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Dear Aspiring Writers: The Worst Advice You'll Ever Read

Spirited Away: Decay and Renewal

An American Poem
(Robinson Jeffers)

Taoist Chinese Poems

11 more in archive

American Identity
Hapas: The New America

Can You Tell What I am? Part I

Can You Tell What I am? Part II

Only in America


Cultural Commentaries

On Hatred and Anti-Americanism

Anti-Americanism Part 2

Anti-Americanism Part 3


Kroika! Chronicles

This Blog Sells Out

Doom and Gloom Sells

The Kroika Mascot-"Auspicious Pet"

Unfolding Crises: Asia
China: An Interim Report

Shanghai Postcard 2004

Corruption and Avian Flu: China's Dynamic Duo

Exporting the Real Estate Bubble to China

Is the Bloom Off the China Rose?

9 more

Battle for the Soul
of America

Katrina, Vietnam, Iraq: National Purpose, National Sacrifice

Is This a Nation at War?

A Nation in Denial

Why Is This Such a Tepid Time?

That Price Isn't Cheap, It's Subsidized

U.S. Fascists Seek Ban on Cancer Vaccine

The Truth About Christmas

10 more

Financial Meltdown Watch
What This Country Needs Is a... Good Recession

Are We Entering the Next Age of Turmoil?

Doubling Down on 5-Card No-See-Um

A Rickety Global House of Cards

Are Japan and Germany Truly on the Mend?

Unprecedented Risk 2

Could One Rogue Trader Bring Down the Market?

Worried about Inflation? Stop Measuring It

Economy Great? Bah, Humbug

Huge Deficits and Huge Profits: Coincidence?

Who's The Largest Exporter?

Three Snapshots of the U.S. Economy

21 more

Planetary Meltdown Watch
The Immensity of Global Warming

Sun Sets on Skeptics of Global Warming

Housing Bubble Watch

Housing Bubble? What Bubble?

Housing Bubble II

Housing Bubble III: Pop!

Hidden Costs of the Housing Bubble

Housing Market Slips Toward Cliff

Housing Market Demographics

Oil/Energy Crises

Whither Oil?

How much Is a Gallon of Gas Worth?

The End of Cheap Oil

Natural Gas, Naturally High

Arab Oil Money and U.S. Treasuries: Quid Pro Quo?

The C.I.A., Oil and the Wisdom of Crowds

The Flutter of a Butterfly's Wings?

A One-Two Punch to a Glass Jaw

Outside the Box
How to Make a Favicon
Asian Emoticons

In Memoriam: Winky Cosmos

The Wheeled Vagabonds

Geezer Rock Overload

In a Humorous Vein
If Only Writers Had Uniforms

Opening the Kimono

One-Word Titles


Keys to Affordable Housing

U.S. Conservation & China
Steve Toma, Me & Skil 77s: 30 years of Labor

Real Science in the Bolivian Forest

Deforestation and Sustainable Forestry

The Solar Economy (book)
The Problem with Techno-Fixes

I Love Technology, I Hate Technology

How To Blow off Web Ads and More

Health, Wealth & Demographics
Beauty of the Augmented (Korean) Kind

Demographics and War

The Healthiest Cold Cereal: Surprise!

900 Miles to the Gallon

Are Our Cities Making Us Fat?

One Serving of Deception

Is Obesity an Inflammatory Response?

Demographics & National Bankruptcy

The Decline of Europe: A Demographic Done Deal?

Selling the Landscape

The Downside of Density

Building Heights and Arboral Roots

Terroir: France & California

L.A.: It's About Cheap Oil

The Last Redwood

Airport Walkabouts

The French Village Bakery

What Is Happiness?

Our Education System: a Factory Metaphor?

Understanding Globalization: Braudel

Can You Create Creativity?

Do Average People Know More Than Their Leaders?
On The Impermanence of Work

Flattening the Knowledge Curve: The "Googling" Effect

Human Bandwidth and Knowledge

Iraqi Guangxi

Splogs, Blogs and "News"

"There is no alternative to being yourself"

The Strolling Bones: Rock of Ages

Bad Karma: Election Fraud 1960

Hiroshima: First Use

All the Tea in China, All the Ginseng in America

Friday Quiz

Quiz #1: Pet Obesity

Essential Books

The Misbehavior of Markets

Boiling Point (Global Warming)

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

How We Know What Isn't So

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

The Third Chimpanzee: The Evolution and Future of the Human Animal

The Future of Life

Beyond Oil: The View from Hubbert's Peak

The Party's Over: Oil, War and the Fate of Industrial Societies

The Solar Economy: Renewable Energy for a Sustainable Global Future

The Dollar Crisis: Causes, Consequences, Cures

Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It

More book reviews


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What's New, 2/03 - 5/05


 Weblog and wEssays

Welcome, readers, welcome.

Please browse this month's entries and the archived wEssays listed in the sidebar. If nothing here strikes your fancy, skim through my recently published articles (generally in the San Francisco Chronicle) and my archives back to 1995.

I would be honored if you link any essay to your website, print a copy for your own use or add my RSS or Atom feed. And of course I appreciate your recommendations of this weblog and your comments:


January 31, 2006

Once More, With Feeling: This Is False Prosperity

What if the foundation of the stock market's incredible rise since 2002 is in fact bogus? The foundation of any stock market is earnings: rising earnings lead to rising values for the companies pocketing all that profit. So what happens when the cloak of ever-rising profits turns out to be threadbare?

Consider this from Barrons issue dated 1/2/06:
One of the big arguing points of the bulls is the extraordinary strength in corporate earnings. And, no question, we've had a spectacular boom in profits. In the third quarter of 2005, to illustrate, operating profits of the S&P 500 were up a neat 11.5%, the 14th quarter in a row of double-digit gains.

However, as the indefatigable David Rosenberg of Merrill Lynch points out, such a splendid performance reflects not so much any inordinate growth of revenues as the impact of an unprecedented mass of buybacks -- $456 billion worth of stock repurchases that TrimTabs Investment Research estimated took place last year.

Operating earnings in dollar terms -- as against per-share net -- actually were up only 7.8% over the comparable year-earlier total. Which, David notes, was the narrowest gain in three years.
In plain English: let's say your company has a million shares of stock, and you net a million dollars annually in profit. Your earnings are a buck a share. Now let's say you buy back half a million shares in a stock buyback plan; there are now only a half a million shares outstanding.

Let's say your profit dips to $600,000. Yikes--what will your shareholders think of this horrendous drop in profitability? What drop in profits, you reply; that works out to $1.20 per share in profit, 20% more than the prior year. Your shareholders and the market are ecstatic with your wonderful 20% increase in profits per share, and your share price promptly rises by 20%.

But what a minute: didn't your actual profit drop by 40%? Yes, but lo and behold, the profit per share went up by 20%. That's the essence of this "profit boom": slight of hand accounting and bogus "pro forma" earnings.

The Wall Street cheerleaders like to talk about unprecedented profits as the driver of this current "prosperity," but the chart above reveals the actual source of all this easy money floating around: unprecedented borrowing by individuals, government and businesses. So, once more with feeling: this is false prosperity, one that will soon meet reality with a mighty crash. Hint: reality can't lose forever.

January 30, 2006

Unhealthy Appetites, Diseased Lifestyles

Am I the only one who sees a connection between America's explosion of obesity and its debt-bloated lifestyle? According to a story titled "How We Get Fat":
Despite the fact that Center for Consumer Freedom in Washington, D.C, says that Americans spend around $50 billion every year trying to lose weight, according to the U.S. Centers for Disease Control in Atlanta, 60% of the U.S. population aged 20 and older is obese.
That is an astonishing and sobering number--nearly 2/3 of America's 250 million adults are overweight and therefore at risk. As the chart shows, America's addiction to easy credit tracks our addictions to junk food and unhealthy lifestyles: despite record low interest rates, the percentage of income being paid to service debt is hitting record highs. This borrowing frenzy has created a false prosperity not unlike the false sense of well-being one feels after eating a supersized burger, fries and empty-calorie soda: it sure tastes good right now, but the damage you've done to yourself will last for years and perhaps your entire life.

As reported in the Wall Street Journal of 1/28/06 in a piece on the falling GDP:
American shoppers have been the main engine of growth for the US and the international economy the last few years. But in the process, they have been spending far more than what they earned. All told, household debt has been increasing at an annual pace of nearly 12% in the latest quarter, the fastest pace in 18 years.
Bernard Baumohl, The Economic Outlook Group
Sadly, there are only two ways to lose weight: eat less and exercise more by applying lifestyle change and discipline, or have your ability to eat large quantities of food surgically restricted. In a similar fashion, higher interest rates and the breaking of the housing bubble are about to restrict America's addiction to vast quantities of new debt.

Evidence that the housing boom is over abounds; here is but one story of many: Contractors Cut Prices as Remodeling Boom Slows
Mortgage giant Freddie Mac predicts that rates on 30-year fixed-rate mortgages will rise to 6.5% by the end of the year, up from the current 6.15%. Home-equity credit lines are tied to the prime interest rate, which is now 7.25%, up from 5.25% a year ago.
Or this from Barrons "Up and Down Wall Street" column of 1/28/06:
What marked the extended and powerful cycle, he reminds us, is that it was built on cheap credit and incredibly relaxed loan standards. Some 43% of first-time buyers, David recounts, put zero money down on their home purchases last year; by contrast, two years earlier, 28% bought a house with no down payment. Well over a quarter of the mortgages in '05 were of the dicey "buy now, pay later" variety. The backlog of unsold inventories in the resale housing market last month shot up 26% above the December '04 level to a 5.1 months' supply; that compares with the low of 3.8 months in January of last year. Inventory of new homes stands at its highest level in nine years. The overhang of unsold units in the condo market constitutes a formidable 6.2 months' supply. And pricing is beginning to reflect the inventory bulge: December's median price of $211,000 for an existing home was virtually unchanged from last spring and down 4% from the August peak.
Will Americans be healthier once they can no longer borrow huge amounts of "free" cash on their homes, or buy homes with no money down? Undoubtedly. But the transition--call it "belt tightening," "correction," recession" or "depression", the result will be the same whatever label you apply--will be painful. Marginal borrowers will lose their homes and go bankrupt. The builders, suppliers and home furnishings industries will contract mightily, along with the wider economy they've been supporting. Nobody says losing weight is easy or fun; in a similar fashion, paying off debt or blowing it off in bankruptcy is neither easy nor fun. But the piper is about to demand payment for years of profligate borrowing, and like an obesity-caused heart attack, there will be no choice but cut, cut, cut.

January 28, 2006

Scenario for a Stock Market Plummet

If there was any sure way to predict the rise and fall of the world's stock markets, we'd all be millionaires. Alas, there is no such reliable crystal ball, but there is one truism we can follow: eventually, reality trumps market euphoria and hype.

Thus we can look at the accompanying chart and safely predict that the Federal Reserve will not stop raising interest rates on January 31, as the stock market has been widely anticipating. Why? Because inflation has only begun its slow, inexorable rise. The 40% rise in oil and transportation costs, the 20% rise in medical costs, the 20% rise in college tuition--the list of huge price jumps across all categories of goods and services goes on and on.

As noted here and elsewhere, the Feds have tried every trick in the book to cook the books on inflation to make it appear low, but as mentioned above, reality has a way of trumping even the most cleverly cooked books. And so the Fed has no choice but to keep raising short-term interest rates, just as the Chinese have no choice but to keep buying U.S. bonds to keep the dollar artificially low.

So here's how the scenario will play out in the next four months. The Fed will "shock the market" by raising rates again in February or March, and signal they may do it again in May. The stock market plummets on this "bad news," as does gold, which now looks less attractive than higher-interest Treasury bonds. By May, the markets and gold will both be bottoming, setting up one more rise before catastrophe strikes in September and October, and the market drops like a stone even as gold skyrockets.

Remember, you read it here first.

January 27, 2006

Friday Quiz: Oil and Renewable Energy

How much energy from oil did the world produce in 2003?

A. The world garnered 148 quadrillion British thermal units of energy from oil in 2003, according to the U.S. Energy Information Agency. In contrast, the world produced only 33 quadrillion Btus from renewable resources.

For a view of the future, check out these three books:

7. The realities of declining global oil reserves:
Beyond Oil: The View from Hubbert's Peak

Or, as an alternative text on Peak Oil:
The Party's Over: Oil, War and the Fate of Industrial Societies

8. The potential for a solar powered society:
The Solar Economy: Renewable Energy for a Sustainable Global Future

January 26, 2006

The Feel of Quality

There is an unmistakable feel to quality which cannot be faked. I wonder how many Americans even know this feeling. I was reminded the other day of the almost intuitive feel of durability and quality.

I was in a large Berkeley-based recycling yard, Urban Ore, looking for a handle for a 50-year old American Standard bathroom faucet. Given the hardware's age, I expected to find boxes of them; instead, the bins were overflowing with modern single-handle faucet sets--the light-weight, planned-obsolescence variety sold in Home Depot and installed in McMansions and cheap remodels everywhere. I found only one old single-stem faucet, and it was locked in a case with other valuables.

Surprised, I asked the clerk about the old faucets, and he reported that the local landlords snapped them up as soon as they came in. Then it struck me why: these faucets are basically indestructable. If you change the washers every once in awhile, these 50-year old work-horses will last another 50 years--or even a 100 years.

Rather than show you a photo of a faucet, I am including a snapshot of myself with my 1976 Les Paul Deluxe electric guitar--another example of a quality which you feel the instant your hand grasps the guitar neck. Your first impression is weight--this guitar weighs ten pounds, about twice that of a $200 guitar at Costco. Your other initial impressions will be similarly positive: the sleek action, the comfort of the neck, the artful placement of the fret markers, the beauty of the sunburst design--I could go on, but you get the idea.

My guitarist friends Steve Toma and Gayland Baker both own a number of Fender Stratocasters (a Telecaster or two may also be in their collections), for serious guitarists appreciate the subtle differences in various models of the classic Fender Strat. (I bought the Les Paul from Gayland 25 years ago.)

Sadly, Fender has joined the parade of American manufacturers who affix their label to a range of products with varying levels of quality. As a result, there is a complex hierarchy of Stratocaster values--lower quality with no collectable value: made in Korea. Better quality: made in Mexico. Better still, with some collectable value: made in Japan. Most collectable, highest price: Made in the U.S.

Yes, you can buy an "official" Stratocaster for a couple hundred bucks, but the feel of the thing is an embarrassment to the Fender brand. You can also buy a Les Paul knock-off, or a cheesy off-brand version of a Strat, but there is something inherently unsatisfying about these cheap guitars, even if they superficially look like "the real thing." You can't play them very long because they wear you out; they don't sound that good, and so you give up. In contrast, plug in my Les Paul (and this one is from the low point in American guitar-making history) and even a lousy player like myself sounds golden.

Like the solid, heavy American Standard faucet, this 30-year old guitar will still sound good in 50 years. Yes, a new one costs a couple thousand dollars; but there's a reason, and that's the reason to want one, to save your nickels and dimes, and to scour the bulletin boards for a used one: to feel a certain inexpressible joy every time you pick it up to play.

January 25, 2006

The World Is Not a U.S. Suburb

We are all prisoners of our own experience. This leads us into thinking that other people and other cultures are much like our own; they are not. It has long struck me that the vast majority of pundits and commentators possess a shallow understanding of just how different other cultures are from their own personal experience of life in an American suburb. This misunderstanding predicates their failure, and indeed, the failure of American policy based on such wishful thinking.

To illustrate the point, I recommend a lengthy but deeply insightful piece in the current issue of The Atlantic entitled Point of No Return which explores how the supposedly "rogue" Pakistani nuclear scientist Khan was able to sell nuclear secrets to outlaw states like North Korea for his own personal gain.

I asked him how Khan could have gotten away with so much for so long. He said, "It is a cultural trait. The Western assumption that law should treat everyone the same way is no longer applicable in this country, in this culture. In Pakistan relationships exist only on an individual level, and as an individual I am entitled to forgive you or penalize you no matter what the law says. It is a feudal culture—or a degenerated feudal culture. That is why there is no law for the elites in Pakistan—why they do whatever they want to do. So your question of why nobody investigated A. Q. Khan? He must have had allies in high places who ignored his activities. You've given us the bomb. All power to you."
Next up: the incredibly swift rise of counterfeit drugs made in China, which are rapidly finding new markets in the U.S.: As Pfizer Battles Fakes in China, Nation's Police Are Uneasy Allies
Mr. Benner handed over a detailed report on the case and called a top Beijing cop whom he has worked with for years. Almost a year after Mr. Benner's initial approach, Chinese police conducted several major raids in August and September, arresting 12 people and seizing nearly half a million pills.

While police are sometimes helpful, Pfizer feels it is often bucking up against Beijing's "tacit acceptance of counterfeiting," says John Theriault, Pfizer's vice president of global corporate security.

Nowhere have counterfeiters grown more sophisticated than in China, where the manufacture of fake goods from computers to cars has taken off. Pirated copies of Western movies, such as "Harry Potter and the Goblet of Fire" late last year, are available on the streets of Chinese cities just days after they're released in theaters. General Motors Corp. accused Chinese auto maker Chery Automobile Co., of using stolen design information to produce a car that is a virtual replica of GM's Spark minicar -- a claim the U.S. government publicly backs.
So the Chinese police jumped on the drug counterfeiting case post-haste and arrested a few people--a year later. Hmm. Do you reckon a few million possibly worthless or even dangerous pills got sold in that year? Let's be honest: if it takes a year to catch up with counterfeiters, just how effective can Beijing's anti-counterfeiting campaign be? Although the Chinese officials don't like hearing it, it is clearly a cultural issue: Chinese society routinely accepts counterfeiting as a "normal business."

So how are you going to make money in China when every one of your products is knocked off in days or weeks in quantities vast enough to cover the globe? Short answer: maybe you can't.

January 24, 2006

Storm Clouds of Recession Gathering

Here is the chart which presages a deep, prolonged recession. Why? For the simple reason that this chart shows homeowners have stopped borrowing against their homes. As this weblog and other sources have repeatedly revealed, wages have been flat, savings are below zero and yet consumer spending has been incredibly robust.

So where have Joe and Suzie Citizen been getting all these hundreds of billions to blow? From re-financing their house, of course. As that humble abode has doubled or tripled in value, they've pulled out tens of thousands of dollars in equity to spend on "Keeping up with the Joneses" (or Wong's, Sanchez's, etc.). With the real estate bubble finally topping out, there's suddenly no more equity to borrow against; and with interest rates rising, the predictable result is: re-fi's are plummeting to zero.

So where are people going to get another twenty grand to spend? Well, they're not. With the housing ATM closed, the consumer has nowhere to get more money: wages are flat, and his or her savings are negligible. With the consumer unable to borrow, they'll be unable to spend, which will cause the economy to contract (otherwise known as "recession"),

Not only that, but as reported in Barrons, new regulations to tighten risky interest-only mortgages have finally been put in place, cutting off a heretofore rich source of suckers, oops, I mean mortgage borrowers.

The standard line is that business will pony up the hundrds of billions in spending which the consumer can no longer manage, but this presumes business is good--and exactly how good can business be when the consumer has less money to spend? It also presumes business execs will be as stupid as consumers have been, i.e. spending like drunken sailors on shoreleave. Believe me, you don't start a business or rise to management by squandering capital on unnecessary spending (unless you worked your way up in Enron, HealthSouth, etc.). So the wish that businss will collectively replace the 2/3 of the economy which relies on the consumer spending freely is at best a wish, and at worst, a dangerous, misguided fantasy.

January 23, 2006

So Who's the Doomsdayer?

You think I'm the only one worried about America's out-of-control borrowing and its complacent acceptance of very high risks for low returns? Read these selections and then guess who penned them:
"Our budget deficit will substantially worsen in the coming years unless major deficit-reduction actions are taken…The likelihood of growing deficits is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards."
Translation into English: The more money the Federal government borrows to fund its deficit and the more it pays in interest on that rising debt, the less there will be available for investing in private enterprise. And remember, it's businesses old and new which create the jobs and profits which support the living standards for both workers and investors--even government workers.
"This vast increase in market value of asset claims (stocks, bonds, houses) is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent… But what they perceive as newly abundant liquidity can readily disappear… history has not dealt kindly with the aftermath of protracted period of low risk premiums."
Translation into English: There's an asset bubble in stocks, bonds and housing, folks, because people are foolishly assuming there's no risk of a drop in asset prices. As a result of this 'what, me worry?' complacency, people are accepting low returns on their money--in other words, they aren't demanding any "risk premium" at all.

Even worse, investors are assuming these risk-free conditions will last for the foreseeable future, when history shows that all the easy-to-borrow-and-very-cheap-money can vanish in a New York minute, causing all asset bubbles to pop more or less at once. With nowhere to hide, and finding they can no longer borrow their way out of trouble, the financial house of cards people have been counting on as rock-solid will crumble.

So who's this wild, irresponsible doomsdayer? Alan Greenspan. Read his comments again, listen to the deafening silence and denial of our leaders and citizenry, and then fear for our nation.

January 21, 2006

Building Heights, Density and Liveability

Former Paris resident and erudite reader Lou Glorie found my entry Building Heights and Arboral Roots while collecting data to support his campaign to limit building heights in Ann Arbor, Michigan. Glorie reports that Bay Area planning and architecture luminary Peter Calthorpe, a leader in New Urbanism, has proposed a city plan which allows 30-story towers in what is essentially a large college town not unlike Berkeley, CA, where I live.

I fully understand Lou's dismay, for there is a much better way to raise densities: keep buildings at a more uniform height of 4 to 6 stories. He forwarded this link to architect Leon Krier's website which I highly recommend: Building heights and critical problems of plot-ratios:
The most beautiful and pleasant cities which survive in the world today have all been conceived with buildings of between two and five floors. There is no ecologically defensible justification for the erection of utilitarian skyscrapers; they are built for speculation, short-term gain or out of pretentiousness.
As readers know from my little wEssay The Downside of Density, cities like Paris (the photo is of a typical Parisian street) with strict height limitations achieve higher densities than those which mix towers and low-rise housing like New York: New York City has a population density per square KM of 25,925, less than half that of Paris's 52,180 residents per square KM.

Bottom line: uniform buildings 4 to 6 stories in height create extremely liveable streets and neighborhoods, while highrise towers are ecologically unsound and create cold, dark uninviting streets. Towers aren't the only way to add density, nor are they the best way; they're clearly the worst way.

January 20, 2006

The Friday Quiz: Organic Farms

Which country has the most organically farmed acreage?

Australia has the most organically farmed acreage, with 24.7 million acres cultivated sustainably. But tiny Liechtenstein has the highest percentage of its farmland growing organic crops: more than 26 percent. By comparison, the U.S. organically farms just 0.23 percent of its arable land. (source: Scientific American)

Here is a link which connects the great die-off of land organisms in the Permian Era to the soil degradation caused by human over-farming, over-grazing and the over-harvesting of timber: Geologists Link the 'Great Dying' to Volcanism
"Land degradation is a worsening global problem thanks to human activity and soil erosion that has caused the loss of a third of arable land over the last 40 years," Sephton notes. "Identifying the nature of the end of Permian soil crisis may help us understand what is in store for us in the years ahead."

January 19, 2006

Is There a Cycle to War?

Could wars follow a long cycle, much as economic recessions do? To explore this important idea, I recommend reviewing Terence Parker's fascinating website, Wealth and the Human Cycle.

As readers know, I have long expressed an interest in the Kondratieff theory, which sees a recurring pattern of roughly 60-year long cycles of economic growth (prosperity) and decline (renunciation of all debt and depression). The initial period of true prosperity (the 50s and 60s) is followed by a period of false prosperity (where we are now) during which vast debts which cannot be paid are accumulated. This expansion of debt leads to a final period of turmoil and crisis during which all the debt is renounced and written off, setting the stage for another cycle of expansion. My own brief wEssay on the topic is Are We Entering the Next Age of Turmoil?

Mr. Parker is a retired professional soldier with a solid grasp of history. He has many deeply interesting commentaries which place the Vietnam war, Muslim extremism and the current Iraqi war into long cycles of human history. I highly recommend his exploration of war's connections to fundamental economic and social-religious cycles.

January 18, 2006

My Second Kroika Ad

(To see the animated ad, please go to I am delighted to report that my first ad for Kroika Cookies tested very high in all four demographic quandrants: females under 25 years of age, males under 25 years of age, and females and males over 25 years of age.

Yes, high percentages of all four groups reckoned it was one of the cheesiest, most incomprehensible ads they'd ever seen, and most absolutely loathed it, especially after clicking on it in an almost pavlovian fashion to see it again and again.

Needless to say, the Kroika marketing team was ecstatic. Why, you non-industry pundits might ask? Here's the inside scoop: emotion sells. The ad people love--that works. The ad people hate--that works even better! Strong emotion talks, forgettable blah walks.

Although few young people will recognize these figures--didn't the Cold War get dropped from the curriculum, along with P.E., music, and art?--it doesn't seem to affect the ad's special magic.

January 17, 2006

The Coming Conflagration

If a foreign power wanted to destroy the economic foundations of our nation, here is how the enemy would set up an economic conflagration of unequalled size and ferocity:

1. The U.S. government would spend trillions more than it collects and borrow the difference from foreign governments and investors whose interests may diverge from America's--for instance, China and most oil-producing nations.

If you doubt this has already occurred, then read this item:
( President Bush and the current administration have borrowed more money from foreign governments and banks than the previous 42 presidents combined, a group of conservative to moderate Democrats said Friday.

Blue Dog Coalition which describes itself as a group focused on fiscal responsibility, called the administrations borrowing practices astounding.

According to the Treasury Department, from 1776-2000, the first 224 years of U.S. history, 42 U.S. presidents borrowed a combined $1.01 trillion from foreign governments and financial institutions. But in the past four years alone, the Bush administration borrowed $1.05 trillion.
China's Foreign Currency Reserves Grow to $818.9 Billion, Up 34 Percent From a Year Ago reports Yahoo News, stating that 2/3 of what will soon be $1 trillion in reserves is held in U.S. Treasuries.

2. American citizens would save nothing, heightening their dependence on foreign lenders. The fact that the savings rate in the U.S. is negative (i.e. we are collectively spending more than we earn and borrowing the difference) has been oft-noted in the past few months (see above chart).

3. U.S. pension plans would be woefully underfunded, insuring a no-win showdown between cash-strapped taxpayers and powerful public employee unions. This "war" between those employees promised unaffordably rich pensions back in flush times and the overburdened taxpayers who will rebel at the higher taxes required to pay the fat pensions and medical benefits is no secret:

America's Pension Time Bomb

4. Ensure that American economic growth depends not on true prosperity (selling more products and services than you buy, saving money and investing it in productive assets, socking away money to pay for future pensions, etc.) but on an entirely false prosperity of borrowing money from real estate assets which have reached bubble-like heights of speculative excess.

5. At a critical juncture, the dollar will weaken under the weight of all this debt, causing foreign holders to dump dollars and U.S. bonds in vast quantities. This selling will sink the value of the dollar to unprecedented lows and force the Treasury to pay extremely high interest rates on new debt.

Why is this so? Just ask yourself this simple question. If another currency was dropping like a stone (say, the Mexican peso, just as an example), why would you buy bonds denominated in that currency? The second you buy, your investment drops in value as the currency tumbles. History suggests the only way to entice foreigners to buy your depreciating debt is to offer them very high interest rates to compensate them for the inevitable decline in the value of the bonds.

How much interest will the Treasury have to offer to get foreigners to buy our trillions in bonds once the dollar slips? 10%? Or even higher? What happens when interest rates go to 10% or even 15%, as they did in the 1980s? Financial conflagration. As Adam Florzak has shown on his PactAmerica blog, if the interest on America's $8 trillion in public debt rises to a historically modest 8%, the interest payments will eat up almost half of all tax receipts, leaving relatively little for defense, social spending, Medicare, etc.

Such high interest rates will also pop the housing bubble, wiping out people's ability to borrow money to spend freely on consumer goods.

It won't happen, you say, because Americans will buy up that $8 trillion in bonds. Oh really? With what? Money pulled off their credit cards? Americans save zero money!

No, no, you insist; Fed Chairman Bernake says there's a worldwide glut of savings; foreigners have no place else to put their money except the mighty dollar and U.S. debt. But what if that isn't savings at all, but excess liquidity flowing from the Fed overseas via our $800 billion a year trade deficits? Well, uh, gosh, maybe the foreigners who have been buying all our bonds for a meager 4% return could park their money elsewhere--say, in their own debt or their own assets. Then who's gonna buy all our debt? If no one's buying, how can we run another $400 billion in deficits next year? And what about the $1 trillion in bonds which come due and have to be re-sold every year?

Here's yet another news story on the problem: Analysts Fear Expanding U.S. Deficits Endanger Economic Health, Lead to Higher Borrowing Costs.

No enemy of the nation could have engineered a more pernicious and dangerous scenario than the one we have set up ourselves:
"It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises." Ludwig von Mises

"It's only when the tide goes out that you can see who's swimming naked." Warren Buffett

January 16, 2006

If Everything Is So Great, Why Are Storefronts and Offices Empty?

I live in the San Francisco Bay Area, one of the hottest real estate markets in the country, and home to resurgent tourism and technology industries. Yet empty storefronts and office spaces abound. Is this just a local aberration, or a case in which the observer sees what he is looking for?

Based on this factoid about commercial vacancy rates in San Jose (capital of Silicon Valley), I don't think it's merely bias on my part:
"San Jose vacancy rate: Occupancy rose nearly 4 percent among downtown's 15 Class A office buildings. That brings the vacancy rate to 21.4 percent. Occupancy fell slightly for the downtown core's 51 Class B and C buildings, bringing the vacancy rate to 19.5 percent."
A 20 percent vacancy rate isn't exactly a sign of robust economic growth. Although other parts of the U.S. are doing better than San Jose, check out these news bits from National Real Estate Investor:
When Equity Office Properties Trust (EOP) slashed its dividend last month, few people were surprised. The nation’s largest office landlord hasn’t covered its dividend by earnings since late 2002. But the 34% dividend cut from $2 to $1.32 a share was an about-face for EOP Chairman Sam Zell, who has often said the dividend is “sacred.”

2005 was a year of recovery for the office sector, and most industry sources expect more of the same as the New Year unfolds. Analysts caution, however, that the resurgence will not be uniform as market gains will be sharply divided between coastal cities and nearly everything in between.

7 World Trade Center, one of the first towers to rise along Ground Zero, is lagging behind the recovery with just 40,000 sq. ft. of its entire 1.7 million sq. ft. leased as of late December. The problem, say brokerage sources, are the above-market rents at 7 World Trade Center.
So if commercial real estate is doing so well, why is one of the largest commercial property owners in the U.S., EOP, slashing its heretofore sacrosanct dividend? Would EOP cut the divvie if things were going swimmingly? Of course not.

As for 7 World Trade Center, could this be a sign that rapacious greed has the real estate market by the throat? The surest way to create empty space on Main Street and Business Park, U.S.A. is to jack the lease rates up to the point that business owners can't make a living, pay taxes and pay their lease. The largely empty 7 World Trade Center suggests that point has been reached--perhaps first in Manhattan, but undoubtedly elsewhere as well.

According to the Wall Street Journal's survey dated 1/10/06, commercial real estate is booming overseas: (hence the photo of a Parisian storefront)
For the first time in five years, rents for top-quality office space increased as vacancies fell among 10 of the largest global markets.

Markets improved across the board, but Hong Kong and London had the most eye-catching numbers, according to a study by CB Richard Ellis, the Los Angeles-based real-estate-services firm. By the end of 2005, Hong Kong landlords bumped up their asking rates for leases on Class A properties by 45% to $58.81 a square foot, as the vacancy rate fell to 4.8% from 6.9% in December 2004.

As with the improving fundamentals seen in many parts of the U.S. over the past few quarters, many of the largest global markets have benefited from increasing demand for office space while new construction remains constrained.
That sounds hale and hearty, but recall that both Europe and Asia depend heavily on exports to the American consumer to fuel their currently-hot economies. If the U.S. consumer falters, or the residential real estate bubble which has enabled the American consumer's massive 5-year spending spree falters, then what exactly will support high lease rates in Asia or the E.U.? It's a question worth pondering, for it surely isn't their own consumers.

January 14, 2006

High and Low: A Critique of Postwar Japan

This 1963 film by Akira Kurosawa, High and Low starring Toshiro Mifune as the executive about to make his big takeover move, and Tatsuya Nakadai as the afflicted medical intern who kidnaps his son, is a film classic for a number of reasons. Number one is the cast; I must have seen this movie at least 3 times, and only now did I recognize Nakadai as the kidnapper. Though often cast as a psychopath (Sword of Doom being the prime example), Nakadai shows an amazing emotional range in the final scene, a conversation between the hero Mifune and the psychopathic villain Nakadai. (Interestingly, Mifune was also the heroic samurai sensei in Sword of Doom.)

While High and Low is generally viewed as a morality play married to a police procedural, its most fascinating subtexts relate to Japanese postwar society. The "high and low" has at least four references: one, to the geography of the city, in which Mifune's mansion occupies the top of a prominent hill, while the criminal's hovel is in the lower-class flatlands; two, to the two protagonists' morals; three, to Mifune's ethical stance vis a vis his greedy colleagues, and four, to the Japanese society which created the highs and lows of social standing, twisted ethics and underclass resentment which fuel the story.

The Nakadai character has viewed Mifune's "house on the hill" for years, building a classist resentment against Mifune's wealth and status. This fundamentally social resentment is what fuels his brilliant kidnapping plan, not a personal enmity to Mifune's hard-charging but still highly ethical executive.

There is another subtle irony to this "high and low;" the Mifune character is a working-class guy who rose from shoemaker's apprentice to executive through hard work, attention to quality and pure drive. He simply doesn't deserve the resentment-fed tragedy which befalls him.

Several of the most compelling scenes occur when Nakadai seeks out a personal meeting with the executive whose life he has effectively ruined. In the first instance, Mifune stares plaintively into a shop window filled with womens's shoes. On the night of the kidnapping, he was about to wrest control of the shoe company to which he'd devoted his entire working life from money-grubbing executives who cared not for quality but only for a quick profit. Nakadai approaches Mifune and asks for a light. Nothing else transpires, but we experience the creepiness of the criminal interacting with his unknowing prey.

The irony of the scene is that Mifune was the ethical businessman, the lone stand-out for quality amidst a greed-driven coterie of other executives. If this isn't a statement on the business mores of postwar Japan, what is? Destroyed by the huge ransom demanded by Nakadai's character, Mifune has sunk to window-shopping to keep his conection to his craft--shoe-making--alive.

In the final scene, Nakadai has been apprehended and jailed; he awaits execution for the killing of the two junkies he manipulated into helping him with the kidnapping and ransom collection. He has requested a meeting with Mifune, to explain himself and to confess the raging resentment and madness at his core. Mifune is stoic; having lost everything, including his high-class house on the hill, he is starting over with a smaller shoe company.

It is a bleak yet powerful ending to a caustically social tragedy; a young man, full of promise as a medical intern, turns to kidnapping to destroy a wealthy man he envies from afar. In a truly 60s twist, the greedy, heartless executives win and Mifune loses, due to the intervention of a resentful lower-class person with a terribly heavy emotional burden.

The policemen's sympathy for Mifune is also an intriguing subtext; one states outright that though he typically has little sympathy for the wealthy, the fact that Mifune sacrificed his entire fortune to save the son of his lowly chauffeur has moved him deeply. Not to ruin the movie for you, but the plot twist occurs right on schedule at minute 20 (standard screenwriting technique calls for the first plot point at 20 minutes): the kidnapper thinks he has kidnapped the rich executive's son, but he has mistakenly taken the son'e playmate, the son of the lowly chauffeur. Mifune must then decide, in a classic morality play, whether to execute his takeover of the shoe company or save his underling's son. He chooses to sacrifice his fortune to save the innocent boy. As a feeling human being, he has no choice, and it is this realization which Mifune imparts so brilliantly.

January 13, 2006

Friday Quiz: The Origins of Carbonara

What are the origins of the classic pasta dish of Rome, Carbonara?

A.According to the definitive cookbook Essentials of Classic Italian Cooking by Marcella Hazan: "An Italian food historian claims that during the last days of World War II, American soldiers in Rome who had made friends with local families would bring them eggs and bacon and ask them to turn them into a pasta sauce. The historian notwithstanding, how those classic American ingredients, bacon and eggs, came to be transformed into cabornara has not really been established, but there is no doubting the earthy flavor of the sauce: it is unmistakably Roman."

Yes, but how else would bacon and eggs have entered Roman cuisine if not for the GIs? That sounds definitive enough for non-academics. Carbonara sounds so much better than "bacon and eggs and pasta," doesn't it?

January 12, 2006

A Mutiny on Many Levels

The 1935 film classic Mutiny on the Bounty starring Clark Gable and Charles Laughton is at first glance a rousing sea yarn of a dutiful crew driven to rebellion by an injust, cruel oppressor, Captain Bligh. But the tale as told by the film is little more than fantasy; the truth is much stranger and sadder.

A careful survey of historical records shows that Captain Bligh, who the film portrays as remorselessly punishing the crew in the name of iron discipline, was in reality much less inclined to mete out flogging than other captains of the era.

If Bligh wasn't the meanest S.O.B. in the British fleet, then why set him up as Evil Incarnate? The reason, it seems, is to reveal Bligh's cruelty as that of the entire system. A written intro establishes a quasi-political tone from the first, introducing the story as the event which catalyzed British Navy discipline for the better, enabling "free men" to defend Brittania's dominance of the sea.

A stirring narrative, undoubtedly, but doesn't it seem rather odd that a Hollywood feature would go to such lengths to cast the story as a larger tale of an injust system set to rights by a rebellion of "loyal and true" subordinates? Could this story have less to do with Bligh and Fletcher Christian than Depression-Era America, a nation in the grips of a system rife with injustices, a system that was clearly failing its citizenry?

In another interesting subtext, the movie shows lower-class men pressed into service--basically enslaved--while upper-class men join as idealistic officers. In the final court scenes, it is the upper-class young man--though loyal to Captain Bligh, he was left behind on Tahiti due to the overloading of the longboat Bligh was cast adrift in--who gives the court-martial an impassioned speech on the injustices of British Navy discipline. His speech makes the mutiny seem less an emotional outburst than an inevitable rising-up against injustice, a rebellion which swept up upper- and lower-class men alike.

There is more than a little noblesse oblige in this depiction of class; the unfortunate lower-class men are helpless against the oppressive system, and so it falls to the noble upper-class men to speak truth to power and set things right. And unlike a movie about striking working-class American miners, this mutiny for justice and fairness lies safely in the past.

As for true story behind the mutiny, I refer you to an authoritative website The Bounty Chronicles. The true underpinnings of the mutiny lie less in overarching injustices--though there were injustices aplenty in the British Navy, to be sure--than in Bligh's favoritism for Fletcher Christian. Bligh promoted Christian from seaman to officer on a previous command, and then promoted him over more experienced officers to second-in-command on the Bounty. On the voyage out to Tahiti, Bligh made no complaints against Christian in his logs; yet within days of leaving Tahiti, Bligh accused Christian of stealing his own horde of coconuts and a wild array of other misdemeanors.

Bligh, it appears, was in love with Fletcher Christian. After awarding Christian the plum task of living ashore in Tahiti, overseeing the collection of breadfruit plants, Bligh was mortified and then angered as only the heart-broken can be to find Christian succumbing rather freely to the openly sexual Tahitian women. Though no evidence of a sexual relationship between Bligh and Christian exists, it seems obvious that theirs was a "special friendship," one that Bligh felt was violated by Christian's enjoyment of the Tahitian ladies.

And so he took his revenge in petty accusations and harrassment, making Fletcher's life a pure, inescapable Hell. Christian's plan was to jump ship on a makeshift raft, but in an spontaneous, highly charged outburst, he and those anxious to return to the Paradise of Tahiti took the ship.

The film was accurate in one regard: the crew was very evenly divided between those who remained loyal to Captain Bligh, or at least to the discipline of the Navy, and those who joined the mutineers. Whatever injustices reigned were not severe enough to turn more than half the ship's company to mutiny--an interesting fact to ponder while watching this entertaining classic.

January 11, 2006

My First Kroika Ad

(To see the animated ad, please go to
The marketing folks at Kroika Cookie Corporate (Xiangxi) tasked me with designing ads which will appeal to the American market. Here is my first effort. You marketing mavens out there will no doubt get the many subtexts I've tapped in designing the ad.

Though I don't want to give away all my marketing design secrets, I will tease you with some hints:

  • The gentleman is not having a fun day at the Politburo meeting. The guard to his left (no political pun intended) is a big tip-off.
  • At the sight of a crunchy Kroika cookie, his mood leaps, as evidenced by the fun children's party hat and his childlike grin of delight.

    I'll also clue you in that the coarse graphics and clumsy animation places this ad right at the bleeding-edge of "cool" design. Fancy graphics--ha, the consumer has seen them all and is totally bored by the gloss. This seemingly slapped-together look--actually most carefully designed to pique your surprise and pleasure--is sophisticated beyond easy measure. To see the ad again--and I know you'll want to--just refresh your browser.

    I know the ad's high design concept will be a tough sell to the practical types running Kroika Cookie and Biscuit Company, but hey, you want to sell to hardened, jaded American consumers, you have to cut against the grain.

    January 10, 2006

    Starsbuck and Kroika Take A legal Hit

    Alas, the Starsbuck coffee shop chain in China has been hit with a legal defeat-- China's fake 'Starbucks' is banned from using the name. Starsbuck learned the hard way that one's right to do business as one sees fit--after all, isn't imitation the highest form of praise?--is nasty, brutish and short once Westerners insist on bringing their legalistic rules to the Middle Kingdom.

    Unfortunately, Starsbuck's inability to fob itself off as Starbucks--notice their logo even mimics the famous Starbucks sign, evidence of a high-quality counterfeit--has also negatively impacted the Kroika Cookie and Biscuit Company, the sponsors of this very weblog. As the photo reveals, Kroika had just inked a deal with Starsbuck to open jointly branded shops which would have been the exclusive retailers for Kroika's exciting new cookie, the s'Oreo.

    As you might have guessed, the cookie is a mouth-watering sandwich of creamy filling placed between two crunchy chocolate wafers. Kroika's marketing plan--to which I contributed--called for exotically flavored fillings which would appeal to East-Asian palates: durian, squid, starfruit and orange marmalade (a holdover, it seems, from the British Empire).

    Sadly, the squelching of Starsbuck has cast a pall over Kroika's world-beating plans for the s'Oreo cookie. Corporate in Xiangxi has promised to pay me despite the derailment of the product launch, and I can only hope the check is "the real thing."

    January 9, 2006

    Sea Change in 2006?

    The stars may be aligning for a sea change in the nation's political leadership. An Associated Press story, Public Uneasy With GOP Leadership, outlines the growing recognition, at least among independent voters, that the Republicans (a.k.a. the party of Abramoff) have become as ossified and corrupt as any Democratic Congress in recent history--in other words, they've reached the same state of self-serving greed and hubris which caused voters to reject the Democratic Congressional slate in 1994.

    More important than unease, however, is the nation's deteriorating finances. The cliche is that Americans vote their pocketbooks, and when the economy tanks, they blame (rather naturally) the incumbent party. Herewith is a prediction that the financial damage the Bush administration has inflicted on the nation's fiscal house will become apparent as 2006 unfolds:

  • Inflation will not go away, despite the Fed's 14 straight interest rate increases.
  • Oil prices will continue to be a tax on consumers and the economy at large, driving inflation at the most perniciously ubiquitous level--transportation.
  • As interest rates click ever higher, the rising interest we pay to on the ballooning Federal debt will finally enter the public consciousness as a dangerous, unsustainable weight on the nation's future.
  • The stock market will tank this year, reaching its nadir in October, just as voters prepare to go to the polls.
  • The housing bubble will begin deflating, removing the sole source of fiscal stimulus in the economy (other than the vast Federal borrow-and-spend programs). Once consumers are unable to borrow more, then consumer spending tanks, bringing the economy down with it.
  • The vicious addiction we as a nation have developed for cheap money provided by our primary Asian trading partners (see the reference to "addict and junkie" in the January 5th entry below) will start unraveling, as the sheer size of U.S. debt and foreign holdings of that debt crumble under their own weight.

    Will the Democrats have solutions to these horrendous problems? Of course they won't; but in the past 20 years, it was the Democratic administration in the 1990s which showed the courage to rein in spending and raise taxes to pay the benefits the citizens demanded. Meanwhile, the Republican administrations have proven themselves unable to do anything but raise benefits, cut taxes to the wealthy and run up mind-boggling deficits. That is most assuredly the road to ruin, as the nation will begin learning in 2006.

    January 7, 2006

    More on Oil: Supply Not Keeping Up with Demand

    Back in December The Wall Street Journal ran a piece entitled Five Who Laid the Groundwork For Historic Spike in Oil Market. The salient points are striking: the mismatch between supply and demand has changed, and we as a nation are asleep at the wheel of a gas-hog economy:
    "But the real cause is a profound shift in the global energy system that has been 25 years in the making: The world's thirst for oil has grown faster than the industry's ability to slake it. As recently as the late 1990s there were gluts. Now there is virtually no spare oil left.

    Many big forces combined to create the crunch: the Organization of Petroleum Exporting Countries' obsession with avoiding market crashes, Big Oil's emphasis on profits over finding oil, China's new oil addiction, America's old one, and the new role of investors in energy markets. Behind it were decisions by individuals around the world, including a Saudi minister, a British oil baron and a Beijing yuppie.

    The outcome of the energy law is only the most recent example of how American leaders, both Republican and Democrats, have failed to ease the country's oil dependence. The oil shock of the 1970s led Congress to set auto-efficiency standards. But low energy prices later sapped political will in both parties to keep up the conservation effort.

    Mr. Lundquist notes that the law does include some policies his task force proposed, such as giving utilities more incentives to invest in coal-fired and nuclear-power plants. Perhaps in a decade, those measures will give the U.S. more energy alternatives. But he thinks America is still dodging the tough calls it needs to make on fueling its future.

    Sen. Bingaman agrees: "The big challenges remain unaddressed."
    For an alternative vision of an energy-abundant future not based on hydrocarbons, read my little essay on The Solar Economy.

    January 6, 2006

    Friday Quiz: Energy Use and Waste

    How much has overall energy consumption in the U.S. increased in the last 30 years?

    A. According to the U.S. Department of Energy, overall energy consumption has increased by 27 percent since 1973. (Source: Scientific American)

    What percentage of household electricity in the U.S. is lost to appliances that are turned off?

    A. About 5 percent of household electricity in the U.S. is lost to energizing computers, television and other appliances that are turned off, as a result of poorly designed standby circuitry.

    According to The U.S. Department of Energy, there are 2,776 electrical generation plants in the U.S. That means 140 power plants do nothing but generate the electricity wasted by DVD players, TVs, answering machines, stereo systems, xBoxes and computers plugged into wall sockets while not in use. One solution: put as many of these devices as is practical on power strips which can be turned off with one switch.

    January 5, 2006

    China and the U.S.: Curing a Dysfunctional Fiscal Relationship

    I am taking the liberty of quoting at length from a recent article in The Wall Street Journal entitled Six Steps for Healing A Codependent U.S., China
    "Welcome to the U.S.-China relationship helpline. Here are the Six Steps for your recovery program. If you work your way through each of these steps, you will not only better come to grips with your problem, you may at the same time repair the U.S.-Chinese codependent relationship before it unsettles the 21st century.

    STEP NUMBER ONE: The first step is admitting that we as Americans -- and our government -- have grown dependent on rock-bottom prices, low interest rates and excessive debt. These cloud our instincts. Then accept Chinese behavior supports these addictions.

    We and China have entered a classic state of codependence. We need China to finance our spending and borrowing habits because we don't save. China saves too much and can't stop throwing money at us. China hopes it can maintain the unfair trade advantage of its below-market currency rates because we're so hooked on its goods and financing. That, in turn, will allow it to keep 1.3 billion people happy while becoming a global power.

    To visualize the problem this Christmas season as you shop online or are drawn to Wal-Mart or Target by discounts, imagine Santa Claus taking wing in a reindeer-drawn rickshaw from Guandong Province. More often than not, it is Chinese manufacturers that stand behind our bargains.

    Surprised at how low sticker prices have remained for last couple of years though oil costs have more than doubled since 2001? Thank the Chinese for their low-cost labor. Alan Greenspan and his gang at the Fed have quadrupled interest rates with twelve successive increases over the past 18 months to 4% from 1%, yet the Chinese have helped to ensure inflation remains in check.

    Have you bought a home in the past couple of years, refinanced one, or taken out a second mortgage to fund other purchases? If so, you might want to send a Christmas card to the amiable Chinese ambassador and thank his country for financing America's profligate borrowing.

    The business world generously calls it a vendor-finance relationship. Think of Motorola providing a below-market-rate loan to Turkey's telephone company to buy its handsets. The vendor, Motorola, increases sales, earns interest on the loan and acquires an interest in the customer. Any M.B.A., however, knows the risk profile of a company increases if this game is overplayed.

    What's happening between China and the U.S. is vendor finance on a sovereign level and a massive scale. Americans purchase consumer goods from the Chinese, who buy U.S. Treasurys with the revenue. That in turn sustains low U.S. interest rates, which feeds more U.S. consumer demand, and the circle continues.

    A less generous way to understand the relationship than vendor-client is dealer-junkie.

    STEP NUMBER TWO: The second step is to take responsibility for our addiction. Put more bluntly, we shouldn't blame the Chinese for our problems.

    STEP NUMBER THREE: As the U.S. admits the unhealthy nature of this codependence, so must China.

    What China has done is create huge and dangerous imbalances in its own economy through an overemphasis on export market growth at the expense of internal development. The bias against imports has been an indirect tax on the Chinese people. (China also angers its neighbors by undercutting their markets with its undervalued currency.)

    China's huge increase of foreign-currency reserves to more than $770 billion by September also creates pressures that can only be eased through inflation or appreciation of its currency. Most Chinese exporters can weather some appreciation but others already carrying bad debts could be pushed into bankruptcy. Deputy Minister of Environment Pan Yue, in Germany's Der Spiegel magazine, warned of a "political crisis" if uncontrolled economic growth continues.

    STEP NUMBER FOUR: Recognize your larger responsibilities to the "family" – the global economy. The whole world has come to rely too much on the American willingness to buy and the Chinese readiness to pay for it. World economic growth remains strong, but the situation is more precarious than it seems. It could change overnight if something spooks the American consumer or throws off the Chinese juggernaut -- political turmoil, avian flu, environmental disaster, a Taiwan crisis.

    STEP NUMBER FIVE: Fix the relationship. Too little thought at the highest levels has gone into dealing with the serious mistrust that makes our codependence all the more fragile in what could be the 21st century's most important relationship – that between the world's greatest power and its greatest emerging power.

    Many in the U.S. suspect China's ultimate purpose is to reduce American global influence and, through its artificially low exchange rate and military spending, destroy America's competitive position. China suspects that the U.S. wishes to counter its economic rise and is tightening its ties to Japan and India because it doesn't want a competing power.

    And finally, STEP NUMBER SIX:

    Pray to a higher power that nothing disrupts this fragile relationship while you're repairing it.
    We must realize as Americans that, though it may take some years, the dealer can always find another customer while the junkie is left in withdrawal. The danger for China is that it loses its best customer if the U.S., responding to Beijing's refusal to allow its currency to rise, goes "cold turkey" – slapping steep tariffs on Chinese goods and risking the consequences."
    This mirrors my own thinking rather exactly. Please see all my related entries in the lefthand sidebar under Unfolding Crises: Asia.

    For an excellent explanation of how profligate U.S. Government deficits are dooming our nation to impossibly huge interest payments, read Adam Florzak's current PactAmerica blog entries, Credit Card Analogy and The Curse of Compounding.

    January 4, 2006

    China and U.S. Inflation

    A Cantor Fitzgerald report dated 12/22/05 claims that China's political need for full employment (to stave off angry hordes of disenfranchised, unemployed workers) means inflationary pressures in the U.S. will be low:
    "The ranks of domiciled U.S. producers are being greatly thinned out (witness the -2.353 million drop in U.S. domiciled production workers since 2000, and the weak growth in U.S. industrial capacity since the year 2000), and the rising core crude prices and core intermediate prices are increasingly being absorbed by the profit margins; productivity gains; and real wages of overseas producers, suppliers, middlemen and workers.

    At the end of the global economy's supply chain sits the U.S. consumer, burdened by: already high first, second, etc., mortgage payments; rising home equity payments; and rising property taxes. Other factors include a gasoline price that has more than doubled from the 1990s decade average of $1.12 per gallon price; and modest growth in wages and salaries, especially in "real disposable terms."

    The bottom line: With China's national goal of 'full employment,' and not "the widest company profit margins," Chinese domiciled producers' profit margins and Chinese workers' real wages are absorbing the rise in core crude and core intermediate prices; those pipeline pricing increases are failing to be "passed through" to the U.S. end-using consumer.

    The end result: Until Chinese aggregate demand "catches up" to Chinese aggregate supply (may be in 15 years), we continue to look for benign core U.S. PCE (personal consumption expenditure) deflator inflation.
    There's one teeny little problem with this scenario: while 2/3 of the U.S. economy is consumer spending, not all of it is on goods, and not all of the goods (despite apparances to the contrary) come from China. So all the spending on transportation and shipping (read oil), heating and electricity (read natural gas) and services (read medical costs rising by 10% + year after year) is entirely exposed to inflationary pressures. China alone cannot suppress all the inflationary pressures because its products constitute only a small piece of the consumer-spending pie--roughly $180 billion in goods in an $11 trillion economy.

    January 3, 2006

    On the Horizon: $200 a Barrel Oil

    To start the new year on a deeply unsettling note, read this report in Barron's: Twilight for Oil?
    Since publishing "Twilight in the Desert: the Coming Saudi Oil Shock and the World Economy" this past summer, and touching off one of the great debates of the early 21st century, energy banker Simmons has been squarely in the spotlight. Simmons argues that Saudi oil fields, contrary to reports, have been in decline for some time, and he views skeptically Saudi claims that it can adequately boost supply to meet accelerating demand. Simmons, who has headed the Houston-based energy investment banking firm Simmons & Co. International for 30 years, is no stranger to bold calls and controversy.
    Building his case on readily available data, Simmons predicts oil will reach $200/barrel by 2010. The reason that the Saudi oil fields are so essential to world supply, of course, is that they make up almost half of all known reserves. There is no way to replace that vast ocean of oil, AND THERE NEVER WILL BE. See the books on Peak Oil listed below for stark and irrefutable evidence to support this statement.

    In other news, I've created an archive of wEssays and weblogs organized by subject; please browse through the topics.

    January 2, 2006

    New Year Reflections

    New Year's is typically the season to look foreward, to plan a better future through resolution, but I find myself reflecting on the fragility of life, and of those things we keep to remind us of who we were and who we have become: photos, books, letters, childhood drawings, and even the digital data stored on hard drives. This fragility is something we avoid dwelling on, for it only increases our anxieties about life's uncertainties. Yet this reflection can also heighten our sense of the present, and of the meaning we bring to our lives in 2006.

    January 1, 2006

    Happy New Year! Ten Essential Books for 2006

    Is it presumptuous to select ten books as essential for the New Year? I think not, for this reason: the problems laid out by each title are not affected by one's ethnicity, religious beliefs or ideological preferences; they exist in the real Universe of observation, facts and mathematical models which cannot be interpreted away. We as a nation and as a species ignore them at our peril.

    1. The risks of a stock market collapse:
    The Misbehavior of Markets

    2. The realities of global warming:
    Boiling Point (Global Warming)

    3. The consequences of widespread chemical pollutants:
    Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

    4. The innate human capacity for delusion:
    How We Know What Isn't So

    5. The consequences of global population trends:
    Fewer: How the New Demography of Depopulation Will Shape Our Future

    Or, as an alternative text on demographics:
    The Coming Generational Storm: What You Need to Know about America's Economic Future

    6. The consequences of our mammalian/primate roots:
    The Third Chimpanzee: The Evolution and Future of the Human Animal

    Or, as an alternative text on the risks humankind poses to the planet's other lifeforms:
    The Future of Life

    7. The realities of declining global oil reserves:
    Beyond Oil: The View from Hubbert's Peak

    Or, as an alternative text on Peak Oil:
    The Party's Over: Oil, War and the Fate of Industrial Societies

    8. The potential for a solar powered society:
    The Solar Economy: Renewable Energy for a Sustainable Global Future

    9. The potential for a global dollar-devaluation crisis:
    The Dollar Crisis: Causes, Consequences, Cures

    10. The nature of the political paralysis plaguing our nation:
    Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It


    wEssay noun, combination of 'web' and 'essay,' denoting a short essay which exploits the hyperlinks, interfaces and interactive capabilities of the World Wide Web; coined by Charles Hugh Smith on May 1, 2005, in Berkeley California.

    copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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