Boston Marathon Will Generate Long Term Economic Growth

Image

Many people are focusing on the lost economic activity in the Boston area due to the tragic events over the past two weeks.  While the region has suffered in the short term, this incident may trigger extraordinary future economic growth.

The key driver of this growth will be the use of bionic limbs for amputees.  Dr. Hugh Herr, who heads the Biomechatronics research group at the MIT Media Lab, has been instrumental in developing bionic prostheses that provide extraordinary functionality.   As a double-amputee, Dr. Kerr can attest to the great strides in this area and how beneficial it can be to society.  He believes this technology will become extremely popular and useful in the future, especially given the recent incident at the Boston Marathon.

These bionic limbs are functioning more like our natural limbs and may actually surpass them in the future.  Dr. Herr receives periodic upgrades to his hardware and software, which enable him to continue his passion for rock climbing.  He anticipates the development of future limbs that will enable the user to feel their surroundings, such as sand on a beach versus water in a lake.  He is inspirational as someone who has transformed major liabilities into tremendous assets.  Several months ago, 60 Minutes featured a Department of Defense initiative called Revolutionary Prosthetics, in which artificial limbs are controlled by mere thought.

From an economic standpoint, the long term benefits heavily outweigh the short term expenditures, thereby providing a high return on investment for society.  These benefits include the reduction of secondary disabilities – such as joint arthritis and pain – less rehabilitative intervention, and a more productive, income generating population.  Greater income, lower healthcare costs and a better quality of life will enable a more healthful economic environment in the future.

LIBOR Rate Manipulation

Barclays Bank settles LIBOR manipulation probe.

Source:  St. Louis Federal Reserve Bank

The difference between the LIBOR rate and the OIS rate (Overnight Indexed Swap) represents the default risk of banks as perceived by the market.  That is,  LIBOR is the rate that banks will lend funds to other banks, while the OIS represents a nearly risk free investment.

Historically, this spread has been roughly 10 basis points (1/10 of 1%).  By September 2007 it was 1% – in October 2008 it reached 3.5%.

This suggests the LIBOR rate was severely under reported for many years.  It  permitted banks, such as AIG, to borrow funds at artificially low rates, thereby enhancing profits and transferring risk and losses to counterparties and taxpayers.

Given the extreme volatility of this rate spread, coordination among LIBOR participating banks may have occurred.

US Treasury Secretary Timothy Geithner suggests he learned of the LIBOR anomaly in late 2007 in his capacity as The New York Federal Reserve President.  However, it is not apparent that any action was taken to rectify the situation.

Recently, Barclays Bank agreed to pay $453 million to the US and UK to settle allegations that it manipulated interest rates.  Seven additional banks are currently under investigation.

Global Economy Will Remain Anemic

The global economy will take years to recover from the excess debt accumulated over the past few decades.

Currently, global debt/GDP (private and public) is nearly 300%.  Sustainable economic growth requires this figure to fall below 200%.  Moreover, monetary velocity (quantity of transactions per unit of currency) world-wide is below one.  Long term prospects will improve when this parameter is closer to 1.5.

Therefore, the world economy will remain anemic in the coming year or two.     Fiscal measures that promote long term investment are critical, since additional monetary intervention will have little return on investment at this point in the recovery cycle.

Healthcare Mandate Without Choice and Competition is Not Wise

The Patient Protection and Affordable Care Act (a.k.a. Obamacare) was ruled constitutional by the US Supreme  Court yesterday, based on the ability of the Congress to levy taxes.

Prior to its passage, the president repeatedly claimed this legislation did not contain a tax on the American people.  However, in arguing before the US Supreme Court, the administration claimed the opposite.  That is, the statute is  constitutional because it is a tax.

Notwithstanding this divergent rationale, the legislative policy is severely flawed in its methodology, despite the merits of the individual mandate.

The mandate has merit, since everyone is highly susceptible to requiring medical care.  Uncertainties in life can befall all, leaving individuals to demand healthcare – involuntarily – as a result of accidents and/or genetic anomalies.  Hence, individual responsibility is in order.  That is, contribute while you can, so it’s available when you can’t.

However, the policy is deficient in terms of the lack of funding, competition and choice.   As a result, healthcare expenditures and federal deficits will likely grow at a more rapid pace.

Based on the funding mechanism, many individuals will chose not to participate in the system, since the cost of care is 10-30 times more expensive than incurring the penalty.  As people require care, less money will be in the system to cover the needed services.

More importantly, this legislation reduces competition among healthcare  insurance companies and limits consumer choice.  Optimal economies of scale are realized when firms are permitted access to the entire market and individuals can select the products that best suit their needs at the time.  This law does not permit healthcare insurance firms to compete nationally, and consumers are precluded from selecting a high deductible, catastrophic plan with low annual premiums in lieu of a low deductible, comprehensive plan with high annual premiums. The latter also violates the president’s oft repeated pledge that you will be able to retain your current healthcare plan if you so choose.

In addition, the current legislation lacks meaningful tort reform that would reduce frivolous law suits.  Placing greater responsibility on the plaintiff to file a bona fide law suit could reduce healthcare expenditures that result from defensive medicine and over-utilizing  scarce resources.

This legislation is likely to create more problems than it solves.  Barring substantial changes, repeal may be warranted.

 

 

 

Genealogy and Economics

The data below from the US Census Bureau (Year 2000) indicate how US citizens describe their ancestral roots.  The largest segment (15.2%) are of Germanic descent while only 7.2% are self-described Americans.  The map suggests a majority of US counties possess a plurality of citizens with Germanic descent.

These genealogical data can provide useful economic and business applications.  Incorporating social media with these demographics will enhance targeted marketing, client acquisition and sales cycle optimization.

In addition, Genealogists may also find this information quite valuable in presenting detailed historical information to their clients.

Source:  US Census Bureau, 2000

Source: US Census Bureau, 2000

Global GDP Over the Past 2000 Years

The graphic below depicts the percentage of global GDP for each country over the past 2000 years.
 
Note the massive declines for India and China.  
 
China’s decline correlates with the diminishing power of the dynasty system.  It ended in 1911 with the fall of the Qing Dynasty during the Xinhai Revolution.  It’s growth coincides with the economic liberalization that began in the late 1970′s.

Gold: The Next Global Reserve Currency

Gold is on a path to become the next global reserve currency.

A macroscopic perspective of our global economy suggests the world’s financial crisis was caused by an inordinate accumulation of debt relative to GDP.

However, the excess debt relative to income was the result of fiat currency regimes.  These regimes are based on the faith and credit of governing institutions, not physical capital reserves, and permit an infinite amount of credit and undercapitalized debt formation.

Well capitalized debt formation is predicated on a stable currency regime that cannot be easily manipulated, one that is partially backed by tangible capital reserves.

Global macroeconomic environment remains highly overleveraged, where total debt (private and public) relative to GDP is still unacceptably high.  Future economic prosperity requires further debt reduction.

A sustainable level of total debt/GDP is roughly 150% – 200%.  During the US depression, this figure reached 260%.  By 2008, it was over 350%.

According to the Bank for International Settlements, total debt/GDP in the advanced economies grew from 167% in 1980 to 314% today.  Further debt reduction is essential to improve the global economy.

Debt accumulation also hindered long term investment.  Both severely undermined the economic multiplier, or monetary velocity.  Monetary velocity is the number of transactions per unit of currency over a given time period, where GDP equals Money Supply multiplied by Monetary Velocity.  Given a stable money supply, income rises as the monetary velocity rises.

From 1980 through 2008, monetary velocity in the US fell over 50% and investment as a percentage of GDP dropped 32%. This level of investment is roughly half the global average of 24% and is a major impediment to long term economic prosperity.

Healthy economies produce a monetary velocity greater than 1.5.  Today, this figure is below 1 for the entire world. Debt reduction and increases in investment are needed for global economic recovery.

Debt reduction and an increase in long term investment require a stable medium of exchange backed by tangible assets, such as gold.

Gold possess unique attributes that mitigate geoeconomic and geopolitical uncertainties.  Therefore, it tends to preserve purchase power parity and wealth over long periods of time and across geographical locations.

Attributes of gold include the following:

1.  Gold production is a proxy for general economic activity in terms of resourceallocation and input productivity (i.e., the cost of labor, capital and raw materials per unit of output).  The cost structure for gold production more accurately reflects that of other essential commodities, thereby preserving purchase power parity more readily.

2.  Gold is a physical product that cannot be manipulated easily, since the marginal cost of production per ounce ranges between $500 and $1,000.

3.  Gold is highly durable and reusable, such that the total supply continuously increases.

4.  Gold possesses economic diversity:  this includes investment, both industrial and financial, and consumption (i.e., 10% industrial, 40% financial, 50% consumption).

5.  Gold serves as a historic medium of exchange.

6.  Annual production of gold increases total supply by approximately 2% per annum.

Some believe the supply of gold may be inadequate to support future economic activity.  This may not be the case for the following reasons:

1.  According to the World Gold Council, known supplies will maintain this rate for the next 25-50 years

2.  Future technological innovations may increase gold supplies.

3.  Should future supplies wane, lower capital reserves provide a better stabilizing force than fiat currencies.

4.  Given a constant supply, price appreciation will protect purchase power parity.

If additional capital reserves are needed, other tangible assets with similar properties can be incorporated..

At this time, gold seems to be the most effective candidate based on its economic diversification.  Silver would be a likely addition in the future.

The demand for gold has been increasing significantly.  Currently, there are significant public and private financial resources available to satisfy this increase in gold demand.  These resources include sovereign currency reserves of nearly $12 trillion and private financial assets of $200 trillion.  Investment in gold represents only 0.2% (2/10ths of 1%) of private financial assets and 10% of sovereign currency reserves.

Future portfolio allocations that provide greater weight in gold seem very likely.  Recently, many governments have made large gold acquisitions, especially China.

The global market value of gold is approximately $8.5 trillion and the global narrow money supply totals approximately $26 trillion.

A stable currency regime using gold as a reserve asset can be achieved if the total value of gold approximates the total value of the narrow money supply.  This implies a three-fold increase in the value of gold, from $8.5 trillion to $26 trillion. Therefore, I anticipate a three-fold increase in the unit price of gold in the future.  Deteriorating global economic conditions, including the Eurozone and elsewhere, place greater pressure on achieving this equilibrium more rapidly.

A decade or two is a plausible and realistic time frame for this to occur.  During this time, I expect the price of gold to reach $4,000 per ounce.

The lack of confidence in undercapitalized fiat currencies is accelerating at a rapid pace.   Stable, long term economic prosperity is predicated on a different global reserve currency.

In my view, gold represents the most likely candidate as the next reserve currency.

Copyright 2012 Barry Elias.  All rights reserved.