Monday, September 26, 2011

Nial Feguson is my hero

Ferguson is a very well regarded economist (Cambridge) and has a rare ability to cut to the core of the issue.  Below is a presentation he made at the TED talks.  Watch it!  My issue here is how things are changing for the west in general and for the U.S. in particular.  The six killer apps of the West are:

  • Competition
  • Scientific Revolution
  • Property Rights
  • Modern medicine
  • Consumer Society
  • Work Ethics

The question is: Are all six of these elements necessary for the continued success?  China economic model is looking relatively good, and the concept of property rights there are rather nebulous.  Of course one of the dilemmas with China is that type of growth that has been achieved.  In a sense, growth has been via investment in production capacity – about 70% of China’s GDP is capacity in infrastructure and production.  Chinese model is not dependent on its  citizen to generate demand for its production, rather it looks at the rest of the world as its market.

Looking at the U.S. it is interesting to note that several of the above “Killer Apps” are weakening.  Unlike China, America’s level of consumption is high – around 75% of the GDP.  Whereas the Chinese model is unsustainable the U.S. system faces the same challenges.

Competition:  Still fierce in the U.S. the concept of constructive destruction is alive and well, the rise and fall of IMB, Bell and Microsoft are proof that the U.S. system takes a very aggressive view as to the survivability of its companies.  I would suggest that this extend to most of its financial sector too.

Scientific Revolution:  Is under threat from several segment of society, stem cell research is just the most obvious segment where America is falling back, yet smart foreigners still flock to America, because it is the world single largest homogenous market.  The question becomes more difficult when basic scientific research is concern.  The withdrawal from space is one of the most glaring shifts in America – there’s money for guns at unprecedented level but there’s no more money or scientific inquiry.  It is easy to blame politicians, but they are a reflection of the population at large.

Property Rights: The end of the U.S. housing boom has been difficult for America in more than one way. First off, it is now evident that the housing boom of 2002-2008 was built entirely on debt, yes more borrowing, but more importantly, people borrowed more, but faced, on average falling income.  The middle class of 2011 finds itself with income slightly lower than in 1990 – 20 years ago!  Yet borrowing levels continue to rise.  This has led to unprecedented number of homeowners defaulting on their financial obligations.

Add to all this shoddy paperwork on mortgages that were put in place during the boom years – and property rights in America are deeply affected.  In the U.S. a very strict paper trail to perfect mortgages has evolved over the century (yep we’re talking a long time).  In the case of hypothec the loan note has to be physically attached to the mortgage charge, and hit has not been the case for many mortgages.  This means that the bank which repossess a house may have no rights to do so – you can see where this is going.

Modern medicine is the next topic, and while America has probably the ultimate cutting edge in medicine, and increasingly large percentage of the population doesn’t have access.  The stigma of “pre-existing conditions” never mind the willingness to pay huge premium.  In fact, over the past 10 years, 100% of the nominal increase in national income has been absorbed by ever rising medical expenses.  Modern medicine exist, but too many in the middle class it is no longer available.

The consumer society is alive and “well” in the U.S. although there is doubt that the current level of 75% of GDP in consumption is sustainable (its not) and that consumption will have to drop sooner rather than later.  In fact, the boom in housing between 2002 and 2008 fuelled the largest increase in the consumption society, but since the home ATM is closed (probably for a long long time) the ability of American to continue their consumption binge in the face of falling income is hard to reconcile.

America’s work ethic is one of the strongest, but it is under a great deal of tension with the rising unemployment.  Not only was the 2000-2008 period of economic growth largely accomplished without the participation of labor, the worse is that the 2009/10 recession saw a dramatic increase in unemployment.  The strictest form U2 is at 9.1%, but the more widely accepted measure of U6 (which counts people who are underemployed e.g. would like full time work but cannot find it) at 16% is dramatic, as is the rise of the long term unemployed.  This could fundamentally shift American’s work ethics.  Already a Chinese works a 1,000 hours more a year than does a European (difference is not as wide in America).

So there you have it, what has been the strength of the western world 


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