free lunch

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Printing Food…

NASA is funding the development of a printer for food:

3dprinterfood

Of course, its immediate application is as an experimental technology to feed hungry astronauts in space.

This is getting interestingly close to the fantasies of a Star Trek-style food replicator. Consumers go to the store, buy cartridges of nutrients and flavourings, load them into their printer, download some recipes from the internet, print, and eat.

It may be early to hypothesise about costs, but I hypothesise that 3-D printing foodstuffs may massively lower the costs — both in material inputs and in monetary inputs — of producing food.

For instance, today 70% of water usage is for food-related irrigation. Today it takes 1000 to 3000 litres of water to produce one kilo of rice, and it takes 13000 to 15000 litres of water to produce one kilo of grain-fed beef. So crops and animals take lots and lots of water to rear to the time they go onto human plates. Manufacturing food directly in a 3-D printer cuts out all the resources and energy involved in rearing animals and growing irrigating crops — so could massively cut down on water and resource usage.

Unfortunately, in this era of 2-D printing inks for inkjet printers are more expensive than fine wines. It has been jokingly said that the first thing many of those who experiment with 3-D printing will do is a print a 2-D printer that isn’t such an infuriating moneysucker. So printing at home is by no means guaranteed to lower costs or increase convenience. The technology is still in its nascency, and ultimately the results may be very poor, at least to begin with.

But in the long run, the cost-saving and resource-saving potential may win out. Perhaps 3-D food printing could be the innovation that does for human demand for agriculture what petrochemical fertilisers did in the 20th Century. At the time of Malthus, it was widely recognised that humans were oversaturating the land, that population was growing unsustainably and that it all had to end in starvation, cataclysm. This Malthusian fire and brimstone is once again popular today, with many true believers “doing the math” and declaring that human population growth is unsustainable, and some even suggesting forcible measures to prevent excessive population growth. But the first Malthusians failed to factor human innovation into their calculations. Fertilisers and other innovations in agriculture were black swans that derailed their predictions. In the long run, an innovation like food printing that massively reduces land use, water use and resource use could be the black swan that derails the predictions of modern Malthusians.

And with enough practice, recipes designed for 3-D food printers may turn into as much of an artform as recipes designed for regular ingredients and human labour. There will most likely aways be a niche for human-prepared and naturally-grown food. But music, video, books, etc, distributed via the internet are now of sufficient quality for widespread acceptance. With sufficient innovation, care, thought and experimentation it is possible that food (alongside various other 3-D printed goods) distributed digitally can reach acceptable standards.

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Deindustrialisation & Male Jobs

A whole lot of pundits are spending column inches trying to explain the cruel reality of the last forty years — stagnant wages for full-time male workers, and falling wages for men as a whole:

And there has been a huge outgrowth of men who aren’t in the labour force. In 1954, 96 percent of American men between the ages of 25 and 54 worked. Today, that number is down to 80 percent. That’s a humungous decrease.

The question is why.

Mainstream media pundits are suggesting that men are unsuited to the present economic landscape. The suggestion is that men have been bad at adapting to change, and that women have been good at adapting to change:

In The End of Men: And the Rise of Women, Hanna Rosin argues that changes in the world economy have dramatically shifted gender roles. Women have adapted more skillfully to the new socioeconomic landscape by doggedly pursuing self-improvement opportunities, rebranding as the economy requires it, and above all possessing the kind of 21st century work attributes — such as strong communication skills, collaborative leadership and flexibility — that are nudging out the brawny, stuck-in-amber guys. Rock steadiness, long a cherished masculine trait, turns out to be about as useful in our fleet-footed economy as a flint arrowhead. Life favors the adapters, and it turns out they’re more likely to be women.

Now two things have very clearly changed for women — access to birth control, and the end of the traditional social compact where women did housework, and men did wage work. In regard to the vast majority of expanding occupations today — teaching, medical services, bureaucracy — women no longer are at a material disadvantage due to their (on average) smaller size and lesser strength.

Overall, this has meant proportionally less jobs for men, and proportionally more for women.

But it’s not just that women have been advantaged. Men have been deeply disadvantaged. In sectors that due to physical characteristics men have traditionally been dominant in — manufacturing, agriculture, forestry, mining and heavy industry — there has been a vast decline in output-as-a-percentage-of-GDP, whereas in services — a sector in which men have not traditionally dominated — there has been a vast increase.

Yet it is not the case that there are less manufacturing jobs globally. As we mostly already know, this is a case of manufacturing and industry being exported overseas, most obviously to China. China manufactures, and America consumes. This is America’s trade balance with China:

This is reflected in China’s sectoral employment balance compared to Western nations, and the world at large:

So it’s not at all the case that the United States is cutting back on industrial jobs because industry is less in demand. The United States still has plenty of demand for industry. America has cut back on industrial jobs because it has the ability to run huge trade deficits, through the dollar’s role as global reserve currency, and shipped its manufacturing industry abroad. Other countries have required dollars for trade purposes, so have been more than happy to sell to the United States, making dollars and debt the United States’ greatest exports.

Yet the present paradigm has severely damaged the prospects of young men, for whom a generation ago jobs in industry and manufacturing were once plentiful. Quantitative easing led to a jobs boom — in China, for Chinese industrial workers. That doesn’t help the growing chunk of the male population in the United States who have been shut out of the job market by the rise of America’s Chinese addiction.

And it seems unlikely that the industrial jobs are coming back any time soon. Although there are reasons why America may soon import less from China — rising energy and transport costs, rising Asian wage costs, and questions of the dollar’s sole reserve currency status — there are plenty of places in Latin America with cheap and plentiful labour for America’s corporate elite to set up factories. Even the manufacturing jobs that remain in America will be under threat from increased automation and robotics.

This implies that barring a miracle, joblessness and stagnant or falling real wages will continue to be a significant and worsening challenge for young Americans, and particularly men, in the coming years.

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Is Apple Really Worth More than the Sum of Microsoft, Dell, Google, Facebook and HP?

Because that’s what the market cap suggests:

But not the book value:

Nor revenue:

And nor earnings before interest, taxes, depreciation and amortisation:

The data suggests that relative to other tech companies AAPL is significantly overvalued. And going forward there is no guarantee that AAPL can justify today’s value by keeping up its dominance of the sector. Tech is an extremely fickle and fast-changing sector where one year’s turkey can be next year’s prize pig. And AAPL’s product lineup is still dominated by products developed under the charge of Steve Jobs — it will take a while longer to fully assess whether or not AAPL can succeed at the same magnitude over the entire product cycle from conception to sales without his leadership.

But I doubt that anything like a sober look at the data will stop the Apple bulls. Because this time is different, right?

 

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Facebook & the Bubble Mentality

So Facebook keeps falling, and is now floating around the $27 mark.  We’re a third of the way down to my IPO valuation of FB as worth roughly $2-4 a share (or 5-10 times earnings), although I wouldn’t be surprised for the market to stabilise at a higher price (at least until the next earnings figures come out and reveal — shock horror — that Facebook is terrible at making money).

The really stunning thing is that even after all these falls, FB is still trading at 86 times earnings. What the hell did Morgan Stanley think they were doing valuing an IPO without any viable profit model at over 100 times earnings? The answer is that this was an exit strategy. This IPO was about the people who got in early passing on a stick of dynamite to a greater fool which incidentally is precisely the same bubble mentality business model as bond investors who are currently buying negative-real-yielding treasuries at 1.6% hoping to pass them onto a greater fool at 0.5% (good luck with that).

This was achieved by convincing investors to ignore actual earnings and instead focus on projected future earnings. From Bloomberg:

Facebook, with a market capitalization of $79.1 billion, is trading at 29.5 times the company’s projected 2014 profit of $2.69 billion, data compiled by Bloomberg show.

Or much more simply, counting chickens before they hatch.

There’s an interesting comparison to the development of AAPL. Steve Jobs — who went on to do great things — was never fully in charge of AAPL until much later on. AAPL externally recruited CEOs with business experience, and Jobs was eventually thrust out of the company he founded, to continue his journey on his own. Failure is a really valuable lesson. Jobs was lucky to experience it and learn from it early before he ever got a chance to destroy AAPL.

FB isn’t really a bad business, and prospects would look much rosier if it were priced more realistically. It’s generating a profit — just a much smaller one than suggested by the IPO pricing. And management are being swept along by everyone else’s irrational euphoria. Zuckerberg can freely throw away a whole year’s earnings buying Instagram — an App whose functionality FB actually duplicated in-house almost certainly for a tiny fraction of the cash thrown at Instagram. And Zuckerberg — who controls a majority of the voting rights — isn’t going to get thrust out into the cold by shareholders. He can keep wildly throwing cash around so long as it keeps flowing into FB. The problem is, given the steep price falls, it looks like the river is running dry.

As I wrote before FB started falling:

The big money coming into Facebook just seems to be money from new investors — they raised eighteen times as much in their flotation yesterday as they did in a whole year of advertising revenue. For an established company with such huge market penetration, they’re veering dangerously close to Bernie Madoff’s business model.

That’s life. Bubbles get burst; the Madoff bubble, the securitisation bubble, the NASDAQ bubble, the housing bubble, the Facebook bubble, the treasury bubble. The trick is not getting swept up by the irrational euphoria. Better to miss a blow-out top than to end up holding a stick of dynamite.

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Is China a Currency Manipulator?

Mitt Romney thinks so:

China has an interest in trade. China wants to, as they have 20 million people coming out of the farms and coming into the cities every year, they want to be able to put them to work. They want to have access to global markets. And so we have right now something they need very badly, which is access to our market and our friends around the world, have that same– power over China. To make sure that we let them understand that in order for them to continue to have free and open access to the thing they want so badly, our markets, they have to play by the rules.

They’re a currency manipulator. And on that basis, we go before the W.T.O. and bring an action against them as a currency manipulator. And that allows us to apply tariffs where we believe they are stealing our intellectual property, hacking into our computers, or artificially lowering their prices and killing American jobs. We can’t just sit back and let China run all over us. People say, “Well, you’ll start a trade war.” There’s one going on right now, folks. They’re stealing our jobs. And we’re gonna stand up to China.”

The theory goes that by buying U.S. currency (so far they have accumulated around $3 trillion) and treasuries (around $1 trillion) on the open market, China keeps demand for the US dollar high.  They can afford to buy and hold so much US currency due to their huge trade surplus with America, and they buy US currency roughly equal to this surplus.  To keep this pile of dollars from increasing the Chinese money supply, China sterilises the dollar purchases by selling a proportionate amount of bonds to Chinese investors.  Supposedly by boosting the dollar, yuan-denominated Chinese goods look cheap to the American (and global) consumer.

First, I don’t really think we can conclusively say that the yuan is necessarily undervalued. That is like assuming that there is some natural rate of exchange beyond prices in the real world. For every dollar that China takes out of the open market, America could print one more — something which, lest we forget — Bernanke has been very busily doing; the American monetary base has tripled since 2008. Actions have consequences; if China’s currency peg was so unsustainable, the status quo would have collapsed long ago. Until it does, we cannot conclusively say to what extent the yuan is undervalued.

What Romney is forgetting is that every nation with a fiat currency is to some degree or other a currency manipulator. That’s what fiat is all about: the ability of the state to manipulate markets through monetary policy. When Ben Bernanke engages in quantitative easing, or twisting, or any kind of monetary policy or open market operation, the Federal Reserve is engaging in currency manipulation. Every new dollar that is printed devalues every dollar out in the wild, and just as importantly all dollar-denominated debt. So just as Romney can look China in the face and accuse them of being a currency manipulator for trying to peg the yuan to the dollar, China can look at past U.S. administrations and level exactly the same claim — currency manipulation in the national interest.

While China’s currency policy in the past 40 years has been to attract manufacturing, technology, resources and investment into China (and build up a manufacturing base to provide employment to its low-skilled population) by keeping its produce cheap, America’s currency policy has sought to enjoy a free lunch made up of everyone else’s labour and resources. This has been allowed to develop because of America’s reserve currency status — everyone has needed dollars to access global markets, and so America has rested on her laurels and allowed her productive industries to decline. Why manufacture the bulk of your consumption when China can do it cheaper, and Wal Mart has no problem with slave labour? Why manufacture your military hardware when China can do it cheaper? Why produce your own energy when you can instead consume Arab and Latin American oil?

Former U.S. ambassador Jon Huntsman raised this issue in an article from China Business News in a cable that was eventually leaked via Wikileaks:

The U.S. has almost used all deterring means, besides military means, against China.  China must be clear on discovering what the U.S. goals are behind its tough stances against China. In fact, a fierce competition between the currencies of big countries has just started.  A crucial move for the U.S. is to shift its crisis to other countries – by coercing China to buy U.S. treasury bonds with foreign exchange reserves and doing everything possible to prevent China’s foreign reserve from buying gold.

If we use all of our foreign exchange reserves to buy U.S. Treasury bonds, then when someday the U.S. Federal Reserve suddenly announces that the original ten old U.S. dollars are now worth only one new U.S. dollar, and the new U.S. dollar is pegged to the gold – we will be dumbfounded.

Today when the United States is determined to beggar thy neighbor, shifting its crisis to China, the Chinese must be very clear what the key to victory is.  It is by no means to use new foreign exchange reserves to buy U.S. Treasury bonds.  The issues of Taiwan, Tibet, Xinjiang, trade and so on are all false tricks, while forcing China to buy U.S. bonds is the U.S.’s real intention.”

Romney and others of his ilk might brush this off, believing that China’s $3 trillion dollar reserve hoard was gained through unfair means — slave labour, cutting corners in quality, the aforementioned “currency manipulation”, etc, and that that somehow gives America the right to inflate away its debts and screw its creditors. To some degree, they have a point. If China had a problem with America inflating away its debts, it should never have put itself so deep into dollar-denominated paper. If China recognised that America’s debt position was unsustainable, it should never have put so much into something so unsustainable, irrespective of supposed American pressure.

In the short term, though, I think escalating the trade war through the imposition of tariffs is a very bad idea. America is a consumption-led economy, and with middle class incomes already squeezed, a constriction of the supply of cheap and readily available goods is likely to put a lot of downward pressure on consumption. And it’s not just consumption — in today’s hyper-globalised world, a huge proportion of manufacturing — including military hardware — at some stage flows through China.

As Vincent Fernando noted:

Most of America’s key military technologies require rare earth elements, whose production China holds a near-monopoly over.

It’s thus perhaps no surprise that China has made the threat of rare earth export restrictions a new political bargaining chip.

American corporations could gradually pull out of China and shift to manufacturing and extracting resources elsewhere including America (which has large rare earth deposits), but it would be a challenging process. Rebuilding an industrial base is hard: skilled and experienced labour takes time to develop (American labour is rusty and increasingly unemployed and disabled), and supply chains and webs have all agglomerated in China. Building up domestic supply chains takes time, expertise and entrepreneurial zeal. And any destabilisation could spook global markets.

So let’s make no mistake: in the short term America needs China far, far, far more than China needs America. The notion that China needs America as a consumer is totally false; anyone can consume given the dollars or gold, and China holds $3 trillion, and continues to increase its imports of gold.

Peter Schiff summarises:

The big problem for countries like China and India is that they still subsidize the U.S. They buy our Treasury bonds and lend us all this money so we can keep consuming. That’s a big subsidy and a heavy burden.

They can use their money to develop their own economy, produce better and more abundant products for their own citizens. It’s a farce to think that the only thing China can do with its output and savings is lend it to the U.S. government, especially when we can’t pay it back.

Mitt Romney seems intent on destabilising this fragile relationship. American policy that incentivised globalisation and the service economy has very foolishly drawn America into this fragile position where its economy is increasingly fuelled not only by energy coming out of the politically and economically unstable middle east, but also by goods coming from a hostile and increasingly politically and economically unstable power.

And make no mistake — although China has done well to successfully transform itself into the world’s pre-eminent industrial base and biggest creditor, it has a lot of bubbles waiting to burst (particularly housing), stemming from the misallocation of resources under its semi-planned regime. Which makes this entire scenario doubly dangerous. Any shock in China would surely be transmitted to America, simply because it is becoming increasingly pointless for China to continue subsidising American consumption (through buying treasuries) when they could instead spend the money raising the Chinese standard of living. That could mean a painful rate-spike.

The real problem is that Romney is trying to address a problem that is very much in the past. If Romney was elected as President on this platform in 2000, things might be different. But China got what it wanted: by keeping its currency cheap and its labour force impoverished it became the world’s pre-eminent industrial base, the spider at the heart of the web of global trade, and a monopoly on important industrial components and resources. China used American demand, technology and investment during the 00s to develop. Now the imperative is not to grab a bigger share of global manufacturing, or a bigger hoard of dollars, it’s to leverage that position toward the ultimate aim of returning China to its multi-millennial superpower status. The promise of Chinese primacy is quite simply the strongest tool for the CPC to retain its (increasingly shaky) grip on China.

However we should not discount the possibility that bursting economic bubbles may stoke up some kind of popular rebellion against the Communist authorities in some kind of Chinese Spring. A new more pro-Western regime is surely America’s best hope of containing China, while gradually manoeuvring itself out of dependency on Arab oil and Chinese goods. But that may just be wishful thinking; it is possible that a new Chinese regime may be vehemently anti-Western; the Opium War and China’s 20th century humiliation still ring deeply in the Chinese psyche.

So it is unclear what is next for China, and the relationship between China and America. But having the world’s biggest manufacturing base and a monopoly over rare earths is a strong position to be in if your ultimate aim is to manufacture huge quantities of armaments in the pursuit of an aggressive, expansionist foreign policy…

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America’s Eurasian Endgame

I have written before of the Chinese aim in this great international game:

I believe that the current world order suits China very much — their manufacturing exporters (and resource importers) get the stability of the mega-importing Americans spending mega-dollars on a military budget that maintains global stability. Global instability would mean everyone would pay more for imports, due to heightened insurance costs and other overheads. China also recognises that while America falters and struggles under the weight of its military burden, its lack of growth, and its deep debt concerns, Chinese military strength can grow at a much faster pace thanks to Chinese domestic growth, and a high domestic savings rate. They are happy that their dollar pile — China has over $3 trillion in foreign exchange reserves — can still buy plenty, and they want its value to remain as stable as possible. But above all they want to gradually diversify out of those dollars and into productive assets.

So, if China is happy with the status quo, or at least where the status quo is going, what does America want out of all this?

America wants to keep the free lunch of oil and goods for dollars and treasuries that is so swiftly evaporating. Someday soon America will have to bring more to global trade than its role as global policeman, its universities and a humungous stack of freshly-printed dollars. While some may carp about the demand created by the American consumer, consumption is not production — consumption does not bring anything to the party except dollars, and the rest of the world already has plenty of those. Some day soon, when the dollar is no longer recognised as the universal reserve currency, America will have to face up to the fact that consumer goods and oil will cost more and more in dollars — and she will either have to choose to be poorer, or to manufacture more, and generate more energy at home.

A sensible American plan going forward would recognise this, and would be developing the means and the infrastructure to end America’s free lunch — specifically, through redeveloping American manufacturing capacity and supply chains, and scaling back America’s role as global policeman. Unfortunately, I see no such thing from government, and very little from private industry. America is clinging onto the old foreign policy doctrines — that if America is powerful enough, and if she can retain its role as global hegemon and world policeman, then she will always be free to consume a chunk of the rest of the world’s production and resources, because her currency will forever be the global reserve. But that simply isn’t true — Russia and China have already ditched the dollar for bilateral trade.

Sadly, America’s foreign policy is ever-more fixated on interventionism, and maintaining the petrodollar standard.

Essentially, American exceptionalism has created a blindness to reality. Humungous debts to hostile creditors often makes an empire fall. Resource and energy dependency often makes an empire fall. Yet America just continues spending ever greater amounts on her military, and just hopes for the best. Every President since Carter has promised to reduce American oil dependency, but there has been no substance to that.

So — absent any real progress on reducing dependency — America’s endgame seems to involve taking the Arab Spring to Tehran, Islamabad, Moscow and Beijing, and having the new middle classes of consumerist Americanised zombies take out uppity creditor regimes — and replace them with Facebook-friendly State Department-endorsed place men, and adhering more closely to edicts out of Washington.

That way, America’s free lunch can go on forever.

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Why the Debt Ceiling is a Dead Issue.

The Elephant in the Room?

I spent the last three days writing blog posts on economics without ever mentioning the “hot button” issue of the day: the United States Treasury running out of juice, and having to yet again raise its debt limit. For those with a short memory, or a lack of interest, here’s a figure of the U.S. debt, first in absolute terms:

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