Update: July, 2009
The US GDP decreased in the first quarter of 2009
by an annualized 5.7% following the 6.3% in the 4th
quarter of 2008 after a 3rd quarter decrease of
0.5%. Unemployment in June rose slightly to 9.5%
with another 467,000 jobs lost during the month. These
numbers underline what most Americans have experienced for the
past year, along with the loss of over 3 million jobs and more
cuts announced daily in 2009. States facing their new
fiscal year are wrestling with budget shortfalls with
California's at $24 billion, while Illinois and Arizona have
much smaller deficits.
President Obama's $787 billion Economic Recovery
and Reinvestment plan is now underway. Deeply entrenched
ideologies and special-interest politics are battling over the
2010 budget of $3.6 trillion. Cutting the Pentagon's weapons
procurement and subsidies for big farmers would boost
investments in education, health care, efficiency and
renewable energy. All this shows that the great transition
from the fossil-fueled, unsustainable Industrial Era to the
green economy of the Solar Age (see my The Politics of the
Solar Age, 1981) is now well underway. Everyone sees the
government printing presses printing money on TV while the
$350 billion given to banks by former Treasury Secretary Henry
Paulson and the new incumbent Timothy Geithner has apparently
been wasted. The uproar over AIG bonuses has made executive
pay an international issue for the G-20, along with tighter
regulation of all financial markets. The United Nations
General Assembly Meeting in New York, June 24-26th, debated
the global financial crisis and adopted many of the
recommendations of its Commission of Experts, chaired by
Joseph Stiglitz. This new group of 192 nations critiqued
the G-20, the G-7 and the G-8, calling for a new global
reserve currency, much deeper reforms than proposed by the
Obama Administration, as well as the need for a tax on all
global financial transactions (www.un.org/ga). Widespread peaceful
demonstrations in many cities focused on the G-20's summit in
London, April 2nd. See my analysis of the G-20
outcome at
RESPONSE TO G-20 SUMMIT www.EthicalMarkets.com. No wonder
US voters are furious, demanding to know why their schools
and other vital services are being cut and why small banks,
credit unions and homeowners were not included in the
bailout. Meanwhile, local initiatives to restore homegrown
economies are flourishing (see my "Democratizing Finance" at
www.ethicalmarkets.com).
Trickle down economics of bailing out Wall Street
is colliding with the bottom-up demands of middle class voters
for fairness, accountability and transparency. It's about
time for this debate and the deeper debate about whether money
is more important than the other forms of wealth that GDP and
Wall Street doesn't count: human "capital," knowledge,
ecological assets and productivity. President Obama
campaigned for recognition of these uncounted forms of wealth
and of the higher values of Americans: trust in each other and
our institutions and fairness in rewarding hard work in an
economy designed to include opportunities for a better future
for all. Many new investors see these
opportunities, as I describe in "The
New Financiers."
Now for the good news. The confluence of the
financial meltdown and increasing threats to climate stability
are leading to much creativity by these new financiers in
devising new ways of investing in the needed global transition
to a low carbon "re-industrialization." The
weakness of the Waxman-Markey energy bill passed in the US Congress
by 7 votes focused the critiques of its reliance on Wall Street-centric cap
and trade markets which have so far failed to reduce carbon
emissions. The new financiers spate of proposals for a
"Marshall Plan" type plan to finance a doubling of production
of carbon-free, efficiency and renewable energy and smart
infrastructure every year for the next 10 years are welcome
indeed (see International Climate Bonds Proposals – Draft from
the Network for Sustainable Financial Markets at
www.ethicalmarkets.com, courtesy of Sean Kidney and
Climate Risk Pty of Australia). Their forthcoming report,
Climate Solutions II: Low Carbon Re-Industrialization was
also supported by the World Wildlife Fund (WWF). This rapid
deployment of solar, wind, geothermal, ocean power sources as
well as retro fitting for maximum energy efficiency is
projected to cost $10 trillion. This can be covered by
issuance of several classes of new assets: long-bonds, zero
coupon bonds, with hedging against the main risk: governments
back-sliding on their greenhouse gas emissions targets under
the Kyoto Protocol. While this seems like a large sum, it is
less than 10% of the $120 trillion in pension funds and other
institutional portfolios. Since pension funds and other
government bonds focus on long maturities, they are ideally
suited to finance climate prosperity bonds out of the savings
they will produce: from energy efficiency and in reducing the
cost of renewable energy (with free fuel sources from the
Earth) over the costs of fossil fuels (projected to keep
slowly rising).
Business leaders met in
Copenhagen in May 2009 to address climate risks in their
companies fossil-fueled processes and agreed that the
opportunities in shifting to a green, solar, wind, geothermal,
ocean and energy-efficient global economy were enormous. The
700 business leaders participating in the meeting declared
that immediate action would be cheaper than any further
delays. Thus, the outlook looks brighter for a new global
climate treaty to replace Kyoto at the UN Conference in
Climate in
Copenhagen
in December 2009.
The key will be to keep pressure on governments to
stop back-sliding and pandering to the fossil-fueled industry
sectors with toothless cap and trading which will only make
Wall Street players richer. Downsizing bloated financial
sectors will be imperative. Those on Wall Street and in
London grew to 25% of U.S. and U.K. GDP. An efficient
financial sector should be less than 10% of a country's GDP.
So today's dismal GDP figures force us to
re-examine our rearview-mirror focus on the costly past and
reformulate statistics themselves which only measure money
transactions. They overlook the savings in shifting to the new
green economy and the vast riches in our society from
energy-efficiency while ignoring the almost 50% of all
productive work that is unpaid and therefore omitted from GDP.
From caring for our homes, children, the elderly and sick and
volunteering in our communities to exchanging and bartering
goods and services, this vast unpaid "love economy" is
thriving and increasingly electronically traded on e-Bay, Craigslist, Freecycle, time-banking and hundreds of other
websites, flea markets and on radio programs and via cell
phones.
President Obama's team understand the transition to
the green economy and this savvy internet-based team sees all
the new possibilities in this explosion of internet and
community trading such as Making Change Without Money, the
title of a new series of papers by Gwendolyn Hallsmith and
Edgar Cahn, both pioneer community organizers. I have been
pointing to all these alternatives to government-printed money
as well as all the local currencies helping to clear local
markets: e.g., the Schumacher Society's Berkshares in
Massachusetts
and time-based currencies based on Paul Glover's Ithaca Hours
(www.smallisbeautiful.com).
The shocking truth that a badly designed,
irresponsible, poorly regulated financial system can disrupt
the lives of millions is now opening our eyes to practical
alternatives to re-knit our communities – by-passing Wall
Street and bankers' money games. A bill to reform the Federal
Reserve system is now before Congress which would curb the
power of banks to create our money and restore this to our
government (see
www.monetary.org). A chorus of Freedom of Information
demands forced the Fed to finally describe where all the
bailout money for the big banks and AIG was disbursed.
Billions went to pay off the bets at 100%, i.e., credit
default swaps held by other Wall Street firms as well as
foreign banks. These kinds of credit derivatives should be
banned. $683 trillion of these (Bank for International
Settlements December 2008) overhang a world economy whose GDP
is only $62 trillion! (IMF October 2008). The only issue is
who should take the hit in writing them off. So far, the
political clout of the financial sectors have forced the bill
on to taxpayers. At last, the SEC is promulgating reforms on
short-selling and bringing credit derivatives under regulation
on new clearing houses.
And, at last, all the efforts over the past 30
years to correct our money-based GDP, including indicators of
education, health and environment and subtract costs of
pollution and resource-depletion are being publicly
debated. When we add in that 50% of unpaid work and accounts
for our human, social and ecological assets, we will take
heart in our real wealth and community riches. The European
Parliament's lead in its Beyond GDP debate in 2007 set the
stage, and a new commission headed by economist Joseph
Stiglitz and Amartya Sen reported in April on how to make
these corrections to GDP so that our national scorecards of
progress can steer us toward restoring health to the real
economies of
Main Street.
The European Commission's conference
Beyond GDP in the Parliament
November 19-20, 2007,
was attended by 700 experts and parliamentarians. EU
President Barosso and the President of the Parliament both
endorsed the goal to integrate social environmental
statistics. A survey in ten countries by GlobeScan found
large majorities in all favoring this broadening of GDP (www.EthicalMarkets.com
and
www.beyond.gdp.eu). I am honored to serve as a member of
the Advisory Board. The U.S. Senate held hearings in the
Commerce Committee on "Re-thinking GDP as a Measure of
National Strength" on March 12, 2008 -- with input from me on our
Indicators, submitted for the record. The "BEYOND GDP" issue
is now promoted in many countries by the SIMPOL network which
fosters simultaneous policy adoption by politicians of such
proposals for global sustainability
(www.simpol.org.uk). Even The Economist
editorialized in "Grossly Distorted Picture" (March 13, 2008)
that GDP growth was not the best measure of national progress
(see my editorials at
www.HazelHenderson.com). China's President Hu Jintao
called for continued effort on it "Green GDP" in spite of
resistance by local officials to push traditional GDP-growth
(China Daily,
July 17, 2007).
China
devised its own changes to GDP accounting to subtract
pollution and resource depletion (The Economist, "Greening of
China," Oct 22, 2005, p. 43). This "Green GDP" deducted 3% of
environmental costs of the current GNP-growth economic model
according to a Task Force Interim Report (2007). However,
local officials still judged by GDP-growth managed to suspend
the Green GDP. As China's pollution is now visible on TV
worldwide, from the Olympic Games, we believe the Green GDP
will be reinstated. The British government report on the
impacts of climate change released October 30, 2006 caused worldwide reaction. The report
by Sir Nicholas Stern, the former chief economist of the World
Bank, states that stabilizing CO2 emissions at 550 parts per
million could cost one percent of global GDP growth and would
prevent a likely global depression and economic losses of from
5-20% of global GDP (Financial Times, Oct 20, 2006).
China is moving rapidly to create its own green economy and is
already the world's largest producer of solar panels, a leader
in wind power and has the first plug-in hybrid car on sale now
which will reach the US market in 2010 costing $22,000.
Meanwhile, President Obama faces huge challenges
including an unemployment rate of 9.4% and another 345,000
jobs lost in May 2009. Obama's $787 billion stimulus to
create or save 3 million jobs will take the country toward
less dependence on foreign oil. Change can come faster from
reform and rechanneling of global finance toward local credit
unions and businesses needed now to grow the greener economy.
The Bretton Woods II conference in November (see my "More
Advice for Summiteers on Reforming the Global Casino" at
www.EthicalMarkets.com), produced little progress, while
monetary authorities continue to throw trillions into their
unrepentant banks. The US Treasury's "stress tests" still
allowed many "too big to fail" banks to continue rather than
be placed in FDIC receiverships then broken up and pieces sold
off. The Geithner public-private investment partnership to
buy banks' toxic assets provides huge subsidies to hedge funds
and private equity firms while offering little upside for the
additional $75-100 billion of taxpayer funds. Geithner, Larry
Summers and Paul Volcker still cannot see beyond the obsolete
economics textbooks or grasp that economies need to be "de-financialized."
Inflation is no longer the immediate worry, as
personal consumption is falling. Long-term, inflation is
likely to rise following the almost $10 trillion of various
government bailouts, Fed easing, loans, etc. The G-20 leaders
of
Brazil, Russia, India and China are offering proposals for a
new global reserve currency: either a "basket" of major
currencies or IM F Special Drawing Rights (SDRs) to be
expanded. China, with over $1 trillion of US bonds, is
nervous about inflation of US dollars.
Many government rule changes are being enacted with
no cost to taxpayers, including the FASB's new guidance rules
allowing "significant judgment" on "fair value" modification
of the "mark to market" rules, while providing greater
transparency. Bringing back the uptick rule and regulating
short-selling are under review as well as naked shorting and
other such criminal activities. The G-20 could agree to less
a than 1% tax on the global currency trading of $4 trillion
daily (mostly speculation) by installing computer systems like
FXTRS (see paper at
www.hazelhenderson.com). Cleaning
up Wall Street is necessary to restore confidence and the
financial sector needs downsizing from its bloated 20% of US
GDP. An efficient financial sector should comprise less than
10% of GDP. Unrealistic pay and bonuses will also need
cutting.
Longer-term, Congress can, for a start:
-
Focus the balance of the TARP's
$350 billion on local lending through credit unions.
Mortgages now "under water" should require lenders to take
at least 50% of the "haircuts", similar to the Home Owners
Loan Corporation (HOLC) from the 1930s.
-
Re-instate the very small tax on
stock transactions of .25% as in the Securities Turnover
Excise Tax enacted in 1914 and repealed in 1966. Many other
countries in
Europe and
Asia
levy such a tax, which curbs speculation and would bring in
the USA some $150 billion per year.
-
Extend further Production Tax
Credits for renewable energy and add $150 billion to develop
solar, wind, geothermal and upgrade our electric grid.
Reduce the over $200 billion of annual subsidies to fossil
fuels and nuclear power -- so as to create a level playing
field.
-
Invest in restoring and
maintaining US infrastructure.
-
Re-instate federal revenue sharing
with states.
-
Extend unemployment insurance to
laid off employees.
Many of these proposals are now included in the
Economic Stabilization and Reinvestment Plan for $787 billion.
Oil prices at over $60 are still less than half of
the high of $145 per barrel. Much of the drop is due to
reduced demand due to the now global recession. Yet oil may
end up at $70 a barrel since this is the average cost of
production. Constant media coverage, million-strong protest
groups like those at
www.StopOilSpeculation.com, and investigations by the
Commodity Futures Trading Commission (CFTC) and the US Senate
have scared off pension funds and college endowments who lost
heavily on their oil bets! Thus, many speculators began
unwinding their long positions and this, plus reduced demand,
brought the price down. At around $60 per barrel oil is still
priced below its production costs. We agree with the "peak
oil" researchers that supply is not keeping pace with demand.
Yet speculation was another factor, denied by most financial
players (see my "A Closer Look at Oil Speculators"), as was
the flight from the US dollar, bonds and equities into
commodity index funds as a hedge against inflation (see also
"New Games in the Global Casino", Inter Press Service, June
2008 and at
www.EthicalMarkets.com). The financial crisis mentality in
Congress, Wall Street and the financial media has led to
unprecedented volatility. Useful checks on government
statistics: GDP, CPI, Unemployment and M-3 are available at
www.shadowstats.com compiled by economist John Williams
who tracks data revisions that overstate the performance of
the
US economy. The meltdown in the subprime mortgage market has
already forced central banks in
Europe
to match the Fed and inject billions of liquidity.
The unemployment rate, now at 9.4%, and still
excludes those "discouraged" while including increases in
part-time jobs held by those needing full-time work, from a
recent low in April 2006 of 3.9 million to nearly double this
in November 2008 of 7.3 million workers. The Fed's easing to
0.25% rates, which are effectively zero, leaves fixed-income
investors with few choices. All these bouncing numbers and
uncertainty about Congress and the election continue to spook
markets and brought widespread acknowledgements of recession.
The Fed can no longer oblige Wall Street with more interest
rate cuts. Chairman Bernanke no doubt realizes his own role
in pushing up oil and food prices and hurting the US dollar.
The result is that commodities became a new asset class, which
then crashed. Traders piled into commodities with 16 to 1
leverage due to low margin requirements. The quickest, best
way to curb the pure speculators is to raise margin
requirements to force traders to put up their own money. The
CFTC closed the "ENRON loophole" enacted in 2000 which
shielded energy trading from oversight, and is addressing the
"London
loophole" where traders move to the Intercontinental Exchange
(ICE). Subsidies for ethanol and mandates in legislation
should also be repealed.
The Fed's job with so many new tasks is now harder
-- trying to steer between recession and inflation. Interest
rates are actually negative when corrected for inflation. The
role of the Fed, a private institution owned by its 12
regions' banks, is now coming under scrutiny by Bloomberg, Fox
Business News and other media for its secrecy. Many are
focusing on state-owned banks like the Bank of North Dakota
which provides low-cost credit directly to the state's
infrastructure, education and services, as well as businesses
(see "Monetize
This!" by Ellen Brown at www.ethicalmarkets.com). The
middle class is hurting from high prices, job losses and
foreclosures. A CNN/Opinion Research Poll back in
March 14th-16th, 2008 found 74% of Americans believed
the economy was already in recession. The Census Bureau's
report
August 29, 2007
that the median household income in 2006 was $1000 less than
in 2000. In 2006, 36.5 million Americans were living in
poverty, 5 million more than six years ago. The New York
Times editorialized "in the last 4 years the spoils of the
nation's economic growth have flowed almost exclusively to the
wealthy" (August 29, 2007).
Meanwhile, food prices worldwide are causing hunger and
malnutrition for millions. One sector benefitting is the
growing barter economy says Bob Meyer, publisher of
Barter News.
Growth slowed in
Europe,
Asia, and Latin America indicating the spread of Wall Street's
woes to the world's economy. Many international observers
noted that we are seeing the end of the
USA's
single superpower status and the rise of a new multi-polar
world. This would, on balance, be good news for the USA,
which would no longer need to be the world's only policeman.
Most policy-makers now talk of the need to return to
multi-lateral diplomacy to address global problems: from
climate change to health and human security which no country
can solve alone.
A revealing look at these issues is A Demon of
Our Own Design (2007) by former hedge fund manager Richard
Bookstaber who shows how financial engineering of ever-more
exotic swaps, derivatives, options, etc are themselves adding
to market instabilities worldwide. Another market institution,
the Depository Trust and Clearing Corporation (DTCC) has a
backlog in handling the huge volume of derivatives trading.
Much of the volatility on
Wall St.
is due to the failure of these exotic "quant" models and the
need for hedge fund managers to sell assets to cover margin
calls from their bankers. Yet another challenge to Wall
Street's conventional wisdom is the best-seller, The Black
Swan, by veteran options trader and mathematician Nassim
Nicholas Taleb, who critiques risk assessment models used by
investors and banks. I made similar critiques of such models
as Value At Risk (VAR) used so widely that unanticipated
events could lead to system-wide crises.
Inflation must keep the Fed on alert longer term,
despite new fears that collapsing demand and lower oil prices
may mean deflation. The core rate (excluding food and energy)
is now suspect, prompting a scathing editorial in The
Economist calling this use of the core index "highly
misleading" since most people eat and drive! (June 23, 2007,
p.16) We have made this same point for many years. Meanwhile,
behind all the headline numbers, average wages for
non-supervisory workers remained stagnant, house prices fell,
and many deeper structural problems in the USA went
unaddressed. The 2008 $600 rebate checks produced little
stimulus, yet Republicans are calling for more, as well as tax
cuts for business, in the new $787 billion plan, rather than
repair USA infrastructure and provide green jobs. The growing
green economy worldwide is overlooked by Wall Street's
obsolete asset-allocation models dominated by the fossil
fueled sectors (see my The Sustainability Sector at
www.seekingalpha.com). The growing gap between rich and
less affluent citizens is worrying Republicans - but their
concerns offered the familiar remedy: more GNP-based economic
growth. Economist Joseph Stiglitz now estimates the Iraq
occupation will total $3 trillion in his The Three Trillion
Dollar War (2008).
Good news is the accelerating shift to renewable
energy with leadership at municipal and state levels, with
over 600 cities now adopting "green" energy goals. Congress
finally extended production tax credits for renewable energy
(still only 1% of the subsidies to fossil fuels and nuclear
power). Venture capital continues to cascade into green
technology and energy companies, with no less than 14 new
stock indexes to track their progress as I cover in Ethical
Markets: Growing the Green Economy from
Chelsea Green Publishing (winner of the Best Business Book
2007 AXIOM Award) and in the new TV special, Growing the
Green Economy, airing on PBS stations in 2007, reaching
49.5% of all US TV households. The FY 2009 budget includes a
projected deficit of $1.2 trillion due to all the 2008
bailouts. The forecasts for GDP growth in 2009 are now
negative. GDP revisions reported by the Commerce Department's
Bureau of Economic Analysis and job creation revisions by the
Bureau of Labor Statistics are now regularly expected. Such
large revisions are unsettling to financial markets. Yet,
since GDP is not a good indicator of overall progress -- it
should be de-emphasized or broadened to include more measures
of sustainability and quality of life, as outlined in my
invited commentary on Marketplace
(National Public Radio, July 28, 2006).
The dollar is still seen as a safe haven as
overseas investors deal with increased currency risk. But US
deficits, at over 12% of GDP will continue to worry the
world's investors in US Treasury Bills.
Brazil's
Central Bank announced in 2007 that it intended to diversify
its $109 billion away from US dollars following similar
decisions by many other countries. In 2009, one of its credit
rating agencies, SR, downgraded
US
debt from AAA to AA. Moodys downgraded Britain's debt from
AAA to AA, raising fears for US debt. Iran's central bank also
announced that it would sell more of its oil in euros. Global
financial markets now exert greater influence over Fed
Chairman Ben Bernanke's interest rate decisions, which are
usually based on domestic U.S. conditions.
U.S.
interest rates may now be tied as much to global interest
rates as to U.S. inflation fears. Thus the Fed is on a
tightrope: more rate cuts to please Wall Street will
eventually weaken the dollar; rate increases to fight
inflation may trigger recession. Many economists, including
Bernanke, used to claim that continuing low interest rates
were due to a global "glut of savings," new financial
instruments and globalization. We saw this more as a global
bubble in the world's money supply and excess credit due to
increasing use of leverage and exotic derivatives in the
financial markets and were proved correct. We should also
remember that the Fed has several other ways to combat
inflation -- ways less harmful to consumers than raising
interest rates, which raises costs of house and car loans and
many other costs throughout the economy. The Fed has the power
to increase margin requirements on stock prices, to raise
banks' reserve requirements -- both can cool speculation -- as
well as foster competition from small banks and credit unions
(see Stephen Zarlenga's commentary from the American Monetary
Institute for more ideas at
www.ethicalmarkets.com).
All the revisions mentioned earlier call into
question such headline numbers, which tend to downplay
continuing
U.S. deficits and household debt and the faltering housing
sector. Business Week (June 18, 2007)
accused the US Bureau of Economic Analysis (BEA) of
downplaying the real costs of off-shoring
US
production, due to the Bureau of Labor Statistics (BLS)
failing to distinguish how much of corporations' "domestic
production" is actually produced by their outside-the-US
suppliers' plants. Business Week claims that this may
have created about $66 billion of overstated "phantom" GDP
gains since 2003. A more upbeat report from Business Week,
"Unmasking the Economy" pointed out a statistical anomaly we
have emphasized since the inception of the Calvert-Henderson
Indicators in 2000. Our national accounts (GDP) still book
education and training expenditures as "costs" on the
consumption side of the ledger instead of vital investments
in our nation's "human" capital. We are happy that Business
Week now agrees with us that "Tuition ... is not like an
ice cream cone, " as author Michael Mandel puts it (Business
Week,
Feb 13, 2006). However --
important as this revision is and however much it would lower
the deficit and increase personal savings rates -- we
shouldn't start breaking out the champagne without a sober
reassessment of many other government statistics. (See
The New Politics of Productivity Measures below.)
David M. Walker, former
US Comptroller General now heads up a $1 billion foundation
set up by former Republican Commerce Secretary Peter Peterson.
Walker called for a "new set of key national environmental and
social indicators such as life expectancy, infant
mortality,... to help strategic planning, enhance performance
and accountability reporting." We say "AMEN!" Walker points
out correctly that according to the OECD's key social,
environmental and economic indicators, the USA ranks 16th out
of 28 countries. However, the new movie and book I.O.U.S.A.
exaggerates fears about entitlements while downplaying tax
cuts for the top brackets and the cost of the wars in Iraq and
on "terror".
The National Urban League's "State of Black America
2006" uses an Equality Index which measures equality
gaps between blacks and whites in five areas: economic
(income, unemployment, home and business ownership, median net
worth, and poverty rates); education; health and quality of
life; social justice; and civic engagement. The Equality Index
remained unchanged from 2005 in spite of the rebounding of the
U.S. economy. The economic status of African Americans is 56%
that of White Americans and their median net worth averages
$6,166 -- one tenth that of whites. Blacks own 50% of their
homes versus over 70% for whites. The one bright spot is the
growth of black-owned businesses. The full report and summary
are available at
www.nul.org. The mis-management of relief efforts to
devastated Gulf Coast communities has been a focus of
worldwide media attention as was the 2008 hurricane "Gustav",
punishing New Orleans again. The
U.S. deficit is still unsustainable, requiring foreign
investors to come up with some $80 billion per month into next
year. The U.S. foreign debt now stands at some $2.5 trillion.
China's Wen Jaibao expressed worry about US debt held in
China's
reserves, and they have shifted their investments to US
Treasuries with much shorter maturities.
According to the Globalization Index jointly
calculated by Foreign Policy and accounting firm A.T.
Kearney, the
USA -- ranked seventh after Singapore, Hong Kong, The Netherlands,
Ireland, Denmark and Switzerland --is still weak on its
indicator of Political Engagement (international treaty -
participation). The report is on line at
www.foreignpolicy.com. Increasing global interlinkages
continue to accelerate change globally, regionally, locally
and in our personal lives.
The rapid changes unleashed by globalization affect
not only the
U.S.
economy and domestic conditions but also those of all
countries. They range from global climate change, poverty,
epidemics, terrorist attacks, trade policy and outsourcing to
oil prices, deficits, developing country debt-relief and the
sustainability of the global economy. Deep divisions in the
U.S. public remain. A flashpoint, second only to the economy
and Iraq, is the failing
U.S.
healthcare system, as employers dropped another 4.9 million
Americans from health insurance plans. Many U.S. companies
claim they can no longer compete globally, while some are
calling for a single-payer national insurance system in
coalitions with labor unions. The number of uninsured children
increased between 2004 and 2005 from 7.9 million to 8.3
million even as President Obama signed the SCHIP bill. The new
Massachusetts plan, echoed by Senator Barack Obama requires
every person to buy health insurance or face a fine! This may
simply feed our vast dysfunctional medical-industrial complex,
already costing twice what other advanced countries pay --
with little better outcomes for patients. President Obama's
Health Summit,
March 5, 2009,
and the April hearings of Senator Baucus brought all the
stakeholders together – the only way the
US
health crisis can be addressed. The World Health Organization
released the report of its Commission on the Social
Determinants of Health on August 28th, finding that
"inequities are killing people on a grand scale". This
high-level Commission noted that DGP-growth did not assure
better health outcomes citing the USA's largest expenditures
but inequitable distribution of health care (report at
www.globalmarkets.com or from WHO, Geneva.)
Estimations of the impacts of all these concurrent
changes and crises vary widely, as do the many forecasts and
policy proposals to address them. Underlying these differences
are competing paradigms: the fading but-still dominant
Newtonian, Cartesian world view that the planet is like a
giant machine in a clockwork-like universe, versus the
emerging paradigm based on quantum physics, biology and
ecology that all is interconnected and that policies require
an interdisciplinary systems approach. Even the scientists of
the Nobel Prize Committee are debating whether the prize in
economics is legitimate; questioning that economics is even a
science. The G8 Summit's pledges to cancel the debt of 18
heavily indebted countries and double aid to
Africa by 2010 are welcome. But, the civic movements worldwide
demanding that leaders work to "Make Poverty History" say
these G8 promises have fallen short.
Global power shifts continue: in the proposals to
expand the United Nations Security Council; the new 27-member
European Union with 10 more countries in Eastern Europe; the
rise of China, the world's manufacturing giant as a major
importer and locomotive of the global economy; the rise of
democratic populism in Latin America, led by Brazil, toward
integration and new approaches to sustainable development. The
World Trade Organization's collapse at its
Singapore
meeting in 2007 and its
Doha
round in
Geneva
in July 2008, failed to meet the Group of 20 developing
nations' demands that the U.S. and Europe cut their
agricultural subsidies and open their markets. The
International Monetary Fund (IMF) may get a new mandate from
the G-20 after most countries in Latin America and
Asia
have repaid their IMF loans - saving billions in interest
payments, the source of the IMF's income. The continuing
tragedies of HIV/AIDS and poverty still haunt the future of
many African countries. Many commentators now question whether
the WTO, IMF, and G8 are still relevant. G8 member countries
are losing economic power to the countries of the G20.
However, a broad consensus still exists for the G-192 to
address the promises all these UN member countries made in
2000 in the Millennium Development Goals to reduce poverty,
expand education, access to health and other human goals.
The Globescan Global Stakeholder Panel Survey of
1,000-plus global leaders in business, government,
multi-lateral agencies, and civic, non-governmental
organizations (NGOs) found 89% agreeing on the importance of
achieving the UN Millennium Development Goals and large
majorities agreeing that closing the rich-poor gap was more
important than increasing economic growth alone. Over 85%
agreed that economic models themselves were in need of an
overhaul.
Globescan's survey of public opinion in 10 countries for
the European Commission
Beyond GDP conference in November 2007 is at
www.EthicalMarkets.com together with their recent survey
on Climate Change.
Secretary of State Hillary Rodham Clinton and
President Obama have stressed the importance of the
international community and multi-lateral institutions and the
other two legs of national security: diplomacy and
development. The confrontation with
Iran is a case in point, as the startling new Intelligence
Estimate revealed that in fact,
Iran
had ceased its program of nuclear weapons development in 2003.
While the USA, as the world's military superpower, was the
agent or primary actor in many of these global changes, there
are now clearly many other forces at work. For example, major
shifts in the world's global unregulated currency markets
still create potential for new financial crises. Today, the
weapon of choice for many countries is currencies, and many
countries are following the likes of Norway, Singapore, and
China with sovereign investment funds, which use their
surpluses to invest in real assets, companies, natural
resources, etc rather than in US treasuries. These sovereign
wealth funds have bailed out many of Wall Street's reckless
investment banks, Citibank and many other firms implicated in
the credit crisis. New research invalidates the traditional
"efficient market" model of currency exchange and prices,
showing how large market-makers, such as Citibank, enjoy prior
information on currency movements in their order flows (The
Economist, "What Economists Can Learn from Currency Trades,"
Economic Focus, Nov. 26, 2005, p. 92).
Economic theory holds that a decline in the dollar
would increase
U.S.
exports. So far the increase has gone into reverse, with
exports decreasing 19.8% in Q4 of 2008, while imports cost
more. Imports reduction has reduced the US trade deficit from
its record levels. Business Week (Dec 6, 2004) was the first to question economists'
trade model, based on Ricardo's concept of "comparative
advantage" - now over 200 years out of date. The failure of
the Doha Round in
Geneva of the WTO illustrates the need to overhaul trade
theory. In "Shaking Up Trade Theory" (pp. 116-120) Business
Week, in views similar to our own, dispels many myths in
politicians' scape-goating of India and China. China's
currency hovering at 7 renminbi to the U.S. dollar is still
undervalued. China's central bank has addressed this by
pegging its currency to a basket of the world's strong
currencies. Over the past three years, based on purchasing
power parity (PPP),
China
has accounted for almost one third of global GDP growth
vis-à-vis the USA's 13%.
China's
dollar reserves now top those of Japan at $1.3 trillion.
Many economists and traders expect the dollar's
decline to resume, as
U.S.
domestic and trade deficits continue. The euro has now become
an alternative to the dollar as a global reserve currency in
spite of the "no" votes on the European Constitution and the
usual bickering over its budget (some 35% of world currency
reserves and trade are now conducted in euros). What are
global investors and currency traders saying about the U.S.
dollar and the fundamentals of the U.S. economy? Some $4
trillion in currencies change hands every day -- 90% of which
is speculation. Hedge funds losses are due to bad bets on oil
and other speculative plays, with many closing down. They
will receive new scrutiny as more pension funds pile into such
highly-leveraged vehicles in hopes of higher returns. Hedge
funds peaked at 8,000 worldwide, but still account for between
one-third and one-half of all trading on the
New York
and London stock markets (The Economist, July 1, 2006).
Views on the future prospects for the
U.S. economy differ widely depending on competing economic
theories. My view is that the global economy has entered the
transition I predicted in my The Politics of the Solar Age
(1981) and that all countries are restructuring toward more
efficient renewable-resource based, information-rich economies
of the new Solar Age. Investment diversification strategies
and relative interest rates have not adjusted to this
transition and its effects on the different interests of
foreign investors versus those in the U.S. Fears over
dependence on the
Middle East
and effects on economic growth and inflation have brought
energy policy to the fore. Oil production costs average $70
per barrel so prices cannot go much lower for long. Consumers
are responding -- driving less, using mass transit where
available, biking and buying more efficient cars. Misguided
federal subsidies to ethanol have helped trigger the worldwide
food crisis together with speculators in agricultural
commodities and oil. We have been warning that the buzz about
ethanol and other biofuels should include caution about using
energy and water to grow corn and soybeans to fuel wasteful
cars -- rather than feed hungry people. Already corn, wheat,
and rice prices have doubled, hurting livestock raisers.
Brazil's use of sugarcane wastes and other biofuels from
wastes are more efficient and equitable. Yet the US still has
a 54 cents a gallon tariff on importing Brazilian ethanol. It
is now clear that future cars will run on electricity and not
liquid fuels and the electricity can come from wind and solar
thermal plants using desert lands unfit for agriculture --
without taxing water sources.
President Obama, if not Congress, will respond to
Britain's call for a new climate treaty to curb CO2 buildup,
and Europe's new pledge to reduce greenhouse gas emissions by
20% and shift 20% to renewable energy by 2020. Even after the
dire warnings on global warming from the February, 2008
meeting of the International Panel on Climate Change in Paris
and the December, 2007 meeting in
Bali,
the US position on climate change still lags the G-8 leaders.
The new Obama energy plan shifts the Bush focus on nuclear and
fossil fuels and increasing supply. Alternative sources,
energy conservation, fuel efficient cars, and new technologies
are making strides with costs of wind now compatible with
coal. Congress' 2008 pork-laden energy bill favored fossil
fuels over alternative technologies and greater efficiency. US
subsidies for nuclear power, beyond the Price-Anderson blanket
insurance by taxpayers, was questioned by The Economist's
(July 7, 2005) closer examination of all the subsidies to the
nuclear industry. The new post-Kyoto protocol on climate
change will be hammered out in
Copenhagen
in December and is bullish for all clean, renewable new
technologies and venture capital is now flowing into these new
energy options. Carbon trading markets now centered in
London
may not grow as hoped by Wall Street into a $1 trillion global
market. Whether or not the USA eventually decides to play a
positive role in Copenhagen, California and New England states have their own energy
transitions underway. Former Vice-President Nobel Laureate Al
Gore's Oscar-winning movie An Inconvenient Truth became
the fourth-highest grossing documentary ever. Gore's July
2008 challenge to change the
US
energy system to clean renewables in 10 years, similar to that
of oil-man T. Boone Pickens, helped push Congress.
OPEC accounts for a larger percentage of the
U.S. current account deficit than China and Japan combined,
but has taken current losses, since it prices its oil in U.S.
dollars, leading to continued speculation that Iran and other
OPEC members may re-denominate their oil in a new oil-based
currency. This would raise U.S. gasoline prices up to $5 a
gallon -- closer to the world price -- because the U.S. would
have to buy euros to buy OPEC oil. I have warned of this
scenario since 2002, as another reason to accelerate energy
conservation, efficiency, and alternative energy sources.
Largest buyers of U.S. treasuries have been Japan (to keep the
yen from appreciating as their economy revives) and China (to
recycle its surplus dollar reserves). The USA, still the
world's largest debtor, must encourage the G-20 Summit to
reform the IMF to democratize so that the largest creditors,
OPEC, China and Japan have larger votes.
US politicians of both parties are beginning to
understand the expanding role of
China, now the world's second largest economy in purchasing
parity power terms. Scape-goating
China
for U.S. manufacturing job losses (2/3 of which are the
outsourcing by U.S. companies) and
India
for its growing call center business (also outsourced by U.S.
companies) is giving way to newer views of China's growing
imports.
U.S.
job losses are as much a factor of domestic policies that make
investments in job-displacing equipment much cheaper than
retaining or hiring workers. The deepening inter-dependencies
between China and the
USA
and how economic globalization has changed the world will be
understood by U.S. citizens as the GM bankruptcy will keep its
Chinese plants humming.. The March 2007 tariffs on some paper
products from China will make little difference. Giant
retailers Wal-Mart, Target, CostCo, and others, which buy huge
quantities of goods from China have facilitated their rapid
penetration of U.S. markets at below-cost prices that U.S.
manufacturers cannot match (see "The China Price" report in
Business Week Dec. 6, 2004). Meanwhile,
China can be expected to continue using its pile of surplus
dollars to acquire U.S. companies as well as other real assets
around the world, from energy supplies to land in African
countries.
All these issues are part of the continuing "good
news -- bad news" changes due to globalization of the
financial markets, following obsolete trade theories that even
"free trade" ideologue, Jagdish Bhagwati, of Columbia
University now thinks might be harming, not helping, the U.S.
economy. Adding to
U.S. problems, the soaring cost of college students carrying
unsupportable loans. A new report from the
National
Center for Public Policy and Higher Education warns that the
share of the U.S. workforce with high school and college
degrees could decline over the next 15 years.
The corporate scandals continue unabated, focused
now on Wall Street's recklessness, executive pay, private
equity deals, and the hedge fund industry. Worries that hedge
funds and banks had lost track of their credit derivatives
trades - now ballooned to some $683 trillion (Bank for
International Settlements December 2008), poses a new threat
(The Economist,
March 15, 2008).
In my conversation with John C. Bogle some years ago, the
founder of the Vanguard Group of mutual funds stressed the
need for institutional investors to assert more oversight
since the 100 largest pension and mutual funds now own 56% of
all
U.S.
equities. He added, "strong managers, weak directors and
passive investors -- and the looting begins." In 2003, at the
urging of reformers like Bogle, independent shareholder
activist Robert Monks, author of The New Global Investors
(2000), and the Calvert Group, the Securities and Exchange
Commission over-rode lobbying by the Investment Company
Institute and instituted new rules requiring mutual and
investment advisors to disclose how they voted their proxies
at the annual meetings of companies whose shares are owned in
their portfolios. Robert Monks explores needed reforms in his
Corpocracy (2007).
Uncertainties continue, regarding the length of the
recession, inflation rates, interest rates, oil prices, and
rates of job creation while stock prices gyrate. Economists
now acknowledge that the flip side of corporate productivity
is weaker job growth. One thing we can be sure of continuing
is accelerating global changes driven by the ever-increasing
interactions between all the players in our globalized
economy. Pension fund managers from 16 countries, announced
that new signatories to their Principles of Responsible
Investing have now brought their total assets to $17 trillion
(see
www.Ethicalmarkets.com for more details). Financial asset
managers are now taking climate change seriously, such as
those managing over $3 trillion in employees' pension funds.
Beginning at a UN-sponsored press conference in December 2003
and others in 2004 and 2005, most pension funds now require
companies in their portfolios to disclose whether or not they
had instituted climate risk mitigation plans.
Britain's institutional investors, which own half of all the
shares on the London Stock Exchange, released their
Institutional Investors Group Principles on Climate Change in
October 2006, pledging to incorporate climate change concerns
into their decision making and requiring their asset managers
to do the same. (Financial Times, Oct 3, 2006). The
Carbon Disclosure Project represents $54 trillion managed
by financial firms requiring companies to disclose their
emissions and mitigation plans. The giant insurance company
Swiss Re went further, announcing that it would become a
"greenhouse gas emissions neutral company" -- offsetting all
its carbon-emitting activities with environmental restoration
programs. Many European and
U.S. companies are taking similar proactive action, leaving
U.S. lawmakers on the sidelines. Australia's new Prime
Minister, Kevin Rudd, signed on to Kyoto, leaving the
U.S.
as the only industrial country outside the Treaty. This issue
and similar ones that investors and companies are grappling
with are now regularly addressed, for example see
www.ceres.org.
I hope the Calvert-Henderson Quality of Life
Indicators may whet your appetite to delve deeper and feed
your interest in some or all of these aspects of quality of
life. These Indicators are featured in the financial TV series
"Ethical Markets," which showcases the most ethical CEOs and
companies, the cleanest and greenest technologies, and all the
new indices of socially responsible companies. This series is
airing on many PBS stations covering 45 million households in
the
USA (see
www.ethicalmarkets.com). The companion book Ethical
Markets: Growing the Green Economy is available at
Chelsea Green Books. Our TV special "Growing the Green
Economy" is still airing on PBS and at
www.ethicalmarkets.tv. We will continue tracking this
holistic view of our lives, society, and the economy, so that
you can remain empowered with these facts, as citizens,
consumers, employers and investors. Below are links to more
details about current issues relating to:
Hazel Henderson can be reached at
www.hazelhenderson.com
|
