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Mon Aug 2 22:53:03 2010 Deflation and Stagflation I think we're turning Japanese...
Looking good after the Lost Decade Image courtesy of Morio (wiki) Today, the Wall Street Journal had a story about renewed deflation fears. Given that the US ecnomy has been slow to recover, there is now real fear that prices will continue to decline. That in turn can cause a deflationary spiral. Any talk of deflation immediately turns to Japan, which experienced a "lost decade" as growth came to a standstill in the 1990s. As bad as that was, deflation is usually better than stagflation, which is what I predicted in 2008 (see The S-Word). However, the massive inflation I feared didn't happen. The economy cooled fast enough (people stopped spending) so that lower interest rates didn't cause inflation. People think deflation may be on the horizon in the US because prices are flat or down, and unemployment is still high. However, I think a deflationary spiral is unlikely. Prices may drop slightly for the next few months, but I think we'll be fighting inflation in a year's time, not deflation. Why? Mainly because a majority of companies expect to expand in the next 12 months. With the combination of increased hiring and equipment expenditures, I think things will heat up again. Probably in 2011 or 2012 the economy will be running hot enough that we'll run out of oil again (see High Oil and Gas Prices). But we'll run into problems with inflation first. Comments	Related: economics > predictions < Unrelated: books energy environment geopolitics lists mathematics science

Sun Jul 11 22:38:59 2010 The End of Microsoft Taken down by the little guys...
Microsoft Kin: The little phone that couldn't. Image courtesy of iTech News Net You've probably already heard about the Microsoft Kin fiasco, whereby Microsoft spent several years and around 1 billion dollars (a billion dollars!) to produce the Kin phones, which were then discontinued after just 6 weeks. They weren't selling. Just recently local papers noted that Microsoft was firing people, although it isn't clear if these were related to the Kin disaster. Microsoft has been steady sliding in the mobile market. Market shares as of July 2010: Blackberry: 42 percent Apple: 24 percent Microsoft: 13 percent (down from over 19) Google: 13 percent (up from zero last year) Palm: 5 percent (data from here). But this is just mobile phones. Why do I think this means the End of Microsoft? Because the future of computing is mobile devices. We've already seen the death of the desktop, killed by both browsers and laptops. Soon the laptop will be killed by mobile devices. Mobile devices are already doing most of what laptops can do, and in a few years laptops will really look like dinosaurs. Microsoft understands that mobile devices are the future. They take the same development platform philosophy as Apple, that is, try to produce a compelling customer experience while making it very difficult for application developers to build for multiple platforms. They want to keep a steady revenue stream for their mobile operating system, regardless of which phone is selling. But they can't seem to make any headway with Windows Mobile! Laptops and desktops are going away, and with them, Microsoft's main cash cow, the Windows operating system. Since office applications are also moving to the cloud, Microsoft has no cash cows left. The future of computing, only a few years away, is mobile devices, and Microsoft is steadily losing market share in the only strategic market. I'm not excited to see a large local company--and former employer of mine!--about to go off the precipice. Hopefully they will learn from their mistakes here, and get a compelling mobile operating system out before it is too late. Comments	Related: economics > predictions < Unrelated: books energy environment geopolitics lists mathematics science

Sun May 9 20:52:16 2010 Sovereign Bankruptcies What really happens when countries go bankrupt?
Spain celebrating peace, just before running out of money. Image courtesy of Razr (wiki) I've been wondering about this for a while. How do sovereign countries go bankrupt, and what happens when they do? So I decided to find out. I am mostly (and selfishly) worried about the United States. We seem to be unable to constrain our spending, meaning that we have to borrow a lot of money. Whenever you keep borrowing money, whether you are a person, a company, or a country, eventually people get tired of lending money to you. Over time, people stop lending, or lend at ever-higher rates. At some point you either pay off your debts and live within your income, or you go bankrupt. But lately this has come up several times for countries besides the US. Iceland nearly went bankrupt 2 years ago, and now Greece could go bankrupt, and some say Portugal and Spain may not be far behind. What with talk of bond markets and "contagion risks" and riots, it can all look very complicated. But really, bankruptcy is very simple. If you can't pay your debts, then you are bankrupt. You have to pay what debts you can, and the rest are left forever unpaid. Most investors (the people doing the lending) simply lose their money--that's why bonds aren't completely risk-free. Countries have leveraged debt since the concept was invented, so it's no surprise that countries themselves also go bankrupt. Here are some of the historical national bankruptcies I've found: Spain's bankruptcies of 1557, 1560, 1576, and 1596. Yes, four national bankruptcies in 40 years. This is while Spain was plundering the New World and raking in huge amounts of gold and silver bullion! In the 1557 bankruptcy King Phillip II simply refused to pay debts, and that ruined several large banking houses in Germany. France's near-bankruptcy of 1789. France was likely only months away from defaulting on several expensive loans, but then revolution broke out. The poor state of the nation's finances has been called out as a major reason for the French Revolution (see the wiki link). After the revolution, the new leaders of France simply expropriated property as needed and executed unhelpful lenders--which I think counts as default. Portugal's bankruptcies of 1892 and 1902, which, like today in Greece, caused widespread unrest and riots in Portugal. Germany's bankruptcies of 1923 and 1945. The 1923 bankruptcy (and preceding hyperinflation) was especially chilling because it helped launch Hitler's career and the rise of the Nazi party. The 1923 bankruptcy came about due to complete currency collapse, leading the counry to default on foreign debt payments (debt payments which themselves were poorly-conceived reparations for World War I). The defaults of 1922 and 1923 led to occupation of its territories. The 1945 bankruptcy was due to the country's production problems after the decimation of its industries in World War II. Clearly, both bankruptcies caused widespread pain--and as I said, the 1923 bankruptcy was a major event that pushed the country psychologically towards World War II. Russia's defaults of 1998. Russia defaulted on domestic debts, and massively devalued the ruble. Other debts were unilaterally restructured. Argentina's bankruptcy of 2001. The impact on the economy (riots, bank runs, 25% unemployment) was severe. After years of deficit spending, corruption, and poor monetary policy, Argentina was forced to default on over $120 Billion (US Dollars) and massively devalued its currency. Iceland's near-bankruptcy of 2008. This wasn't a "true" bankruptcy since Iceland didn't actually default on any loan payments. But that is only because they took a massive loan from the International Monetary Fund, and instituted harsh austerity measures. Their GDP is expected to shrink by around 10% (maybe more), unemployment has nearly tripled, and their currency has collapsed. Furthermore, many households have their debt indexed or denominated in foreign currencies. So the collapse of their currency has made things much worse for them. [this data is from the wikipedia article] Printing money can be hard to clean up. Image courtesy of Timur lenk (wiki) On top of the human misery at the time, after the bankruptcy the countries found themselves unable to borrow at favorable rates. In general, this gives governments less flexibility and is (I think) a security risk--a lack of funds could be exploited by other countries for economic or even territorial gains. Certainly Greece will be hard-pressed to borrow more money until it demonstrates to the world that it can maintain fiscal responsibility for several years. What I find most scary is that these defaults (with corresponding catastrophic impact to the nation involved) were usually not well foreseen ahead of time. That is, there were many people who recognized that the fiscal and/or monetary health and behavior was poor, but default and bankruptcy were usually a bit of a surprise to everyone. The "surprise" nature of national bankruptcies is either due to fraud and misinformation at the highest levels (such as France's 1789 financial problems), or more commonly due to the fluctuating nature of national income. A country may think it can pay back its debt in 10 years, but then a war, famine, or recession can suddenly decimate cash flow to the point where a country realizes it is only months or weeks away from default. Once you get to that point, you're toast. Anyone with money to lend won't go near you, and anyone who already lent you money is now freaked out and wants their money back. That's the nightmare scenario that Greece is facing now. In the past, many countries have simply printed more money to solve the problem. Printing money is effectively a country-wide tax: as the currency devalues, all the money that you have becomes worth slightly less, and the value that you lost is now transferred to what was just printed. Taken to extremes, this corrodes trust in the currency to the point that it accelerates towards zero worth. But in some cases, careful inflation (printing money) allows the government to tax everyone enough to pay off debts. However, printing money doesn't always work. If a large amount of your debt is foreign-denominated, devaluing your currency will make it even harder to pay off foreign creditors. That's what happened to King Philip (Spain) and the Weimar Republic (Germany) above. Europe may just have to print Euros to bail out Greece. Basically, all of Europe will be taxed to save Greece. Personally, I think a solution like that is best: it reinforces what it means to be a European state. It is what we (United States) might do if we had to bail out one of our states, along with other measures. Will any of this happen to the United States? That depends on if we can reign in spending, and how much patience our creditors will have. Personally, I see risks for both. First of all, we haven't been able to stop overspending, and the problem with just get worse in the next few years as we won't be able to pay for Medicare or Social Security. Politicians are unable to fix either of those programs because it would be political suicide to even suggest changes. This isn't our politicians' fault: voters in the US recognize that we have fiscal problems here, but nobody is willing to accept cuts in their (future) benefits--even though cuts are mathematically inevitable. This is the same reason we see people rioting against austerity in Greece even though it is clear their government has no money. Secondly, foreign investors are starting to see credible alternatives to the US Dollar. Both the Euro and, in a few years, the Yuan, will be good options for countries to hold foreign reserves. There are already proposals for just this sort of model. Once there are credible alternatives to the US Dollar, foreign investors won't put up with large deficit spending in the United States, and any risks (such as Medicare/Social Security insolvency) will result in even higher interest rates we'll have to pay to borrow money. My predictions? The European Union will save Greece. That seems most prudent from a stability level, and is also a painful but deep reminder of what it means to be a true European State--the Union will help (at a price). Foreign creditors will continue to look for alternatives to the US Dollar. We'll see increasing interest rates as we borrow more money to pay for our deficits. This might lead to better fiscal discipline on our part, but I am a bit worried that we'll keep overspending anyway. The result? Greece won't go bankrupt, although it will be painful for them over the next several years. And the US will face a high risk of bankruptcy in 5-10 years when creditors suddenly decide to stop lending. At that point we ourselves will be dangerously vulnerable to recessions or other events that reduce national tax revenues. Comments	Related: economics > predictions < Unrelated: books energy environment geopolitics lists mathematics science

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