Global Geo-Economics

Calvert-Henderson Quality of Life Indicators in Context, originally posted atwww.calvert-henderson.com, 2007

Many international observers noted that we are seeing the end of the USA’s single superpower status and the rise of a new multi-polar world.  This would, on balance, be good news for the USA, which would no longer need to be the world’s only policeman.  Most policy-makers now talk of the need to return to multi-lateral diplomacy to address global problems: from climate change to health and human security which no country can solve alone.

The dollar is less seen as a safe haven as overseas investors deal with increased currency risk.  But US deficits, at over 12% of GDP will continue to worry the world’s investors in US Treasury Bills.  Brazil’s Central Bank announced in 2007 that it intended to diversify its $109 billion away from US dollars following similar decisions by many other countries.  In 2009, one of its credit rating agencies, SR, downgraded US debt from AAA to AA.  Moodys downgraded Britain’s debt from AAA to AA, raising fears for US debt. Iran’s central bank also announced that it would sell more of its oil in euros while OPEC countries continue to plan for pricing their oil in a new ol-based currency, beyond the US dollar. Global financial markets now exert greater influence over Fed Chairman Ben Bernanke’s interest rate decisions, which are usually based on domestic U.S. conditions.  U.S. interest rates may now be tied as much to global interest rates as to U.S. inflation fears. Thus the Fed is on a tightrope: more rate cuts to please Wall Street will eventually weaken the dollar; rate increases to fight inflation may trigger recession.  Many economists, including Bernanke, used to claim that continuing low interest rates were due to a global “glut of savings,” new financial instruments and globalization. We saw this more as a global bubble in the world’s money supply and excess credit due to increasing use of leverage and exotic derivatives in the financial markets and were proved correct. We should also remember that the Fed has several other ways to combat inflation — ways less harmful to consumers than raising interest rates, which raises costs of house and car loans and many other costs throughout the economy. The Fed has the power to increase margin requirements on stock prices, to raise banks’ reserve requirements — both can cool speculation — as well as foster competition from small banks and credit unions (see Stephen Zarlenga’s commentary from the American Monetary Institute for more ideas at www.ethicalmarkets.com).

All the revisions mentioned earlier call into question such headline numbers, which tend to downplay continuing U.S. deficits and household debt and the faltering housing sector. Business Week (June 18, 2007) accused the US Bureau of Economic Analysis (BEA) of downplaying the real costs of off-shoring US production, due to the Bureau of Labor Statistics (BLS) failing to distinguish how much of corporations’ “domestic production” is actually produced by their outside-the-US suppliers’ plants. Business Week claims that this may have created about $66 billion of overstated “phantom” GDP gains since 2003. A more upbeat report from Business Week, “Unmasking the Economy” pointed out a statistical anomaly we have emphasized since the inception of the Calvert-Henderson Indicators in 2000. Our national accounts (GDP) still book education and training expenditures as “costs” on the consumption side of the ledger instead of vital investments in our nation’s “human” capital. We are happy that Business Week now agrees with us that “Tuition … is not like an ice cream cone,” as author Michael Mandel puts it (Business Week, Feb 13, 2006). However — important as this revision is and however much it would lower the deficit and increase personal savings rates — we shouldn’t start breaking out the champagne without a sober reassessment of many other government statistics. (See The New Politics of Productivity Measures below.)

David M. Walker, former US Comptroller General now heads up a $1 billion foundation set up by former Republican Commerce Secretary Peter Peterson. Walker called for a “new set of key national environmental and social indicators such as life expectancy, infant mortality, … to help strategic planning, enhance performance and accountability reporting.” We say “AMEN!” Walker points out correctly that according to the OECD’s key social, environmental and economic indicators, the USA ranks 16th out of 28 countries. However, the new movie and book I.O.U.S.A. exaggerates fears about entitlements while downplaying tax cuts for the top brackets and the cost of the wars in Iraq, Afghanistan and on “terror”.

The National Urban League’s “State of Black America 2006” uses an Equality Index which measures equality gaps between blacks and whites in five areas: economic (income, unemployment, home and business ownership, median net worth, and poverty rates); education; health and quality of life; social justice; and civic engagement. The Equality Index remained unchanged from 2005 in spite of the rebounding of the U.S. economy. The economic status of African Americans is 56% that of White Americans and their median net worth averages $6,166 — one tenth that of whites. Blacks own 50% of their homes versus over 70% for whites. The one bright spot is the growth of black-owned businesses. The full report and summary are available at www.nul.org. The mis-management of relief efforts to devastated Gulf Coast communities has been a focus of worldwide media attention as was the 2008 hurricane “Gustav”, punishing New Orleans again. The U.S. deficit is still unsustainable, requiring foreign investors to come up with some $80 billion per month into next year. The U.S. foreign debt now stands at some $2.5 trillion.  China’s Wen Jaibao expressed worry about US debt held in China’s reserves, and they have shifted their investments to US Treasuries with much shorter maturities.

According to the Globalization Index jointly calculated by Foreign Policy and accounting firm A.T. Kearney, the USA — ranked seventh after Singapore, Hong Kong, The Netherlands, Ireland, Denmark and Switzerland –is still weak on its indicator of Political Engagement (international treaty – participation). The report is on line at www.foreignpolicy.com. Increasing global interlinkages continue to accelerate change globally, regionally, locally and in our personal lives.

The rapid changes unleashed by globalization affect not only the U.S. economy and domestic conditions but also those of all countries. They range from global climate change, poverty, epidemics, terrorist attacks, trade policy and outsourcing to oil prices, deficits, developing country debt-relief and the sustainability of the global economy. The World Health Organization released the report of its Commission on the Social Determinants of Health on August 28th, finding that “inequities are killing people on a grand scale”.  This high-level Commission noted that DGP-growth did not assure better health outcomes citing the USA’s largest expenditures but inequitable distribution of health care (report at www.globalmarkets.com or from WHO, Geneva.)

Estimations of the impacts of all these concurrent changes and crises vary widely, as do the many forecasts and policy proposals to address them. Underlying these differences are competing paradigms: the fading but-still dominant Newtonian, Cartesian world view that the planet is like a giant machine in a clockwork-like universe, versus the emerging paradigm based on quantum physics, biology and ecology that all is interconnected and that policies require an interdisciplinary systems approach. Even the scientists of the Nobel Prize Committee are debating whether the prize in economics is legitimate; questioning that economics is even a science. The G8 Summit’s pledges to cancel the debt of 18 heavily indebted countries and double aid to Africa by 2010 are welcome. But, the civic movements worldwide demanding that leaders work to “Make Poverty History” say these G8 promises have fallen short.

Global power shifts continue: in the proposals to expand the United Nations Security Council; the new 27-member European Union with 10 more countries in Eastern Europe; the rise of China, the world’s manufacturing giant as a major importer and locomotive of the global economy; the rise of democratic populism in Latin America, led by Brazil, toward integration and new approaches to sustainable development. The World Trade Organization’s collapse at its Singapore meeting in 2007 and its Doha round in Geneva in July 2008, failed to meet the Group of 20 developing nations’ demands that the U.S. and Europe cut their agricultural subsidies and open their markets. The International Monetary Fund (IMF) has a new mandate from the G-20 after most countries in Latin America and Asia have repaid their IMF loans – saving billions in interest payments, the source of the IMF’s income. The continuing tragedies of HIV/AIDS and poverty still haunt the future of many African countries. Many commentators now question whether the WTO, IMF, and G8 are still relevant. G8 member countries are losing economic power to the countries of the G20.  However, a broad consensus still exists for the G-192 to address the promises all these UN member countries made in 2000 in the Millennium Development Goals to reduce poverty, expand education, access to health and other human goals.

The Globescan Global Stakeholder Panel Survey of 1,000-plus global leaders in business, government, multi-lateral agencies, and civic, non-governmental organizations (NGOs) found 89% agreeing on the importance of achieving the UN Millennium Development Goals and large majorities agreeing that closing the rich-poor gap was more important than increasing economic growth alone. Over 85% agreed that economic models themselves were in need of an overhaul. Globescan‘s survey of public opinion in 10 countries for the European Commission Beyond GDP conference in November 2007 is at www.EthicalMarkets.com together with their recent survey on Climate Change.

Secretary of State Hillary Rodham Clinton and President Obama have stressed the importance of the international community and multi-lateral institutions and the other two legs of national security: diplomacy and development.  The confrontation with Iran is a case in point, as the startling new Intelligence Estimate revealed that in fact, Iran had ceased its program of nuclear weapons development in 2003. While the USA, as the world’s military superpower, was the agent or primary actor in many of these global changes, there are now clearly many other forces at work. For example, major shifts in the world’s global unregulated currency markets still create potential for new financial crises. Today, the weapon of choice for many countries is currencies, and many countries are following the likes of Norway, Singapore, and China with sovereign investment funds, which use their surpluses to invest in real assets, companies, natural resources, etc rather than in US treasuries. These sovereign wealth funds have bailed out many of Wall Street’s reckless investment banks, Citibank and many other firms implicated in the credit crisis.  New research invalidates the traditional “efficient market” model of currency exchange and prices, showing how large market-makers, such as Citibank, enjoy prior information on currency movements in their order flows (The Economist, “What Economists Can Learn from Currency Trades,” Economic Focus, Nov. 26, 2005, p. 92).

Economic theory holds that a decline in the dollar would increase U.S. exports. So far the increase has gone into reverse while imports cost more.  Imports reduction has reduced the US trade deficit from its record levels.  Business Week (Dec 6, 2004) was the first to question economists’ trade model, based on Ricardo’s concept of “comparative advantage” – now over 200 years out of date. The failure of the Doha Round in Geneva of the WTO illustrates the need to overhaul trade theory. In “Shaking Up Trade Theory” (pp. 116-120) Business Week, in views similar to our own, dispels many myths in politicians’ scape-goating of India and China. China’s currency hovering at 7 renminbi to the U.S. dollar is still undervalued. China’s central bank has addressed this by pegging its currency to a basket of the world’s strong currencies. Over the past three years, based on purchasing power parity (PPP), China has accounted for almost one third of global GDP growth vis-à-vis the USA’s 13%. China’s dollar reserves now top those of Japan at $1.3 trillion.

Many economists and traders expect the dollar’s decline to continue as U.S. domestic and trade deficits continue. The euro has now become an alternative to the dollar as a global reserve currency in spite of the “no” votes on the European Constitution and the usual bickering over its budget (some 35% of world currency reserves and trade are now conducted in euros). What are global investors and currency traders saying about the U.S. dollar and the fundamentals of the U.S. economy?  Some $4 trillion in currencies change hands every day — 90% of which is speculation. Hedge funds losses are due to bad bets on oil and other speculative plays, with many closing down.  They will receive new scrutiny as more pension funds pile into such highly-leveraged vehicles in hopes of higher returns. Hedge funds peaked at 8,000 worldwide, but still account for between one-third and one-half of all trading on the New York and London stock markets.

Views on the future prospects for the U.S. economy differ widely depending on competing economic theories.  My view is that the global economy has entered the transition I predicted in my The Politics of the Solar Age (1981) and that all countries are restructuring toward more efficient renewable-resource based, information-rich economies of the new Solar Age.  Investment diversification strategies and relative interest rates have not adjusted to this transition and its effects on the different interests of foreign investors versus those in the U.S.  Fears over dependence on the Middle East and effects on economic growth and inflation have brought energy policy to the fore. Oil production costs average $70 per barrel so prices cannot go much lower for long. Consumers are responding — driving less, using mass transit where available, biking and buying more efficient cars.  Misguided US subsidies to ethanol have helped trigger the worldwide food crisis together with speculators in agricultural commodities and oil.  We have been warning that the buzz about ethanol and other biofuels should include caution about using energy and water to grow corn and soybeans to fuel wasteful cars — rather than feed hungry people. Already corn, wheat, and rice prices have doubled, hurting livestock raisers. Brazil’s use of sugarcane wastes and other biofuels from wastes are more efficient and equitable. Yet the US still has a 54 cents a gallon tariff on importing Brazilian ethanol.  It is now clear that future cars will run on electricity and not liquid fuels and the electricity can come from wind and solar thermal plants using desert lands unfit for agriculture — without taxing water sources.

President Obama, if not Congress, committed to a 17% reduction in CO2 buildup, less than Europe’s pledge to reduce greenhouse gas emissions by 20% and shift 20% to renewable energy by 2020. Even after the dire warnings on global warming from the February, 2008 meeting of the International Panel on Climate Change in Paris and the December, 2007 meeting in Bali, the US position on climate change still lags the G-8 leaders. The Obama energy plan shifts the Bush focus on nuclear and fossil fuels and increasing supply.  Alternative sources, energy conservation, fuel efficient cars, and new technologies are making strides with costs of wind now less than coal.  However, China, not the USA stands to benefit due to US delusions about “free trade” and China’s industrial policy of greening its economy.  US subsidies for nuclear power, beyond the Price-Anderson blanket insurance by taxpayers, are questioned by economists.  A closer examination is needed of all the subsidies to the nuclear industry. The new post-Kyoto protocol on climate change may be hammered out in the next UN meeting in Mexico City in 2010.  Trends are still bullish for all clean, renewable new technologies and venture capital is now flowing into these new energy options. Carbon trading markets now centered in London may not grow as hoped by Wall Street into a $1 trillion global market.  California and New England states have their own energy transitions underway.  Former Vice-President Nobel Laureate Al Gore’s July 2008 challenge to change the US energy system to clean renewables in 10 years, similar to that of oil-man T. Boone Pickens, helped push Congress.

OPEC accounts for a larger percentage of the U.S. current account deficit than China and Japan combined, but has taken current losses, since it prices its oil in U.S. dollars, leading to continued speculation that Iran and other OPEC members may re-denominate their oil in a new oil-based currency.  This would raise U.S. gasoline prices up to $5 a gallon — closer to the world price — because the U.S. would have to buy euros to buy OPEC oil. I have warned of this scenario since 2002, as another reason to accelerate energy conservation, efficiency, and alternative energy sources. Largest buyers of U.S. treasuries have been Japan (to keep the yen from appreciating as their economy revives) and China (to recycle its surplus dollar reserves).  The USA, still the world’s largest debtor, must encourage the G-20 Summit to reform the IMF to democratize so that the largest creditors, OPEC, China and Japan have larger votes.

US politicians of both parties are beginning to understand the expanding role of China, now the world’s biggest exporter and second largest economy in purchasing parity power terms. Scape-goating China for U.S. manufacturing job losses (2/3 of which are the outsourcing by U.S. companies) and India for its growing call center business (also outsourced by U.S. companies) is giving way to newer views of China’s growing imports. U.S. job losses are as much a factor of its delusional “free trade” domestic policies that make investments in job-displacing equipment much cheaper than retaining or hiring workers. The deepening inter-dependencies between China and the USA and how economic globalization has changed the world is now understood by U.S. citizens.  The US tariffs on tires and some paper products from China will make little difference. Giant retailers Wal-Mart, Target, CostCo, and others, which buy huge quantities of goods from China have facilitated their rapid penetration of U.S. markets at below-cost prices that U.S. manufacturers cannot match (see “The China Price” report in Business Week Dec. 6, 2004). Meanwhile, China can be expected to continue using its pile of surplus dollars to acquire U.S. companies as well as other real assets around the world, from rare earth minerals and energy supplies to land in African countries.

All these issues are part of the continuing “good news — bad news” changes due to globalization of the financial markets, following obsolete trade theories that even “free trade” ideologue, Jagdish Bhagwati, of Columbia University now thinks might be harming, not helping, the U.S. economy. Adding to U.S. problems, the soaring cost of college students carrying unsupportable loans. A new report from the National Center for Public Policy and Higher Education warns that the share of the U.S. workforce with high school and college degrees could decline over the next 15 years.  Meanwhile, China graduates millions of engineers annually.

The corporate scandals continue unabated, focused now on Wall Street’s recklessness, executive pay, private equity deals, and the hedge fund industry. US banks are bigger and financial firms still fragile.  Hedge funds and banks are still speculating while credit derivatives trades of some $683 trillion (Bank for International Settlements December 2008) still pose a threat.   In my conversation with John C. Bogle some years ago, the founder of the Vanguard Group of mutual funds stressed the need for institutional investors to assert more oversight since the 100 largest pension and mutual funds now own 56% of all U.S. equities. He added, “strong managers, weak directors and passive investors — and the looting begins.” In 2003, at the urging of reformers like Bogle, independent shareholder activist Robert Monks, author of The New Global Investors (2000), and the Calvert Group, the Securities and Exchange Commission over-rode lobbying by the Investment Company Institute and instituted new rules requiring mutual and investment advisors to disclose how they voted their proxies at the annual meetings of companies whose shares are owned in their portfolios. Robert Monks explores needed reforms in his Corpocracy (2007).

Uncertainties continue, regarding the length of the recession, inflation rates, interest rates, oil prices, and rates of job creation while stock prices have been inflated by Fed policies and stimulus funds.  Some economists now acknowledge that the flip side of corporate productivity is weaker job growth. One thing we can be sure of continuing is accelerating global changes driven by the ever-increasing interactions between all the players in our globalized economy. Pension fund managers from 16 countries, announced that new signatories to their Principles of Responsible Investing have now brought their total assets to $19 trillion (see www.Ethicalmarkets.com for more details). Financial asset managers are now taking climate change seriously, such as those managing over $3 trillion in employees’ pension funds. Beginning at a UN-sponsored press conference in December 2003 and others in 2004 and 2005, most pension funds now require companies in their portfolios to disclose whether or not they had instituted climate risk mitigation plans. Britain’s institutional investors, which own half of all the shares on the London Stock Exchange, released their Institutional Investors Group Principles on Climate Change in October 2006, pledging to incorporate climate change concerns into their decision making and requiring their asset managers to do the same. (Financial Times, Oct 3, 2006). The global Carbon Disclosure Project represents $54 trillion managed by financial firms requiring companies to disclose their emissions and mitigation plans. The giant insurance company Swiss Re went further, announcing that it would become a “greenhouse gas emissions neutral company” — offsetting all its carbon-emitting activities with environmental restoration programs. Many European and U.S. companies are taking similar proactive action, leaving U.S. lawmakers on the sidelines.  Australia’s new Prime Minister, Kevin Rudd, signed on to Kyoto, leaving the U.S. as the only industrial country outside the Treaty. This issue and similar ones that investors and companies are grappling with are now regularly addressed, for example see www.unpri.org and www.ceres.org.

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