". In order to deal with this terminology, I first need to clearly communicate what I mean by "regulated" and "deregulated". Within the case of the United States, the term "regulated"--as I will use it--implies 4 key constraints on banking:
1. To cross state lines
2. Limits on branch banking
3. Limits on corporate consolidation
4. Limits on asset-backed securitization
Note: These constraints are often packaged together and they may or may not overlap.

2. Oligopoly Banking:
Most importantly, the oligopoly style of banking system is relatively, or totally, deregulated in the 4 key constraints above. In this kind of a system, banks often cross state lines with no real way to stop them. Branch banking across various states is easy. Corporate consolidation isn't just easy, but also common, so if banks find themselves in trouble they usually just get taken over another financial institution. Another key aspect is asset-backed securitization that allows for banks to take smaller and more local assets, package those assets into a security, and sell them to various financial institutions across the world.

It's commonly thought that the first asset-backed security in US history was created in 1980, but it was really created in 1790 (as I've written before). It's also thought that the first collateralized debt obligation (CDO) was created in 1980 in the United States. This is also patently false. The first CDO was created in 1851 to finance the production of railroads across the Union (the result was a rail network by 1860 larger than the rest of the world combined). So clearly, the US has a long history of "deregulated" financial markets.

In the oligopoly based banking system, the idea is for private capital to use the federal government as a tool to impose a system by which there's long-term investment, centrally directed, while still allowing for a decentralized consumption base (it's also a goal of the more decentralized private banking system as well, but it's accomplished by differing means). So the direction of investment comes from private-public partnerships and requires an oligopoly on banking.

In this kind of a financial system, you end up having serious deflationary pressure, if not outright deflation. Inflation becomes very difficult to come by because the link between money supply and inflation is severed, as I've previously written. If there's any sort of issue with smaller banks, they get absorbed by larger banks in corporate takeovers. So if there's a lot of smaller banks, those banks usually end up either failing or being absorbed into corporate conglomerates.

Also note that due to the fact that the vast majority of financial assets are owned by a few large financial institutions, it makes corporate consolidation easier for other firms who can use the large banks to broker such deals. So in essence, the oligopoly style banking system I'm describing makes it rather simple for all firms to take advantage of economies of scale. To put simply, this kind of a banking system doesn't just foster scaling effects in banking, but in virtually all kinds of firms ranging from industry to technology to services to any industry that has economic advantages by economies of scale.

The oligopoly type of banking system in the US has a history of concentrating financial, political, and economic power in the hands of a few. In effect, this kind of a banking system has had a historical tendency to exacerbate income and wealth inequality. It is economically efficient, but this kind of financial system is ruthless in terms of social costs. It can place very difficult financial circumstances upon communities of all kinds.

3. "Regulated", Decentralized Banking:
The second extreme of banking is the decentralized form of banking. This type of banking has its roots in the old Jacksonian era of American politics. It's built on the idea that banks and concentrated financial power are dangerous to republican institutions due to the way they can impose social costs upon a community against their will. The Jacksonians view the centralization of power as a real threat to republican institutions and a real cause of disillusionment and fear among common populations.

In order to regenerate republican institutions, the Jacksonians generally call for a rapid reduction of federal financial power by effectively letting states put up barriers to interstate banking. They did this by "free banking" where each state would have its own banking laws, making it difficult or prohibitively costly for banks to be more than regional (maybe they'd cross state lines, but it was tough to go across regions due to having to deal with state by state regulation).

So the idea of the Jacksonians was to leave the policy of banking to the states. Later on, the progressives picked up many of these same policy positions and ideas that they'd run on. These ideas primarily involved a banking system that's totally dependent on local and community banking. Eventually, this view was imposed by strict regulation on the use of financial derivatives.

One of the key aspects of a "regulated" and decentralized banking system was that it decentralized the power and decision making of finance to local communities and states. Due to this fundamental aspect, this kind of banking system has the tendency to be inflationary--especially during given conditions and time periods--since households have a lot of power, can vote themselves purchasing power, and then demand surges at key points. In other words, the losses of a recession are borne with higher inflation instead of higher unemployment or lower wages because workers and households have more control and influence over the factors of production.

The "regulated" and decentralized banking systems have also had a history of high rates of bank failure because all banking is local. If a bank fails, it just goes out of business instead of being consolidated into a larger network. So either the depositors get hit or there's deposit insurance. The Jacksonians never pushed for deposit insurance, but the progressives did to offset the losses to depositors. You can have either or, but it doesn't change the underlying structure of the financial system.

The Jacksonians went to more of a "free banking" style of a decentralized and "regulated" financial system, but the progressives took a more top-down approach. They decided everything would center from the Fed and the Treasury. The progressives also decided that it'd be a good idea to place branching restrictions on banks in an order to prevent them from crossing state lines. That way, banking couldn't have an oligopoly by the very nature of the system.

4. Conclusion:
Throughout US history, we've gone back and forth in between these two extremes. Currently, we're living under the oligopoly extreme of the financial system. Personally, I do not like the "regulated" and decentralized style of banking that's favored by the progressives and Jacksonians. At my core, I'm a Hamiltonian who prefers a strong base and power center in the political and financial system for private capital that often supersedes the power of the larger populace at large.

As I've written before, Hamilton created a financial system that ended up being much closer to the oligopoly style of banking after the birth of the Republic. Eventually, Andrew Jackson totally shook this system up to impose a more decentralized and "regulated" financial system (albeit the consideration by many libertarians as "less regulated", although it's important to note that what we consider as 'libertarian economics' has a historical track record of going along with Jacksonian political economy in the United States) after his successful attempt in destroying the Second Bank of the United States. Then, the first CDO was created in 1851 and the resolution of the 1857 crisis started to push this country more and more toward the oligopoly style of banking system.

As we approached the Civil War, the political divides were fundamentally economic and financial divides built around the banking system and the power of private capital. Private capital was on the side of the Union, which's why Lincoln ended up being the man who forged a Union. However, this banking system led to a gross amount of income and wealth inequality in the Gilded Age (quite similar to social environment we've got now). So over time, the progressives realized they could win elections by running against the banks.

Eventually, it took the Great Depression for the progressives to impose their kind of banking system (even though they got the reasons for the Great Depression entirely wrong and they actually worsened it due to Woodrow Wilson's terrible economic and foreign policy), which they did. So for the next ~40-50 years this kind of a banking system held until the inflation in the 70's. So over time, such restraints on the banking system were loosened. And here we are now.

Tuesday, October 18, 2016

American Foreign Policy and The Rest of the World

It's been a while since my last post (largely due to my activity in the political campaigns which's been eating up most of my time), but that post was primarily about the structure of international geopolitics, the rise of market-state empires, and how international deal-making takes place. I've also written about the liquidity flows across borders along with the financial implications of these shifts. This post will be about American foreign policy in this kind of a world.

We're currently in the middle of what's a Second Great Depression (with the United States being relatively insulated from the rest of the world). In Europe, half of it is in depression (Portugal, Italy, Ireland, Greece, Spain, much of Eastern Europe) with the other half in the middle of a massive bubble (Scandinavia, Germany, and others). A couple of years ago, I wrote about how there're serious underlying problems in the European banking system which've just now begun to surface (Deustche Bank is just the beginning). This post is about how the current unfolding events impact foreign policy, both domestically and internationally.

Middle East:
In the Middle East, we've got what's effectively a real-life shitshow. You've got several key players: Saudi Arabia, Iran, Turkey, and Israel who're the real powers of the region. Everywhere outside of their domain is basically a conflict amongst themselves. In Yemen, there's a complex proxy war between different power players that crosses across many factions. We see a similar phenomenon in Iraq with different kinds of rebels, Turks, Kurds, ISIS, and Assad loyalists grappling for power.

The one exception to this rule is in Syria, which is run by Assad and basically a puppet of the Kremlin. However, Syria's also involved in this chaos. We've seen a total breakdown of civil order across most of the region. When we see a collapse of civil order, we end up with warlords, which is what we've got. As I've written previously, ISIS is a warlord state. After the collapse of the Syrian nation-state which's mostly run by random warlords, Assad has now become another warlord.

In such a climate, it seems like the US has taken a balance of power approach that I suggested several years ago wherein the Americans fund all sides. As a side starts to become more and more powerful, the strategy is to divert support to others to maintain the balance of power. The balance-of-power strategy came out of the Iraq invasion which was simply deemed too costly to the American people.

Going forward, the most sensible strategy is a balance-of-power as it allows for flexibility to adapt in any scenario. I suspect this's what we continue to see for the next few decades. Any sort of invasion is simply too costly for American taxpayers to withstand while a total and complete pullout of the region risks giving foreign powers like Russia far more say in what happens over there.

Currently, most of Africa's in total and utter chaos. As I've discussed, most of the countries in Africa get their revenue from the exports of raw materials and commodities. I've also written about how such systems can (and have) created political and economic instability whilst making capital formation effectively impossible. Such systems've distorted African governments to the point where there's basically little hope. Also note that Africa's having a population surge while it's landscape is basically getting raped.

Due to the nature of what's going on in Africa, there's a real chance we see very large population corrections there. What does this mean? It means people who'll be forced to move (and die). There'll also be a landgrab for its resources from foreign powers--as I've also discussed before--where various empires effectively bring the area into their control.

Other than what I listed above, there's really not a whole lot of ways Africa's a factor in terms of foreign policy.

China and Southeast Asia:
I first wrote about China's economic and geopolitical problems a couple of years ago. China's currently in the midst of an economic transition where growth rates've fallen (which was one of the scenarios I listed); however, they haven't fallen as quickly as I thought they would've. With all that being said, Chinese growth rates continue to fall slowly although they're still rather high. The more China grows now, the less it'll grow later on. If you wonder why this must necessarily be the case, I reference you to my post about the structure of the Chinese financial system in relation to its economic growth model. The growth is simply not sustainable, it's founded on an unprecedented credit boom, and it looks more and more like Japan in the late 1980's as every day passes by.

Due to the structure of the Chinese financial system and its economic growth model, China's been forced to build an empire in order to satisfy its ridiculous demand for natural resources. This demand has been falling (as I said it would) for the past few years which's left commodity prices in the dumps (as I also said was likely). As growth rates fall and China's insatiable demand for natural resources becomes more satiable, the need for China to be externally focused will decline. Eventually, China's demand for commodities will fall, but it'll still exist. So what does that imply? It implies that China will still need to secure its trade routes, but it also implies China'll be more internally focused during its economic rebalancing.

The key issue of Chinese empire isn't so much the areas being effectively colonized (like Africa), but about the other linkages the Chinese economy has developed--mainly in Southeast Asia. China has currently been expanding its influence in Southeast Asia by building its islands, arming its fishing boats, using economic power to control countries in Southeast Asia, and via other means. In order to counterbalance this impact, the US will be increasing its presence in Southeast Asia whether or not the TPP gets through.

In other words, we'll be witnessing a strengthening of ties between the US and most Southeast Asian countries including Malaysia, Indonesia, Singapore, Vietnam, and others. We're already seeing the beginnings of this. As China's economic transition continues, they'll be relatively contained for the most part.

Russia and Second Cold War:
As of right now, the US is basically in a Second Cold War with Russia. The Russians've hacked into various political parties or certain candidate's (Hillary Clinton) campaign's personal files (like emails) and have published them on Wikileaks after slightly doctoring them in an effort to wage a disinformation campaign. These are the same kinds of tactics that were used by the Russians in the early Cold War era. There's also been several people from within our intelligence community who've leaked files and then took asylum in Russia (like Edward Snowden) who're likely traitors. Again, these are Cold War tactics.

In regions like Eastern Europe or in the Middle East (mainly Syria), we're seeing the Russian government build ties into insurgencies or with puppet regimes/dictators like in Ukraine. Of course, I wrote about this a couple of years ago as well. The US is taking up a containment policy (as I've discussed before) involving a series of Eastern European countries and Turkey, although Turkey's case is a bit different as they've gotten slightly more friendly to Russia as of late.

The Cold War went on for 45 years after World War II until it culminated in the fall of the Berlin Wall. This time around, Russia's much weaker and already in dire and desperate financial straits. Russia's current economy is almost entirely dependent on natural resources and commodity exports. Due to the current situation regarding commodity prices and the price of natural resources, Russia can't continue to sustain its empire.

So instead of a 40-45 year Cold War, we'll be looking at one that doesn't last longer than 20-25 years (probably much less than that). There's many scenarios and it's difficult to say exactly what happens, but the fragmentation of Russia is a real political risk. Either way, one thing is clear. Russia's reliance on natural resources and commodity exports is its primary weakness. This reliance limits the power Russia can wield and the scale of its empire.

Russia looks like it's in terminal decline and nearing its end. The Second Cold War could be Russia's last stand in its current form. A possible scenario for Russia is that it'll recede to the Muscovy territory, which was the domain of the Russian Empire in ~1600.

Liberal Democracies in Asia:
When I say the liberal democracies in Asia, I'm speaking about India, Indonesia, Malaysia, Japan, and other countries in Asia that're not located out of Central Asia. These countries have a history of friendly relations with the United States and I don't see that changing. Many of these countries (ex. India, Indonesia, Malaysia, etc) are developing countries with vibrant industries that're looking for foreign investment to build infrastructure or to invest in companies or communities or whatever else. The interesting part is that the US's the most capital-rich country in the world while currently running current account deficits; hence importing capital even though capital scarcity is no problem at all--which I've written as being one of the biggest problems the US and the world face due to the implied distortions in global financial markets.

So what we're likely to see are increased financial ties from countries like the US (and probably Japan) into the liberal democratic countries of South and Southeast Asia. As I've stated, China's getting more aggressive in South and East China Seas which's forcing a larger US imperial footprint in the region too. That larger imperial footprint is likely to coincide with a furthering of investments and financial/economic ties between these countries (after all, this's the purpose of TPP).

I've also written about how basically every "civil war" in Asia east of the Middle East is a proxy war between India and China. In this proxy war, the US will take the side of India and probably try to create an alliance of South and Southeast Asian countries (not allied with China like Pakistan or Sri Lanka) alongside of Japan and perhaps even South Korea.

I suspect we're likely to see a further expansion of missile defense systems and weapons deals with all of the liberal democratic countries in Asia, largely to ward off Chinese aggression. To gauge the impacts of this long-term are difficult cuz it'll depend on how the Chinese economic rebalancing takes place. Thus far, I'm assuming it'll be relatively neat. However, there's a chance such a rebalancing'll be rather messy which means China could be on the verge of fragmentation.

Overall, American foreign policy will likely be more restrained over the next decade than it's been in almost a full century. There's a population that seems weary of war, but there's also an empire that needs to be managed. The primary tools of engagement'll likely be financial measures used in most of the world. There'll still be weapons deals or alliances in strange ways, but there won't be much more than that.

I also expect the large US trade deficit to fall over the next decade or so, especially considering that 70% of the American trade deficit is from China alone and both Presidential candidates're now running on a platform of going after China's disregard for international trade agreements along with its repeated violations. I suspect the same could happen to Japan. Considering that 90% of the American current account deficit is with China and Japan, the current account deficit'll basically be eliminated. That'll mean we'll be seeing more net capital exports from the United States.

It's also important to note that ~70% American energy is sourced from North America and almost all of it's sourced from the Americas (the US produces half with rest coming primarily from Canada, Mexico, Colombia, and a handful of other places). The US no longer needs Middle Eastern oil nor does it need to import much energy, so there's less of a need to engage in a foreign policy to secure those resources.

With all that being said, the US will remain as the global leader, but it'll also be taking an international role that's effectively quasi-isolationist with a focus on financial ties with ideological allies or countries with liberal capitalist democratic systems of political economy.

Sunday, August 21, 2016

Shifting Geopolitical Structures, Market-State Empires, and the International Deal-Making

This post will be regarding the international structure of the world and how it's shifted from the old world of nation-states. In order to do so, I'll split this post up into several sections:
1. Introduction
2. Geopolitical Structures Today
3. Market-States, Clashing Empires, Diplomacy, and International Deal-Making
4. Conclusion

1. Introduction:
The world isn't just becoming rapidly imperial, but the entire power structure is something drastically different than anything we've seen in the past 300-400 years. Before the 20th century, the world was essentially ruled by European powers that held international empires. In the 20th century, these European states went to war and that war rapidly escalated into two World Wars because these European powers had international empires. So when the nation-states went to war, their empires simultaneously went to war. So a European war immediately and necessarily translated into a World War, which eventually saw a collapse of their empire and ended up in a world of nation-states.

In the 20th century and the previous 300 years, the most powerful world powers were all European. Today, the most powerful countries internationally are the US, China, India, Russia, and Japan. Note how only one of those countries is a European power (Russia). 3/5 are purely Asian and 4/5 have a coastline on the Pacific Rim. Late in the 20th century, the total amount of trade in the Pacific surpassed the trade in the Atlantic and this process has accelerated in the 21st century. So for the first time in world history, the most powerful trade network is the Pacific Rim trade network.

2. Geopolitical Structures Today:
So today, we live in a world dominated by Asian powers that're not only growing in population, but are also growing in power, productivity, and economic clout. Within a couple of decades maximum, we will see an Indian Navy that's more powerful than the Royal Navy. So the world we live in is rapidly transitioning from a line of thinking and philosophy centered out of Europe to one centered out of Asia. We're entering a world wherein the primary base of thinking and philosophy will be that of Asia.

It also becomes important to note that Europe is currently in terminal decline. Almost all European countries have experienced a total fertility rate well below sustainable for the past ~40-50 years. In other words, their populations are falling rapidly AND these countries already have very high levels of development. So the next logical step is sustained pressure on pension systems and social welfare programs. So these societies have declining populations, a declining workforce, and a larger pool of people who're now dependents. They're also now having difficulty assimilating immigrants and immigration is creating internal tensions within their societies. Europe's also got major financial issues that're leading to social and political imbalances. To put simply, there's really not much hope left in these places. They're gonna be headed on a downward trajectory for a long while.

So the power structures, ideologies, and ruling philosophies of the world are becoming more Asian. Also note that the battles between Asian powers are now taking center stage in terms of worldwide geopolitics. For example, virtually all of the "civil wars" or internal strife in most of Asia are really just a part of proxy wars between China and India. To put more simply, their empires are in conflict.

3. Market-States, Clashing Empires, Diplomacy, and International Deal-Making:
In Africa, there's a battle for much of Africa's mineral resources. Note that many of these mineral resources are key items with low substitutability in our smartphones, computers, and many other technologies. Also note that these minerals are very expensive to extract and refine, which is why they're pushed overseas. Due to the need for the extraction of these minerals, we have "civil wars" in many parts of Africa like Nigeria or Congo or many other places that're really just wars between two militias fighting for control of supply-lines and control of natural resources with each militia backed by some larger country as a part of its empire. In other words, many of these wars in Africa are just proxy wars primarily between the US and China as these are the two most predominant world powers with raw material needs. If a given party doesn't use these raw materials or mineral resources, these resources get immediately contracted out to the another international player that wants access to them.

In other words, we're entering a world with a few key large powers. Everything that occurs internationally in a geopolitical sense is merely just a clashing of more formidable powers. When these powers have conflicting interests, they sit down at a table and basically throw around various natural resources or contracts or certain ties with certain states as chips on the board to trade with other sides. To put simply, this current shift in international relations is like the days of old imperial powers before the turn of the 20th century. In order to reach some kind of an agreement, one side trades certain pieces of their empires in order to get concessions on the other.

This world is very different from the days of total war between individual nation-states. Instead, we have a recent case of Russia and the US negotiating. In this case, Syria is a government run by Assad who's effectively a Russian puppet. Many of the Syrian rebels, on the other hand, are funded and organized by the Americans. So we end up with a situation where you've got the American Empire and the Russian Empire are smashing into one another. So what happened recently to resolve various disputes in the region? John Kerry showed up with the American diplomatic team with a big binder and was working on a peace deal with the Russians by offering concessions to get concessions.

If the Chinese hold a card with various ties to some strongman in a country like the Congo or Nigeria that's got critical natural resources like, say, lithium that's not being used while some American company needs to access that lithium; then you could have a situation where the corporation makes a deal with various Chinese elites that provides them access to a resources like lithium with some kind of a financial contract.

4. Conclusion:
So we're basically entering a world of market-state empires wherein the empire itself occurs from many different ties ranging from weapons agreements to corporate agreements for natural resources to the ownership of companies in different countries more generally. What determines the clout and power of the empire in question is its economic, financial, and military power of not just itself, but all of the layers of ownership and the structure of the supply chains ingrained into its economic, financial, and military power. The conflicts we see in today's world are merely just a clashing of these empires in various regions across differing scales. In order to come to agreements, there's various parts of each empire that're traded for concessions with parts of another empire.

It's quite interesting to note that the structure of international relations probably more ancient than it is modern as you've got hierarchies across the world coming to agreements by trading various chips on the table as per their abilities and needs. What we have is closer to a return to the imperial world of old rather than the old nation-state world that we've come to know for so long.

As crazy as it seems, the rise of technology has made the world more imperial whilst destroying the old order of nation-states. The rise of market-state empires is simply the next step in the process.

Wednesday, August 3, 2016

Extractive Industries, Economic Rent, and Henry George's Idea of Taxes on Rents

My most recent posts have been quite political. However, this post will primarily be about economics. In various posts, I've discussed the basics of capital and wealth creation. In those same posts, I touched on rent-seeking and how it's essential to avoid such behavior. This post will largely be a spin-off of htose posts. In order to continue, we must first recall the definition of economic rent: an economic benefit received by adding nothing (usually reducing)--on the net--to productivity.

As I've discussed previously, acts like environmental degradation are effectively a form of rent-seeking. In the case of extractive industries, the firms receiving rents from extractive industries are rent-seekers. Why? When you dig out coal from the ground, it destroys the landscape, the air, and often the water. It's the same thing with fossil fuels more generally. These firms get revenues for something that destroys the landscape, the air, etc..

Usually, the most common form of economic rent would be land rents. So in the mid-19th century, there was a great American economist by the name of Henry George who proposed a Land Value Tax as a way to deal with land rents. In today's world, rents from extractive industries are a much larger problem for reasons ranging from environmental degradation like deforestation to climate change. Obviously, the LVT does nothing to deal with rents from extractive industries.

Hence, I'm now proposing a tax on all extractive industries. Regardless of where an extracted material comes from, there will be a flat tax imposed on the extracted material when used as an input in production. For example, as soon as crude is sucked out of the ground and sold, there will be a flat tax imposed on that price wherein the revenues go towards the federal government.

Although there's a tax on extractive industries, there is no added tax for items refined on those products. For example, there will be no tax on gasoline because gasoline isn't extracted. Gasoline is refined from an extracted material. There also won't be a tax on solar panels, but there will be a tax on the silicon used in the production of solar panels in the supply-chain. So this tax will affect value added industries little, especially if there's a lot of parts in the supply-chain. On the other hand, it's impact on industries who have little value-added in their supply-chain will be much larger (relatively speaking, of course).

I've seen various people think of a value-added tax (VAT) when I say a tax on extractive industries, but this is nothing like the VAT. A VAT is a tax on the value-added section of goods. The Extractive Industries Tax (EIT) that I'm proposing is nothing like that. It's only a tax on the initial purchase of a raw material from a company that does resource extraction. We are not taxing anything across the supply-chain. It is purely a tax on extractive industries to add in the negative externalities of extractive rents that aren't in the market price.

Of course, fossil fuel extraction today isn't just not taxed or encouraged, but the behavior is actively subsidized. In the US, the International Energy Agency (IEA) estimates that fossil fuel subsidies total close to ~$550 billion annually. So we currently have incentives that not don't account for negative externalities from extractive rents, but actively incentivize firms to increase profits from extractive rents. In the line of Henry George, we must first actively eliminate all subsidies that go towards all extractive industries and then place a flat tax on extraction (as described above) that'd bring in ~$500 billion in the first year. I'm proposing a tax that's ~50% on all directly extracted mineral resources both within the borders of the US and for any item that uses extracted minerals built into global supply-chains that wasn't extracted domestically as an addition to the current cost. This would be applied by simply calculating the total valuation of all of the extracted minerals on global markets at the time of importation into the US and then tacking on the tax value to that total valuation.

This tax would clearly incentivize renewable energy by relatively increasing energy costs from extracted sources. Such a tax would also incentivize the use of less raw materials in the domestic economy more generally. It'd reduce the total inputs into our economic system while incentivizing the ability to produce more outputs with less inputs. In other words, this kind of a tax would incentivize genuine capital formation instead of increased income from extractive rents.