2008-08-27

Condemning Russia: Western Hypocrisy

Take this recent bit of news:
Seven of the world's leading industrialised nations have jointly condemned Russia's decision to recognise Georgia's breakaway regions.

Canada, France, Germany, Italy, Japan, the US and UK said Moscow's recognition of South Ossetia and Abkhazia violated Georgia's integrity and sovereignty.

Earlier, the UK's foreign secretary said Western countries should re-examine their relations with Russia.

David Miliband also warned Russia not to start a new Cold War.
No more than a few months ago, similar articles could have read almost identically describing events at that time:
Two of the world's largest developing countries have jointly condemned the decision of Western nations to recognize Serbia's breakaway region.

Russia and China said that the Western nations' recognition of Kosovo violated Serbia's integrity and sovereignty.

Earlier, Russia's foreign secretary said Russia and China should re-examine their relations with the West.

Russia also warned the West not to start a new Cold War.
Just like Kosovo, where Albanians are in a 90% majority, South Ossetia and Abkhazia are regions predominantly populated by non-Georgians who want to be independent of Georgia.

WTF?

Where is the West's touted moral superiority when making such obviously hypocritical proclamations?

If the majority argument was good enough to support Kosovo's independence of Serbia, it should be good enough to support South Ossetia's and Abkhazia's case as well.

Edited to add: One could argue, though, that the dynamics of this situation have distinct dissimilarities to the Western intervention in Kosovo, and that Russia has only been dressing up the conflict to seem similar, while the fundamentals are substantially different.

In the case of South Ossetia, it is certainly Russia that had been fueling separatist sentiment for the past decade, and the real reason they have done so is certainly not because they give a floating booger about the South Ossetians. If they did give a floating booger about South Ossetians, they would not have fueled the conflict over the past 10 years, and would have encouraged a peaceful settlement with Georgia. A settlement which, absent Russian meddling, might already have happened on its own.

Instead, the Russian strategy is all about geopolitics, and their "concern" for the people of South Ossetia is just an excuse.

2008-08-26

US bubbles and the global savings glut

I am now of a fairly firm conviction that the U.S. asset bubbles of the recent decade have been caused by the global savings glut.

What's happening is, ever more people around the world have been saving money, putting it into banks. But the banks can't just pull the money needed to pay interest rates out of thin air; it's not supposed to be a Ponzi scheme per se. So banks around the world need to invest their clients' money somewhere where it will generate decent return, so that they can pay the clients some interest, pay for their expenses, and collect some profits in turn.

The problem is, banks in most countries have found it unattractive to invest domestically. A few likely reasons:
  • Taxes and bureaucracy: Most countries in the world don't make it as easy to start and run a business as the United States or, say, Ireland do. Even most developed countries in continental Europe are in this category - e.g. France, Italy, Germany, Spain.
  • Incompetent educational systems: most ex-socialist countries have legacy "universities" with all kinds of wrong incentives in place which cause the education process to suck and the resulting talent to be sub-par when compared to those educated in developed countries. This reduces the ability of companies to find good enough employees.
  • Language barriers: Many countries speak a language that no other country speaks, so companies founded there are at an inherent disadvantage: they have a limited talent pool at home, and at the same time they find it difficult to attract talent from abroad.
  • No market: Even if a country is large, there are few things you can sell to poor people.
  • Corruption: In countries such as Russia, you have to keep bribing officials, or they will obstruct you and shut you down. A company can expect to pay some 10% of its revenue in bribes.
  • Political risk: In several other countries, you never know when the authorities are going to commandeer your company and just take it away.
  • Currency risk: Invest in Argentina just to see the peso collapse overnight.
  • Favoritism: In many countries, success in business is determined not so much by how well a company does its job, but in how well its owners are connected to those in economic power. Government contracts are awarded to large companies owned by favorites, and those companies contract out to their own favorites. Investing in such environments is much more difficult because you have to look not so much at the business you're considering, as to whether you have powerful enough friends.
  • No rule of law: Connected to favoritism, what good is law against anti-competitive behavior, if it takes 5 years to get anything done in court? And even then the outcome is unpredictable.
All of these reasons contribute to making most countries, seemingly or actually, unattractive investment opportunities when compared to the United States.

The United States have few of the above problems. First and foremost, there's rule of law. But also, while taxes are high, starting and running a business is relatively straightforward. If you want to change a lightbulb, you don't need to apply for a bureaucrat's blessing on a triplicate form. The educational system, for now, still produces some of the most competent people in the world. There's an affluent population of 300 million people, most of whom speak a single language. To the extent that there's corruption, it's by far not as endemic as it is in, say, Russia. Political risk is small; a shareholder's rights are well protected. And while the US dollar has had cycles, it has never collapsed overnight like the Argentinian peso.

Sounds like an ideal investment destination, right?

It does, and it would be - if it wasn't for the fact that, because of its appeal, all the world's money has been pouring into the place!

Suppose the world has, say, 1.5 billion affluent people at this point. This includes everyone in the developed world, as well as tens, or even hundreds of millions of people in developing countries who have already reached a level of affluence.

Now, instead of each country benefitting from the savings of its own people, the above factors produce a situation where the savings of 1.5 billion are all invested into an (already developed, and way affluent!) country of 300 million!

What is the natural consequence?

All that money is sitting there in the U.S., wanting to be chosen for investment, competing with all that money that is there after the same thing. But there's only so much investment that can be done. So what happens then? The interest rates for borrowing money fall dead low. What happens then? With money being so cheap, people start borrowing it for all sorts of purposes that make increasingly little sense. All that money is there, waiting to be invested, making people itchy. There are rules which require managers of certain large funds to have at most 5-10% of their holdings in cash. Which means that, because of these rules, and because, in the end, savers in foreign countries are looking for at least some kind of return on their deposits, there's an awful lot of money and there's pressure to invest it somewhere, somehow, in some way.

So, lacking sufficient opportunities, people start throwing money indiscriminately into things that turn out to be Ponzi schemes. Returns are good for the first few years, which attracts more investors and makes it really difficult for conservative fund managers to keep their jobs while everyone else is "making" a killing. Then the bubble collapses, but all the same pressures still exist, so all the "investment" is just redirected elsewhere. First there's: "Oh, we know what to do with all this money, we're gonna throw it into tech stocks, and we will make a killing while we revolutionize the world!" And then that blows up. People sober up, and there's a new tune: "Oh, we know what to do with all this money safely. We're gonna lend it to American mortgage borrowers! Mortgage lending is the safest investment historically. And it pays well." So now the savings of 1.5 billion people fly into the mortgages for a country of 300 million, and lookie look - that blows up, too.

If my assessment is correct, then the reason for these bubbles is not that US regulation failed. It is that the US economy is being overwhelmed with the desire of 1.5 billion people to invest in a "safe place with good returns". Because everyone has the same place in mind, that place becomes no longer safe; and it no longer provides good returns.

One way to fix this, surely, is to make the United States a more bureucratic country. Put up more roadblocks for investment, and the relative appeal of the US for foreign investors will decrease. Make the US shitty enough as an investment destination, and hey, people might consider investing in their own countries.

But that's a fool's solution.

The proper way to solve this problem is to open up the other countries in the world; to put them in a shape where they will themselves become attractive investment opportunities. Reduce taxes; reduce bureaucracy; improve education; teach foreign languages; weed out corruption and favoritism; provide strong ownership rights; have an effective legal system; run a solid monetary policy. Implement these steps, and other countries will become attractive investment opportunities.

The "crisis" of the financial system that we're seeing, however, is already part of the solution. What people seem to think is a "crisis" is merely much needed change. For a while at least, investors around the world seem to have come to their senses, and may just realize that they can't just shovel all their money into the United States and expect it to magically work out.

If the world becomes more balanced, money will never again be as easy to borrow in the US as it has been in recent decades. That would not be a crisis. That would be a regular, sensible course of things.

2008-08-25

The coming insignificance of the West

I'm only halfway through Physics for Future Presidents, so I haven't yet made it to the part about global warming, but just seeing the energy numbers I quoted in my previous post, and putting that together with the other books I'm reading about the prospects of the American economy and China's, causes me to reach the following conclusions.

The fight against global warming is ridiculous. The fight is being conducted by a minority of the world's population, the West, who currently think that we're the shit, and who think that we have some kind of leadership role and some kind of global responsibilities to uphold.

In reality, we, the West, are 1 billion people in a world that has 6. Our Don Quixotic efforts to counter global warming ignore India and China, who can't be persuaded to give a flying turd about the issue, and who are building coal-fired power plants like crazy. The Chinese add the power-generating equivalent of a large European country in a single year, most of it burning coal.

In coming decades, Asian currencies will slowly appreciate against the dollar and the euro. The standard of living in China and India will rise, and the West will slowly come to see where it now stands. What is currently the West, will then represent about 1/3 of the world's "more or less" developed population. Certainly not enough to assume boastful "leadership roles", or to boss anyone around.

Europe, Australia, and the USA, with our paltry hundreds of millions of people each, will come to seem smallish and less important. The Chinese, Indians and Russians already anticipate this. The full realization just hasn't quite dawned on us yet.

We have enough oil: The Fischer-Tropsch process

I have recently been reading Richard Muller's excellent book Physics for Future Presidents: The Science Behind the Headlines. It covers topics from terrorism, energy, food, radioactivity, to global warming, and does all that with an approach that gets the things you need to know across, without spending a lot of time in equations or difficult details. An excellent read not just for presidents, but for anyone who votes for presidents, as well.

The book relates a lot of facts that are not commonly understood, yet dictate what happens in the world. Did you know, for instance, that coal (just the fuel, not counting the power plant or any air cleanup) is about 20 times cheaper than oil, per unit of energy produced?

China is adding new power plants at a stupendous pace. Guess why most of those plants run on coal?

We also have coal available in substantially larger amounts than oil. And the important difference is, coal is readily available in many countries, such as the United States, that are currently paying Arabs through the nose for oil.

And there are ways to convert coal (as well as natural gas) into oil. It's called the Fischer-Tropsch process. However, the initial investment required to build the plants is so expensive that it only pays for itself if the price of oil is going to be at least $50 in the long run. (Those are probably 2007 dollars that Mr. Muller quotes.)

This has interesting consequences for the long term price of oil: it means that there's a long-term equilibrium price of about $50 per barrel. (... in 2007 dollars.)

Russia strutting the stage

Richard Baldwin on Free Exchange makes an astute observation about the nature and purpose of Russia's forays in Georgia:
One tried-and-true glory-restorer is sabre rattling, and here the Georgian crisis was nearly perfect. Russia was reacting. Russia was standing up to the West. The hearts of Russian patriots beat fast and strong. Something like the May Day parade but with much better TV footage. Best of all it was dirt cheap, easily worth the boost in legitimacy it gave the government.

If my conjectures on objectives are right, Russian leaders will milk this crisis for as long as they can. Rattle the west’s cage as many times as possible. But they will avoid real war like the plague. Real war—like the kind that the Soviets fought and the kind that Krugman worries about – is expensive and eventually unpopular. Not at all the sort of thing that will keep Putin’s group in power and in the money.
In addition to that, there's also the obvious oil motive. Gazprom has interests in parts of Georgia.