3 D Printers Are Amazing; But They Also Tell Us That Factory Jobs Will Soon Disappear

By Paolo von Schirach

January 29, 2014

WASHINGTON – We know a lot about the dark side of globalization. Information technology, plus improved and low-cost logistics allowed a gigantic shift of most manufacturing activities from high labor cost Europe and America to low labor cost Asia, first and foremost China. And so, thanks to the new opportunities to outsource manufacturing created by globalization, Europe and America lost millions of jobs.

Old jobs are gone

Most of these jobs are gone –for good. And that’s the way it is. Some politicians try to gain points by blaming “evil” corporations that “choose” to export jobs to low-cost countries. This argument assumes that there is indeed a choice. Sure, how would you like to make T-shirts in North Carolina that would retail at $ 10 or 15 a piece when the same T-shirt made in China or Bangladesh retails for $ 5? Which company can stay in business with competitors selling essentially the same product at half the price or less?

More to come

Be that as it may, we have not seen the end of this tale. In fact, today’s Asian winners may be tomorrow’s losers. Picture this. If you are a Chinese migrant worker who left poverty in a rural village seeking a better life as a factory worker, your luck –such as it is, as working conditions in Chinese factories are grim– may end soon. In part it may be because your Chinese employer may want to relocate the factory to another country (Cambodia, Bangladesh) where labor is even cheaper. But most likely you may soon be unemployed because technology will cause your job to simply vanish.

Amazing 3 D printers

This is no exaggeration.  You may have read about 3 D printing. Well, at the moment this futuristic technology that allows you to literally “make” objects at home, without the support of a small factory or workshop, is still in its infancy. But it is getting better every year. Primitive 3 D printers could only make simple plastic parts. Now they can make metal parts. Soon enough they will be able to make fully functioning complex products.

Want a toaster?…

So, imagine this. Today here in the US, if you want to buy a toaster you go on-line and look for a good product at a good price. You find one on Amazon. In just a few minutes, you can place your order and complete your transaction. Your toaster will be delivered to your door by UPS or FedEx in just a few days. Low cost, simple, clean an efficient.

Your toaster was made in China by the migrant worker mentioned above who had left the village seeking a better life. It was shipped to America inside a container that had been loaded onto a mega container ship that landed in Los Angeles. Then the  container was moved by rail or truck to a large warehouse managed by Amazon. When you place your order on-line, the toaster you selected is placed on a plane or truck and delivered to you via UPS, FedEx or US Mail. The chain that begins in a factory in China and ends up at your door is long and complex. But it is lean and efficient.

…Make it at home

OK, fast forward to tomorrow. Tomorrow you will have at home a new generation 3 D printer that can actually “make” the toaster. You want a new toaster? You go on-line and you buy the specs for your toaster that are included in a  software package. You download the specs into your 3 D printer and the printer “makes” your toaster. Sounds far-fetched? Not really. We are not there yet. But we are getting there, probably sooner than we can all think.

No more jobs

If this is indeed the future, imagine all the implications. The implications are that the factory in China that makes the toasters is redundant, and so are all the people employed there: workers, supervisors, managers, janitors, you name it. Furthermore, the complex logistics network necessary to move the toaster from the Chinese factory into a container ship and then to the Amazon warehouse is also redundant. And that means that all the people who support it are redundant: from the shipyard workers who make the container ships to the truck drivers who move the container from port to its final destination. And this is not the end. FedEx and UPS, whose business is mostly about moving all these boxes with toasters, TVs and hair dryers in them, become redundant.

You get the picture. When your home is the factory, all the factory jobs and all the services jobs necessary to move products from A to B will vanish. We are not quite there yet. But this is the future.

Is the future really great?

The techno-enthusiasts claim that all this is great. They confidently predict that, while old jobs vanish, new jobs will be created to support the new amazing technologies of the future. May be. But what happens if there is a 10 year time lag between the vanishing of traditional manufacturing jobs and the opportunity to create new ones? For 10 years former factory workers will be unemployed or under employed. And, later on, many of them, (if not most of them), will lack the skills to work on the new technologies that have replaced the old factories.

The “Luddites” fight back; but they lose

And so a gigantic economic transformation brought about by truly disruptive technologies will become a social and political problem. Long ago, the “Luddites” in England fought against the mechanization of the textile industry by destroying the new machines that were displacing manual workers. But it was a losing proposition. The machines won. They always do.

Who takes care of the losers?

When the new machines will take over, what will happen to all the displaced workers? Who will take care of them? We better have  a plan, because very soon many societies will have to deal with this problem.




Cheap Energy Makes America More Competitive

By Paolo von Schirach

September 30, 2013

WASHINGTON – Does cheap energy make a difference when it comes to economic competitiveness? You bet it does. The Financial Times, (Eon chief warns Europe on energy gap with US, September 30, 2013), quotes Johannes Teyssen, CEO of  EON, a German energy company, saying that: “there is a  competitive advantage for America that we cannot prevent, at least for some time…It is a dream for politicians to suggest otherwise“. America’s energy edge is in part the fruit of geology (plenty of shale gas); and of Yankee ingenuity, (nobody thought it was possible to extract gas from shale and make money).

Germany’s electricity is too expensive

The funny thing here is that policy makers in Germany, using subsidies and other incentives, pushed hard to get more energy from solar, this way trying to be both modern and “green”. Well, this policy has driven up the cost of electricity, and so Germany’s energy intensive industries are looking for opportunities to relocate to the US because the shale gas boom has made American electricity very inexpensive. Meanwhile, “green” Europe does not have enough of its expensive renewable energy; and so it has to rely more on old-fashioned, dirty, high emission coal, this way increasing green house gases emissions.

Being “green” is not so good for the economy

The paradox here is that supposedly immoral America, the country where business people would do the worst things in pursuit of immediate gain, is actually reducing carbon emissions. Yes, abundant US shale gas has displaced coal, and this means more cleaner burning gas-fired power plants. “Green” Europe, the Continent where concerned citizens really think a lot about global warming, is actually increasing CO2 emissions because of misguided energy policies that subsidized expensive renewable energy, this way displacing natural gas.

 




Policy Makers Claim That Europe Is Finally Stable, Long Emergency Is Over – Not So

By Paolo von Schirach

September 27, 2013

WASHINGTON – It is a sign of the times that listless Europe, run by unimaginative politicians fearful of social reactions to anything that might even resemble serious pro-growth reforms, is deemed to be finally on the mend. Things are looking up, we are told by policy-makers. The long and grueling fiscal crisis emergency is over. We are back to normal. So much so that incumbent German Chancellor Angela Merkel did extremely well in the recent elections. Her steady hand and her pro-austerity (but still cautious) policies were apparently vindicated, and so she won the day.

Dismal numbers

Well, it may be so in Germany. But if you look at Europe, the picture is still very grim, unless you really believe that a Eurozone economy now 3% smaller than its pre 2008 crisis levels is a good sign of recovered health. And if you look closely at the sorry Club Med bunch, (Greece, Italy, Cyprus, Portugal and Spain), things are far worse. All of their economies are still way below pre crisis levels, (Greece is down 28%, Italy 8.8%). And no Southern European country is  about to begin a strong recovery. And what about a 12% Eurozone unemployment levels, (with peaks above 25% in Spain and Greece)? Is this yet another sign of health?

North South divide

Sure enough, Northern Europe, with Germany, Austria and the Scandinavian countries in the lead, is doing reasonably well. But France, the Eurozone number two economy, is not; and Eastern Europe is a mixed bag at best. Still, if the totally unjustified consensus is that this European Union has recovered and that it is now ready to resume business as usual, this means that there is no interest in facing reality and in re-examining the very foundations of a Union among far too disparate members that demonstrably are unable (because of resource levels, profoundly different cultures and psychologies), to function according to the same rules. 

While they all share the geography of this Western appendix to the Asian Continent, the Europeans are traveling at different speeds. Some –Greece being the most obvious example– are in such bad shape that they are clearly incapable of advancing without (permanent?) help from rich Northern partners. 

And, even more fundamentally, the financial crisis revealed profound cultural differences between North and South in Europe. The North believes in growth and responsible government. The South believes in debt, while tolerating graft and corruption as rather normal ways to conduct business.

Governance, Italian style 

Way before the crisis, Silvio Berlusconi long premiership showed the world that the Italian voters could not care less about glaring conflicts of interest (Berlusconi retained de facto control over a vast media empire as he served as Prime Minister) and self-serving legislation. Not to mention that he was the Prime Minister who hosted many “bunga-bunga parties” featuring sexy young women, saucy events described by Berlusconi’s friends as “elegant dinners“. Even now, with Berlusconi finally convicted of tax fraud at the end of one of so many trials, it is not clear that he will be expelled from the Senate, as the law would mandate. In fact, should he be expelled, his party may cause the collapse of an ultra fragile government coalition as a protest against what it believes to be a political punishment. And this is happening in Italy, the Eurozone third largest economy, and one of the original founders back in 1957 of the European Common Market, not in Sudan or Mali.

A slimmed down EU, with only the more modern countries in it, can do rather well. But this patchwork Europe, with the rich having to carry the negligent and indolent poor for the indefinite future, is doomed to eventual irrelevance.

 

 




No Way For America To Compete Effectively Unless It Improves Its Dismal Public Education System

By Paolo von Schirach

September 25, 2013

WASHINGTON – There is really no dispute about the fact that in this hyper competitive global “knowledge economy” a super educated work force is not just an incredibly valuable asset, it is in fact an absolute precondition for success. In order to produce valuable new knowledge, societies need highly educated people whose combined talents will hopefully produce breakthrough innovation. If a country does not produce and sell valuable innovation, then it will have to be a user that  will have to pay for what has been produced by others. The innovators make money. The innovation users pay the innovators.

Invest in education

Given this unfolding scenario, it should be self-evident that all societies that wish to be competitive will invest vast resources in their public education systems. The better the effort to inform and train young minds, the better the chance that many well educated young people will be among tomorrow’s innovators.

All this is so obvious that it should be beyond debate. Well, in the US the principles are agreed upon, but there is a truly dismal record when it comes to implementation.

Simply stated, pro-education advocacy groups and policy-makers have yet to win decisive battles against the super conservative teachers unions that are de facto the main enemies of improved public education standards.

Bad schools in Philadelphia

Here is just one more depressing statistic extracted from a WSJ editorial. (Failure in Philadelphia, September 25, 2013). Last year only 40% of Philadelphia school children scored proficient or above in standardized readings tests, while 99.5% of teachers are doing a job. Note the contradiction. Less than 50% of the students are doing reasonably well, but their teachers are apparently doing great. 

This is clearly an impossibility. If the teachers were really that good, then the test scores would be much higher. And this data underscores a truly grim reality. In the US, the public education system main priority is not to educate the children. No, the main goal is to safeguard the career, job security, benefits and comfortable retirement needs of at best mediocre teachers.

Entrenched unions

As the teachers unions are quite powerful and capable in some instances of influencing local and state elections, politicians are unwilling to pick fights with them. The end result is the continuing status quo: tenured teachers who do little and students who do poorly. 

Education and income divide getting wider

Even worse, bad public schools tend to reinforce poverty and a growing opportunity and income divide. How so? Well, this is because the children of the well educated rich go to private schools or to the few well funded public schools located in very rich counties that have the means to enforce higher standards. It is plain obvious that well educated kids have a good shot at getting into prestigious universities that in turn will open good career paths.

The poor are trapped

The poor have no choices. They have to accept what is locally available. And the end result is more data like Philadelphia. If you are in school but you are not taught how to read the rest is almost meaningless. And yet it is common practice in US public schools to pass functionally illiterate children on to the next grade. While many will drop out, some of them will eventually graduate. However, in many instances their high school education is so bad that they will have trouble moving on to college or finding a decent job.

So, the children of the rich, with the huge advantage of a good education, have an excellent chance of getting into highly rewarding professions. The children of the poor have no opportunity ladder offered to them. They will stay uneducated and therefore poor.

We should do better

America as a whole will still move on, powered by the lucky ones who went to good schools. But we are becoming a two tier society, mostly because of a flawed public education system that policy-makers are still unable to fix. This is a horrible waste of human potential.

The country that sent a state of the art moving lab to Mars can and should do better.




If Solar Power Became Affordable, Developing Countries Would Be Transformed

WASHINGTON – When it comes to electric power generation and distribution, in developed countries we are used to this basic model. Large power plants produce electricity. From these sites, relying on a complex network of power lines, electricity is delivered to customers, be it industrial plants, offices or individual homes. The fuel used for generation can be coal, gas, nuclear or hydro. More recently we have developed wind, solar and biomass.

A new model

Well, in the not so distant future, this complex architecture founded on several large sources of generation from which transmission lines deliver electricity to the end users may become obsolete. A The Wall Street Journal story opens a window on a possible and completely different future, a future that can soon become reality, assuming that technologies keep improving  and costs keep going down.

Simply stated, soon enough we shall be able to have our own miniature power plant at home, no longer relying on electricity coming to us through a grid, care of the local utility company. We are clearly not there yet. But we may get there soon, probably sooner than we think.

Miniature solar power plants in your own home

In America we have plenty of power generation. Going forward, the new shale gas boom guarantees that there will be plenty of gas-fired power plants. Still, at the same time, solar power generation, while still relying on subsidies and tax breaks, is becoming more efficient, its cost are going down.

According to industry and many experts, we will soon get to a point in which it will be cheaper for individual users to install their own domestic solar power plant (based on solar panels that generate electricity) rather than pay a monthly bill to the utility.

A revolution

When we get to that tipping point, this will signal the beginning of a revolution that will have a number of large and important consequences. The first one will be the growth of the solar panels industry and of all the services associated with it. The second one will be that individual households as well as industrial plants, office complexes and commercial centers will be energy independent. The third one will be that most of the complex national and regional regulations that have been created to manage power generation and distribution will essentially become obsolete. The fourth one will be the death of the large power plants, along with the death of all the industries that support them: think of coal mining, storage and transportation, for instance.

More broadly, locally produced affordable power will improve basic economic conditions. Households will no longer have to pay electricity bills that include the cost of maintaining an expensive grid. Overall, affordable energy will be a boost for many energy intensive industries.

Biggest impact in developing countries

But, while this technological innovation will radically change the economies of developed countries, the biggest transformation will occur in emerging markets. Indeed, tens of thousands of rural communities in Africa, India and elsewhere that currently have no electricity will no longer have to wait for governments to invest in power generation and transmission so that electricity will come to them. They will be able to  produce their own, on site, without any recurring fuel costs. This will be a real revolution. Sunlight is free.

No development without power

It is a painful reality that without power these villages are essentially cut off from any meaningful economic progress. If you think about it, there is no hope for real development without electricity. Not much is possible without it. At dark, almost everything has to stop. People cannot read at night. Besides, medical facilities cannot store medications. Shops cannot refrigerate food. You cannot have workshops or small factories. Power tools cannot be used. And forget about basic amenities like street lights, cinemas, bars and restaurants.

But if, indeed, on the basis of the experience in more developed countries, local communities in emerging economies will be able to install affordable solar power generation on site, electricity would create an incredibly important short cut to development.

Right now the key obstacle for any plan to bring power to emerging countries, especially to isolated, off grid communities within them, is the large capital cost of building power plants, plus the cost of fuel, and the  high cost of constructing transmission lines.

Well, if truly cost-effective solar power can be deployed at the village level, no need to focus on huge investments in large-scale power generation and distribution.

Hundreds of millions will step into modernity

Look, I am not even remotely suggesting that all this is happening right now. But it looks as if it is just beginning to happen. As technology keeps getting better and costs keep going down, it should become realistic to think of business models that will allow scaling up affordable renewable energy solutions for the hundreds of millions of Indians who have no power. Likewise, even city dwellers in Pakistan, Nigeria or Zambia who are used to frequent power cuts due to unreliable supplies will have a chance to break off from the grid and finally have their own uninterrupted power supply.

It is impossible to have basic development without the support of reliable and affordable electricity. Until now not much has been done to create adequate electricity generation in many poor countries because of the very high cost of this effort.

If new solar technologies will radically change the model, while bringing down cost for individual users, then a huge barrier to development will also come down.

And life will change for hundreds of millions around the planet.




Washington DC Mayor Vincent Gray Vetoed “Walmart Bill”

By Paolo von Schirach

September 13, 2013

WASHINGTON – Washington DC Mayor Vincent Gray vetoed the “Walmart Bill” passed by the City Council with an 8 to 5 vote, calling it a “job-killer” and a “bill that will deal a huge blow to economic development”. Pretty strong language. The ostensibly noble intent of the bill is to guarantee a “living wage” of at leat $ 12.50 for all workers in the retail sector. In reality this bill specifically targets Walmart, as it excludes unionized chains that already operate in DC. The retail giant, (the largest in the world), is planning to open 6 centers in the District of Colombia. Three of them are under construction, and three more are on the drawing boards. Walmart already indicated that, if this bill becomes law, it will scale down or cancel altogether its plans for entering the DC market.

Higher wages kill jobs?

The laudable goal of a higher minimum wage is of course to improve the living conditions of the working poor. It is true that there are millions of Americans who have a job but have a hard time making ends meet because of very low-income. Still, as Mayor Gray argued in his veto letter to the City Council, by making it a lot more costly for new retailers to operate in the Distric of Columbia, the outcome of this law will be losing Walmart altogether. 

The retailer will build stores elsewhere. And so, the net effect of legislation that would like to improve living standards for the working poor will be to kill new job opportunities altogether. If Walmart cancels its DC expansion plans, there will be no new jobs, whatever the minimum wage mandated by law. Besides, the city would lose tax revenue, while residents in poor neighborhoods would lose the chance to benefit from Walmart’s abundant offerings at comparatively low prices.

DC needs more jobs

Mayor Gray wrote in his letter to the City Council that Washington DC needs all the new jobs it can get. In the long run, it may be a good idea to progressively raise the minimum wage, currently at $ 8.25, for all workers. But to target large retailers by forcing them to pay higher wages (while exempting others) is the best way to convince them to go elsewhere; a net loss for the city in terms of employment, tax revenue and new shopping opportunities for chronically under served poor neighborhoods. 

Sustain this veto

The proponents of this bill would need an additional vote in the City Council to override Mayor Gray’s veto. For the sake of low-income DC residents, let’s hope that they will not get it. Low-income jobs are not a great prospect. But no new jobs and no affordable shopping for thousand of residents is an even worse one.

Let’s be clear, Walmart is not a charity. But its stores will improve quality of life in poor DC neighborhoods.




Only 63.2% Of Americans In the Work Force, Lowest Figure Since 1978 – Fed Policies Cannot Change This Trend

By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2013/09/02/disruptive-technologies-like-3-d-printing-will-kill-millions-of-jobs-can-we-adjust-to-this-new-era/

September 8, 2013

WASHINGTON – Lacking any significant public policy initiative focusing on the never healed US economy, most analysts have become Fed watchers. The only game in town is guessing if and when the Fed will phase out QE3, (quantitative easing), and if so, how fast and what it will mean. Such a move will have an impact on interest rates. In fact,  belief that the Fed will soon stop the easing program as US employment slowly trends down has already caused long-term interest rate to go up.

 Fewer Americans are working

Still, whatever action the Fed will undertake on QE3, the most recent employment data underscore a negative historic trend; and I am not sure that Ben Bernanke and his Fed colleagues sitting in the policy making Federal Open Market Committee, (FOMC),  can reverse it just by manipulating interest rates. 

Simply stated, while unemployment is going down (we are at 7.3%) and more jobs have been created in August, (plus 169,000), the broader trend shows that fewer and fewer Americans are now in the work force. Even worse, fewer and fewer young adults have a job.

Indeed, the percentage of Americans now employed is the lowest it has been since 1978, when Jimmy Carter was in the White House, and far fewer women were in the labor market. Furthermore, looking at the data, we see that the percentage of Americans aged 16 to 24 now working is only 54.8%, down from almost 70% in the 1970s.

Young people without a job

Sure enough, there may be fewer young people in the work force today because more of them are in college. Still, many analysts conclude that this huge drop indicates that far too many young Americans cannot find a job. And the longer they are out of work, the harder for them to find employment in the future.

Likewise, it is clear now that the lower unemployment numbers (we are down to 7.3%) are deceptive,  because the drop is largely due to people who simply stopped looking for work and therefore are no longer counted. Add to this picture the large number of workers who have accepted part-time jobs while seeking full-time positions and we get a rather sad outlook.

People out of the job market

So, here is the future, for a large number of unskilled or semi-skilled  Americans. We have a large army of unemployable people, young and old, while many if not most openings are in low skills, low wage sectors. In simple language, for millions of Americans there is no longer an open road leading to the American Dream. No upward mobility. No career ladder. No comfortable, middle class life style.

Can the Fed, all by itself, change  any of this? I doubt it. Low interest rates may help stimulate economic activities; but they cannot become a substitute for fundamentals.

Well, if so, what is missing in America?

Jobs killed by globalization and automation

No easy answer. Still, I see at least two trends, both of them negative. The first one is a combination of the impact of globalization and automation. The net outcome is loss of employment due to the migration of jobs to low wage countries, (globalization), combined with employment lost due to increased deployment of computer controlled machines and more sophisticated and more affordable robots, (automation). In other words, especially in manufacturing, you lose your job because it went to China, or because a robot now can do what you used to do.

Inadequate public education

The second trend is the lowering of education standards in America, right when we would need a powerful national surge to boost the reach and the quality of public education. Indeed, precisely because everything is becoming more and more high-tech, whatever good jobs opening there will be in the immediate and long-term future, they do and will require sophisticated expertise. And there is no way to land one of them without command of math and science, and therefore the skills necessary to master complicated programs and state of the art computerized machines.

The automation trend is ongoing and unstoppable. As a result, while we may see a stronger US manufacturing sector –and this is of course good news– do not expect employment growth as a result. Factories do and will employ fewer and fewer people, even as they experience higher demand. In fact, in the not so distant future we shall have completely automated factories, with no workers.

Combine this historic trend with localized production thanks to 3 D printing (see link above to a related piece) and other innovation, and we can start predicting the eventual disappearance of factory jobs. Hard to say how long it will take, but we are headed that way.

Of course, we could do a lot more about improving public education, and indeed there are many initiatives. But it seems that we are still way behind, without any real sense of urgency backing new undertakings. Lacking significant progress in this crucial area of “human capital build up”, millions of young (and poorly educated) Americans will be left behind and unable to catch up in this fast-moving world.

The future belongs to the super skilled

Education is indeed most critical. Looking ahead, it is clear that the only way to get a piece of the future is to be highly skilled —in fact, make that super skilled.  The future belongs to the smart innovators, to those who will create new things, new services or new processes, and many others who will support these efforts.

The others will get the scraps. Sure, we can imagine that even in the future there will be a need for janitors, nursing home staff, store clerks and landscape workers. But those will be, as they are today, mostly dead-end jobs.

 

 

 




Underneath China’s Still Impressive 7.5% Growth There Is A Mountain Of Debt

By Paolo von Schirach

August 28, 2013

WASHINGTON – The official news about China is that the number two world economy, expertly managed by the careful Beijing technocrats, is adjusting to a slower but still very impressive rate of growth. After an amazing almost 30 year run with more than 10% growth, year after year, from now on China will be cruising at 7.5% a year. If you think that Europe is barely above zero, while the once mighty America is advancing at a pitiful 2% rate, 7.5% is fantastic.

Too much debt

Well, this is what appears. But it is not so. Not even close. The truth is that China’s growth is largely artificial and now mostly debt driven. And debt is growing at an alarming rate. If you read the hard-hitting pieces on China’s debt crisis published by The Financial Times on August 27 and 28, you get a truly scary picture. China’s construction boom, itself one of the major drivers of GDP growth is based mostly on speculation and enormous amounts of bad debt that now call into question the solvency of many local financial institutions. Likewise, Chinese corporations for years over estimated demand for almost everything. As a result there is enormous overcapacity in practically every sector, from coal to chemicals to steel. Corporate debt, much of it held by non official banking institutions, has skyrocketed. 

And this is has nothing to do with the predictable ups and downs of the business cycle. Here you have a major country whose growth is now sustained mostly by an enormous amount of debt. The good news is that China’s exports over time generated huge cash reserves. However, if a large portion of this capital will have to be used to cover all this red ink, there will be a lot less available for productive investment. Therefore, assuming that this scenario is correct, forget about 7.5% growth, year after year.

Local governments and corporations are in trouble

Just a few illustrative facts drawn from the excellent FT articles referred to above. China is now the most indebted among emerging markets. Aggregate debt (corporate, household, government) has soared from 40% in 2007 to 100% in 2012. Local government debt usually does not include debt carried by local non-bank financial institutions. Therefore, while official figures indicate local government debt level up to 16.8% of GDP, in truth this goes up to 57.8%.

At the local level, local governments used to make money by expropriating farm land that was then sold to developers. Land holdings were used as collateral to obtain cash that would finance infrastructure. Well, now the construction boom has halted because developers have over built. Many of them are in big trouble as they have unsold inventory that cannot be liquidated. In the meantime all the sectors, such as steel and cement, that used to be driven by the construction boom are suffering because of demand contraction. Back to the local government, with the end of the construction boom, now they own far less valuable land that is no longer accepted as collateral. Hence a mounting debt crisis at the local level.

Back to industry, many state-owned corporations now are kept artificially alive via easy government credit funneled to them via state-owned banks. Smaller companies that do not have easy access to credit are struggling. Some now pay their bills through promissory notes. Others disguise their troubles through increased unpaid leaves for their workers, so that official employment numbers appear unchanged.

No problem?

As all this is unfolding, we are told that there is no problem. And this is indeed the real problem. Denial and obfuscation is not a good way to deal with an emerging crisis. Remember Greece? Until the day (back in 2009) in which the Greek Government announced that it had cooked the books regarding the actual level of its debt, it all seemed perfectly normal.

In the US we have had our spectacular 2008 crash. While we can debate how the main actors and the regulators did not see this coming, after the collapse policy-makers and the public knew what had happened. And, sure enough, we have had our own gigantic bail outs. Still, when the Federal Government essentially took over General Motors, it did so publicly, at the same time demanding a credible restructuring plan that included closing down facilities, destruction of jobs, plus salary and benefits cuts for those lucky enough to keep a job.

No transparency

There is no such publicity and transaparency in China. Ttherefore there is far less pressure to restructure in order to obtain leaner and more competitive state owned corporations. As to the local governments and their troubled finances, most likely their debts will become government debts. Still, debt is debt –and it slows you down.

In the end, for sure China must have many healthy companies that are doing and will be doing well. Still, digging a bit deeper, as the FT has done, we discover a country with huge and as yet undeclared systemic problems. It is going to take time and a lot of money to fix all this. China’s economy will stay large. But it will be far less impressive than you would have thought.

 




The Bloodshed In Egypt Will Continue Until The Muslim Brotherhood Will Surrender

By Paolo von Schirach

August 16, 2013

WASHINGTON – Ironically, former strong man Hosni Mubarak turned out to be right. He used to say that Egypt needed to be ruled with an iron fist  (his own), otherwise the banned Muslim Brotherhood would take over. Well, the secularists dreaming of a modern democratic Egypt started the mass protest movement that led to Mubarak’s final demise. But the not so democratic Brotherhood, because of its better organization and genuine grass root support, managed to win elections, shape the new Constitution and get the presidency. Which is to say that Egypt went from Hosni Mubarak, a secular autocrat, to Mohammed Morsi, an Islamic leader with clear autocratic tendencies. Bad tendencies clearly demonstrated in his determination to govern by decree while creating a climate of intimidation that threatened the physical safety of opponents and of Egypt’s large Christian minority.

This was no democracy

So, let’s be clear on one basic fact. Even though Morsi was duly elected, he was not running a real democracy with genuine respect for the rule of law and protection of the rights of minorities. He was running a semi-dictatorship, with the almost open aspiration to make it into a total dictatorship. On top of that, he proved to be a most incompetent economic manager, allowing Egypt’s economy to get close to a real collapse. Therefore, the claim that by deposing him the military inflicted a mortal wound on a fledgling democracy is inaccurate, in fact fanciful.

The military’s plan did not work out

That said, now the military is in charge. However, its initial plans about forming a national unity interim government that would lead to genuine elections proved to be unworkable, simply because the Muslim Brotherhood, even with Morsi out of power and under arrest, did not accept defeat. They completely refused to join the interim government as part of a coalition and pledged to fight back by engaging in open protests. The bloody developments of the last few days tell us that the generals cannot reach any agreement with the Muslim Brotherhood, so that they would join the interim government and agree to participate in a new democratic experiment. Confronted with the Brotherhood daily protests and their vocal demands to have Morsi reinstated, the generals now have only one option, and it is an ugly one.

More killings

If they want order in Egypt, they have to destroy the Muslim Brotherhood as a viable political movement capable of opposing their authority. This means that the killings and the bloodshed that we have seen in the last few days will continue until the Brotherhood will have enough resources and willingness to resist and fight back.

In other words, this is beginning to look like another Algeria. In Algeria secularist forces prevented the Islamists to govern and then they proceeded to slaughter them.

No compromise

Any pious Western invitation to stop the violence and open a dialogue so that a fair compromise involving all the parties may be reached is silly. The Muslim Brotherhood zealots do not negotiate. They want to make a point, even if this will result in their own demise. And objectively the Muslim Brotherhood has residual strength and some genuine popular support. This support provides comfort and encouragement to keep resisting. Besides,the Brotherhood feels that its cause is righteous because Morsi was after all the elected President. They have a point when they ask for the recreation of the legitimate constitutional order destroyed by the military coup.

If this is indeed the context, here is the very unpleasant scenario now unfolding. Until the Brotherhood gives up the fight, we can expect a lot more bloodshed. This is not a battle for political power, a battle in which truces and compromises can be negotiated. This is a fight to affirm principles. This is a fight to the end.

America looks bad

All this places America and the West in an extremely uncomfortable situation. Washington did not realize how deeply divided Egypt is when it sided with the generals in the hope that, with Morsi out, there would be a quick and credible transition to a new and improved democracy, with a secular constitution and everybody behaving. No such thing is forthcoming.

Fight to the end

Unless the Brotherhood surrenders, the military will have to be thorough; and that means most brutal. Sadly, many more people will be killed. Washington and Europe cannot be on the side of the killers, whatever the motivations behind a slaughter. So, expect a hasty withdrawal of American support, even though the public relations damage has already been done.

Sadly, this is war. And a state of war ends only when one side gives up and admits defeat. Rational people will do this sooner. Religious zealots usually want to fight till the end.

 




Mexico Will Amend Its Constitution, Allowing Foreign Companies To Invest In Its Energy Sector

By Paolo von Schirach

August 13, 2013

WASHINGTON – If I were Vladimir Putin or Ali al-Naimi, Saudi Minister of Petroleum, I would be really worried about the latest news from Mexico. President Enrique Pena Nieto is pushing forward an amendment to the Mexican Constitution that would eliminate or at least curtail existing barriers to foreign investments in the country’s oil and gas sectors. 75 years ago President Lazaro Cardenas nationalized the Mexican oil industry. The sector became  a monopoly managed by Pemex, a state-owned corporation.

Amending the Mexican Constitution

But now the Mexican leaders realize that Pemex is very inefficient. Its technologies are not up to date. However, given the constitutional barriers that prevent outside investments, it is almost impossible to find good ways to involve foreign firms in the energy sector. The push to amend the Constitution comes from the knowledge that Mexico has huge untapped resources, both conventional oil and gas as well as unconventional (mostly shale) gas. Mexico’s official reserves are 115 bln barrels of oil equivalent, comparable to Kuwait. But the figure could be a lot higher.

US energy independence

It is obvious that with the active participation of major American, European and other energy companies, Mexico could start developing all these reserves. Beyond the economic benefits for Mexico, from a geo-political stand point The United States of America would have the opportunity to get a larger share of its oil imports from Mexico. Combined with increased domestic production and greater reliance on Canadian oil, the US would reach “Hemispheric Energy Independence” even sooner than expected.

And this means no more OPEC oil for America.

More gas

Furthermore, Mexico has the fourth largest shale gas deposits in the world. As soon as this gas becomes available, this would further increase world supply. As America has plenty of its own shale gas, most the Mexican gas will be turned into LNG and exported to energy starved Europe, China and Japan.

Russia and OPEC will suffer

This is why Russia and Saudi Arabia should be worried. Their only valuable resource is likely to become less valuable on account of increased global supply. Look, even in a best case scenario it will take a while for Mexico to amend the Constitution and then enact the legislation and all the necessary regulations that will eventually enable foreign energy companies to participate in the exploitation of its vast energy resources. But this is going to happen, for sure.

A new energy map

As a result, in just a few years the world energy map will look entirely different. North America will become a net exporter of shale gas. Thanks to increased domestic output and more supplies from Canada and Mexico the US will get all the oil it needs from North America. As a result, Washington will no longer be obsessed with the danger of oil supplies disruptions originating in the Middle East. Consequently the responsibility for ensuring the unhindered flow of oil through the Strait of Hormuz will shift from America to China and Japan –the major oil importers that rely on those supplies.

But, more than anything else, Russia and Saudi Arabia, countries that today make money because of high oil prices, will see their revenue flow go down and their influence diminished.