Nothing But Words

The Trillion Dollar Meltdown

Topic: Politics
Tags: Economics, Me

A couple of weeks ago, Maria got a copy of the book The Trillion Dollar Meltdown. It’s been on her reading list since it came out about 6 months ago, but she had a backlog of books to read, so she’s just getting to it now. The author, Charles Morris, actually wrote the book about a year ago. I’ve only read the Foreward so far - it’s amazingly prescient, and concisely describes the sources of the current market turmoil in a way that is much more lucid than most of what I’m currently seeing in the media:

The sad truth, however, is that subprime is just the first big boulder in an avalanche of asset writedowns that will rattle on through much of 2008. An overhang of subprime-like assets, at least as large, is sitting in corporate debt, commercial mortgages, credit cards, and other portfolios. Even municipal bonds may be at risk. Loss estimates of $400 billion to $500 billion barely get you halfway where.

We are accustomed to thinking of bubbles and crashes in terms of specific markets — like junk bonds, commercial real estate, and tech stocks. Overpriced assets are like poison mushrooms. You eat them, you get sick, you learn to avoid them.

A credit bubble is different. Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.

Here is a crude gauge of the credit bubble. Not long ago, the sum of all financial assets–stocks, bonds, loans, mortgages, and the like, which are claims on real things–were about equal to global GDP. Now they are approaching four times global GDP. Financial derivatives, a form of claim upon financial assets, now have notional values of more than ten times global GDP.

The soaring ratio of credit to real output is a measure of leverage, or financial risk. Think of an inverted pyramid. The more claims are piled on top of real output, the more wobbly the pyramid becomes.

…By March [2007] I was convinced that the bubble was vastly greater than I had imagined… I expected the mother of all crashes by mid-2008 or so.

My only complaint to Maria was that I wish she had gotten the book about 2 weeks earlier! It would have motivated me to finally take my retirement savings out of the stock market - something I’d been considering for a while now. I was waiting only because I hadn’t made the time to research where else to put it. Now I’m seriously regretting not having acted sooner. At this point I think I’ll cross my fingers for at least a modest recovery before pulling out.

The reason I was thinking about pulling out - well before the recent turmoil - was because of an article I read four years ago, which I was able to dig up just now, thanks to the wonders of The Google:

Mr. Logue [who retired in 1994], a Massachusetts Institute of Technology graduate, decided to go back and check his own records. Would he have done better investing his money than the bureaucrats at the Social Security Administration?

He recorded all the payroll taxes he paid into the system (including the matching amount from his employer), tracked down the return the Social Security Trust Fund earned for each of the 45 years, and then compared the result with what he would have gotten had he been able to invest the same amount of payroll tax money over the same period in the Dow Jones Industrial Average (including dividends).

To his surprise, the Social Security investment won out: $261,372 versus $255,499, a difference of $5,873.

It’s an astonishing finding. The DJIA represents blue-chip stocks. Social Security invests in US Treasury bonds. Over long periods of time, stocks have consistently outperformed bonds. So, you would think that Logue’s theoretical stock investments from 1950 to 1994 would have surely outpaced the return on government bonds.

The fact that they didn’t illustrates one of the hard truths about stock investing: Timing matters.

Although Logue started pouring money into Social Security in the 1950s and early 1960s, some of the best years for stocks, he hadn’t accumulated a lot of money.

So the gains of his theoretical stock portfolio would have been limited.

By the time he had substantial sums, the market swooned for long periods. From 1965 to 1982, for instance, the DJIA made no progress. Logue retired before the real run-up in stocks in the latter half of the late 1990s.

My sense is that my market timing will likely match Mr. Logue’s. The 1920s saw a market boom, followed by the Great Depression, and the stock market didn’t regain its values from the 20s until the mid 1950s. Then the markets stagnated from the mid 1960s to the mid 1980s, before taking off again in the mid 1990s. My hunch is that we’re following this pattern again now, so we’re in for another 20 to 30 years of poorly performing markets (as noted in the Morris quote above, there are likely still other shoes to drop, from derivatives based on credit card debt, commercial real estate, etc). There probably won’t be another boom until around the time I retire. I’ll likely be better off (both psychologically and financially) with my retirement money somewhere other than the stock market.

Robotic Nation

Topic: Politics, Technobabble
Tags: Economics, Robots

In an earlier post - More Robot Stories - I expressed concern about how the rapid pace of development in robotics could lead to widespread unemployment and a massive disruption of the economy. It looks like I’m not the only one thinking along those lines. Marshall Brain has written a series of essays on the topic. He outlines the nature of the challenge in Robotic Nation, and then describes other aspects of it, along with an idea for a solution in Robotic Freedom. This guy is a technologist and a successful entrepreneur, so these are not the writings of a Luddite or a socialist. He has a number of related essays, and I haven’t read them all yet, but the two I’ve linked to are well worth reading.

More Robot Stories

Topic: Politics, TV, Movies, and Music, Technobabble
Tags: Economics, Movies, Robots

I’d like to expand on my point yesterday about the relevance of science fiction. But bear with me as it will take a while for me to get to my point. Along the way I’ll make points about other things.

The pace of technological change is every-increasing, and, just as an example, one area where it’s going to have a huge impact over the next quarter century is the labor market. Both the top and the bottom of the workforce are going to be squeezed.

The Top: there’s already a lot of buzz about high-tech jobs (like mine!) being outsourced to India, South Africa, etc. Politically, this poses a fundamental problem for the arguments previously used in favor of free trade. The idea (but not neccessarily the reality) always was that the manual labor and low-tech jobs got pushed to less-developed countries overseas, while the advanced capitalist countries continued to improve and expand the range of products, technologies, and jobs they created. So the new wrench in this argument is that plenty of countries now have workforces that are just as well educated and offer the same set of skills as the US workforce, and they’re available at a fraction of the cost. Ultimately the only jobs that will be “safe” - anywhere in the world - are the ones that require direct personal interaction, localized skills, or simply being physically present: doctors, janitors, real estate agents, cooks, construction workers, etc. But wait…many of those will get squeezed too…

The Bottom: I was just reading up on the current state of robotic technology. The current projection is that within the next 10 years or so we’ll have robots with reasonably good vision and manual dexterity. We already have robots that are pretty good at factory line work, vacuuming floors, cutting grass, etc. What does that mean? It means that once they’re mass-produced, say goodbye to migrant farm worker jobs, janitorial jobs, burger-flipping jobs, lawn mowing jobs, etc.

While this dynamic at the low-skill end of the scale is nothing new - remember the story of John Henry? - this is different because it’s going to happen at a faster pace and with a broader scope than ever before. At the same time, the high-skill jobs are spreading to numerous countries where costs and wages are lower. The US will not be able to sustain the quantity or the wages of those jobs within its borders.

So who has a safe job? The low-skill jobs will be automated. The high-skill jobs - other than those that require highly specialized skills or physically being in a particular place - will be outsourced (or have their wages reduced). It turns out that many doctors may not even fall into the “safe” category: the British now ship cataract surgery patients to India and back - even with the travel expenses it’s still a fraction of the cost of doing it in England. In the long run, so the free-trade argument goes, the countries where the jobs get outsourced will bring their living standards up to ours (assuming no environmental catastrophes due to the massive resource extraction and pollution that would entail, but that’s another story), and then there’s no need to keep outsourcing. But as John Maynard Keynes famously said “in the long run we’re all dead.”

The “ideal” idea behind technological improvement is to make people’s lives easier: to automate the boring stuff (washing machines), get us places faster (cars and planes), etc. The “sinister” idea is to make people irrelevant, except as consumers. But if they can’t work, how can they consume? One outcome is that we all live lives of leisure while the machines do the work. Another possible outcome is a deeply polarized and stratified society, with a small enriched ruling class, and everyone else in grinding poverty. A third, and probably most likely outcome, is at least limited protectionism, such as exists in Japan and France. This will happen as the pain wrought in trying to reach the “long run” I just described will be deemed too high a price to pay for low prices. At least some “inefficient” sectors of the economy will be protected, depending on the political strength of those sectors.

I should say, of course, that I could be proven wrong. When major advances happen - such as the spread of the Internet - it usually triggers a boom, as you end up with a whole new area of the economy that needs to be populated with workers. A continuous series of such booms could continue to sustain a middle class through these changes. Historically, they only happen a couple times per century though, and when the booms end there is is considerable upheaval, such as the .com crash.

Another, positive possibility is that “the long run” ends up happening in the short run: global markets grow at a pace roughly equal to the global spread of jobs. That is, outsourcing to say, India, would lead to growing demand for those same services within India, wages would go up there, and then there’s no longer a cost-basis for outsourcing. But I haven’t seen any evidence pointing to that outcome.

So what does this have to do with science fiction? Well, it seems that you have to turn to science fiction to find any kind of discussion of these kinds of futuristic concerns. I’m not saying that science fiction is about economics. I am saying that it gives you a window into thinking about the future. All the old sci-fi stories about the role of robots in society may be relevant sooner that you think. When ideas that were once only in the realm of science fiction are thrust upon society, we are generally ill-prepared to tackle them. For example, advances such as cloning don’t seem to get any kind of really thoughtful public discussion. Only fear-mongering on one side, and complacency on the other. So how we end up absorbing these changes into our society ends up being driven pretty much by whatever way the wind blows. So a little movie like Robot Stories, which illustrates the impact of technology through very personal tales, is one way to get people to start thinking about these issues.