Electric cars & sustainable growth

The much troubled carmaker GM's new electric car Opel Ampera (Chevrolet Volt in the US and Vauxhall Ampera in the UK) will probably be available somtimes in 2011. This is some of best news I have heard in a long while and apperantly this was one of the reasons that convinced the Obama administration to save the giant company last year. Good job.

I think that the transition from fuel driven vehicles to electric ones is one of the most important if not the most important change that has to happen for real sustainabe growth to be possible.

To begin with, the car industry is one that drives new technology and innovation. Secondly cars is one of the most important consumer good, one that drives economies worldwide both from a real economic aspect and as an indicator of the current economic situation, and since it seems virtually impossible to get something to replace the C in Y=C+I+G+NX a change in the car industry will change future growth, for better or for worse. Last but least a new orientation towards electric cars will mean a huge increase in energy demand and in that industry there exist two roads to take. One possible scenario is that this will mean a surge in cheap fossil fuel or nuclear based electricity or it will help push renewable energy forward. Well, the first scenario would probably add up to almost nothing, because if the electricity does not come from renewable sources electric cars will make little or no difference. The second scenario on the other hand would constitute a real revolution and it would do so by still letting people live their lives the way they want to. Cars mean freedom, and people value their freedom more than ever. The transistion from fuel driven to electric cars will mean that a lot new cars will be bought, a lot of new investments will be made and a lot of demand will be created. People will save to buy cars and governments will hopefully invest in new infrastructure and create incentives for people to make the change and also, countries will trade different models with each other just as they do today. Let us see, consumption, demand, saving, private and public investment and trade; this should equal Y. Growth. And it would be a consumption and a growth we all could live with and which in the best of worlds could spread to more parts of the economy.

I believe (a bit cynical, I know) that the best and most effective way to obtain sustainable growth is not to force people to change their way they live their lives but to make their way of living more sustainable. That should be the goal for technology and innovation. It may sound as a gamble but considering how negotiations in Copenhagen ended last year I think its pretty safe to say that people will not change until they are standing with both their feet on the precipice.

This means that a lot is depending on how governments will act to help people make this vital transistion. And let us just be clear. This, like everything else will always be an economic question and a question of making it easy for people. If people view it as something difficult and time consuming, nothing, or too little to have an impact, will happen.

It is election year in Sweden and I think it is pretty clear that there is one side who seems more commited to this transistion than the other. Still, I do not hear anyone talking about electric cars or the infrastructure needed. There is talk about trains, which is great, but cars affect almost everybody's everyday living in a much bigger way than trains do. If we really want change, we need to help people live better not make them. That never works. Like Keynes pointed out, governments should be there to create and help demand when there is none.

And yes, it is possible.






Pictures taken from: http://ampera.opel.info/photography.html

More info: www.opel-ampera.com

Images of debt

"Paint a perfect picture

Bring to life, a vision in one's mind

The beautiful ones

Always smash the picture

Always, every time" - Prince

The NY Times has published a couple of interesting article accompanied by some very illustrative graphics on Europe's debt situation. The first one is pentagram-looking map showing the PIIGS-countries web of debt and to whom they owe the most. You can see that Greece has a realtively small debt if you compare it to Italy and Spain. The shear size of Italy's and Spain's debt is almost difficult to grasp and when you consider that Italy owes France a sum equivalent to 20 % of french GDP you start to understand the danger of unstable economies with debts of these sizes.

Just imagine how much the U.S owes China.

The other disturbing thing which the map points out is that almost a third of Portugal's debt is owed to Spain, a very strong connection, which would make contagion alot worse if Portugal starts to experience something to similar to Greece. And if Spain's $1,1 trillion (!) starts to be questioned?

Source: Bill Marsh/NYTimes

The second graphic I recommend everybody to take a look at is this interactive debt map. It shows the development of national debt in the EU and also the EU-countries' relative size according to their GDP and finally the different interest rate spreads from Germany, where Sweden is the only one being able to borrow to the same cost as the germans. The most striking thing is that you clearly see that in 2000, before Greece was allowed to enter the Euro, it already had the same debt to GDP ratio it has today. Almost all the other countries held it under the limits set by the Growth and Stability Pact. The start to today's problems maybe?

Once again, the EU's lack of control and monitoring is really disconcerting.

Paul Krugman is right/wrong

"Whatever which way they go (right/wrong)
Whatever which way they go (right/wrong)
Whatever which way they go
They know they gonna owe
They soul to the road they choose
It don't matter if you win or loose
You still gotta pay them dues" -DMX

Greece certainly got to pay them dues.

I just read the article in El País that Paul Krugman wrote in the NY Times april 29th. In this article (which goes under the headline “The Euro Trap”) he is ones again bashing the “euro-mess”. Now, I am not saying that I know better than a Nobel Prize winner, I am just saying he is wrong. And when I say he is wrong I mean that he is wrong to keep blaming the euro as a currency for Europe’s current problems.

Krugman’s argument lies in that by entering the monetary, and by doing so giving up the monetary weapon of being able to adjust the exchange rate, the countries entered a trap. Well, by putting that way it sounds as if Krugman thinks countries was lured into entering the monetary union and then suddenly when crisis hit went like “Oh god, we can’t devalue our currency?!”.

To me the problem does not lie in having a common currency and giving up the ability to adjust the exchange rate. The problem is rather that the countries now being questioned by the markets, the best example of course being Greece, but also Portugal, Spain and in a lesser extent Ireland and Italy have not behaved according to what you could expect and the EU has not monitored sufficiently the development of its member countries.
   

Let us be honest, this would not have happened had Greece not lied and covered up their real deficit. Greece would not even have been allowed to enter the euro had their real statistics been known. The EU did the stupid thing to be ingenuous enough not to let Eurostat do a back up check on Greece’s statistics. In the best of worlds you would be able to trust Greece, but we all know this is not the best of worlds.

And now there are riots in Greece and their unions are protesting against the conditions that EU and the IMF has put on the 110 billion euros they are making available? Please, if you have a corrupt system that tinkers with official national accounts, you let people retire at 63 and give them very generous pensions (with borrowed money), you enter the Euro and take advantage of the good terms in the bond market it gives you and then you do nothing to reform your economy, to battle corruption or to raise productivity and then you are surprised that when the markets discover this they do NOT want to keep lending to you?
    

Equally surprising is that Spain seems surprised that their construction boom did not last and that basing almost all your growth on cheap and un qualified labor will lead to a fall in productivity.

I have a hard time seeing that this is happening because the Euro is a trap. It is happening because of european governments being populist and not making the decisions and chages that their respective countries really needs. The monetary union is not a federal state, it does not share a common fiscal system and I think that, although that is what you keep hearing the euro needs these days, it never will. The member states are too different and a common fiscal system would not be able to be that common anyway.

What the euro needs is more control and monitoring and governments willing to swallow their pride and do the hard work.
   

Will the euro last? Yes. Or to sound more like an economist; it depends (on the above).

Time keeps ticking

"Refuse to give up, your mistakes don't define you

They don't dictate where you're heading, they remind you

That time keeps ticking"

I think T.I. was talking more about personal growth than GDP growth, but you will soon see the importance of the last sentence "Time keeps ticking" for GDP.

Take for example two countries such as Sweden and Spain. In 1950 Sweden had a GDP/capita of $11316 and Spain's GDP/capita was $4012. That's a relation of 4012/11316 = 0,35, in other words, Spain's GDP back in 1950 was only 35 % of Sweden's. Now let us look at the GDP in 2009 of both countries. Sweden's GDP is $39488 and Spain's is $34769, that gives us a relation of 34769/39488 = 0,88 = 88%. From being 1/3 the size of Sweden's economy Spain's GDP is now 9/10 of Sweden's.

The interesting thing is what is behind this development. Let us look at the growth of GDP for both countries during this period. Using this equation and solving for g or by using the rate function of an excel spreadsheet this gives you a anual growth of 2,14% for Sweden and 3,73% for Spain between 1950 and 2009. Comparing the two economies' GDP in 1950 with 2009 shows that 1,5% more growth makes Spain's economy almost nine times larger in 50 year when 1,5% less growth makes Sweden's economy only about three times larger. That is the power of the time that keeps ticking.

I'm going to take advantage of some work from my Growth Theory class here and first show some very interesting but sad facts and then some equally interesting but a bit more positive facts.

First. Let us look at this graph that shows how world GDP/capita has converged over time the last 50 years.

This graph shows that during the last 50 years the GDP/capita for Western Europe, North America and Oceania has indeed converged, that is the standard deviance between these countries' GDP has become smaller. The graph also shows however that GPD/capita, if we count all countries, has not converged but rather, the standard deviance, which is the measure used here, has become larger with time. This sadly means that measured in GDP/capita the world is a more inequal place today than 60 years ago and that it has  gotten a lot worse in only the last 30 years.

Now the positive facts. If you look closer at the graph you can see that the standard deviance has become smaller in last couple of years, let us hope that is just not something tendency but that it will keep on falling.

If, by using the same formula as above, you compare World GDP/capita growth the between 1950-2009 with growth the last ten years, between 1999-2009, you can see that between 1950-2009 it was 1,59% and that in the last ten years it has been 2,37%. Add to that the fact that most rich countries has had slower average growth the last ten years than they had the last 60 years this must mean that there are other economies growing more than before.

This second graph shows GDP/capita growth of some countries the last ten years and there you can see that fortunately growth is now occuring in other places than the rich part of the world. You can also  see, a bit surprisingly, that some of the VISTA-countries have not had very high growth in the last ten years.

 

Hopefully this will mean that the blue line in the first graph will take a dive towards the red on in the coming decades.

Although. Keep in mind that even if Angola in future can keep the same incredible growth as the last ten years it would still take them more than 20 years to reach the same GDP/capita as Sweden has today!

Source: Groeningen Growth and Development Centre, The Conference Board: Total Economy Database

DJ:ing Economics' VISTA-series

”I know that we have to take it to the goal 'cause everyone's depending on we
See we ain't got nowhere to go but up, it's our destiny”

The financial crisis started in the USA, a country considered to be world’s most developed economy. We got pulled out of the crisis partly by China, a country with a dubious leadership, limited freedom of speech and a weak democracy. China’s economic growth on the other hand barely slowed down and instead it is getting closer to something looking like overheating. The chinese stimulus package was huge, but very efficient and in contrast to the western world where it is questionable how many bridges you really need to build just to keep the economy going, China is still in great need of infrastructure, which means that the stimulus package will give great ROI and a more efficient economy in the future and lead to even more growth.

So, where am I going with this and what does it has to do with the title of the post. Well, in the footsteps of China and the other BRIC-countries (Brazil, Russia and India) several other economies are on the rise, all with great growth potential. These economies are often named the VISTA-countries. VISTA is an acronym for Vietnam, Indonesia, South Africa, Turkey and Argentina. They are economies with all the natural requirements you need to be a rich and developed country, for example an abundance of relatively cheap labor and plenty of natural resources, but where corruption and decades of politic and economic instability has hampered their development. With the situation now getting better, so is their economic growth.

That is why DJ:ing Economics will begin a series with posts about the five VISTA-countries, their possibilities, pros and cons and their macroeconomic and political situation. We are going to follow the order of acronym, which means that the first post will be about Vietnam.

The comparison with the US and China is to show that you should never underestimate nor overestimate any country and to me it is clear that the VISTA-countries so far are underestimated, something we soon may have to reconsider.



So, don’t sleep on these countries.



---------------------------------------------------------------------------------------------------------------------
The VISTA countries also offers great investments oportunities for those who are interested. If you look at the development of the BRIC-countries in the last years you get an idea of the enormous potential of the VISTA-countries. You can read an interesting article by Claes Hemberg about investing in the VISTA-countries here.

An assessment of a 7-year old speech. Part 1

Like Ma$e in 1999 we Double Up!
This post is divided in two parts.

”The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

These are the words of Ben Bernanke from a speech he gave before the National Economists Club, Washington, D.C. November 21, 2002, long before he was elected Chairman of the Federal Reserve. What he did not know back then was that only six years later he would find himself and the world thrown into the worst economic crisis since WWII and that he would indeed keep the presses running. Recently the Fed decided to continue its QE-program and to expand it. That means another $ 1.4 trillion from the presses!

What is interesting is that Bernanke in his speech presented a theoretical base for how the Fed would be able to stimulate the economy with interest rates at zero and that today interest rates in the U.S. and many other countries are precisely zero or near zero.

To see the relevance of this today and to see why it can be interesting to look closer at what Bernanke said in his speech let us take a closer look at what deflation and its effects really are. To use Bernanke's own words from 2002:

"Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers…/…/the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress."

So, a sharp decline in demand which leads to deflation which then leads to recession, rising unemployment and financial troubles. Sounds familiar anyone?

Surely, the present crisis did not start because of deflation that was caused by a decline in aggregate demand, it happened because of bad loans in the financial sector. These loans have however led to a colapse in worldwide demand and that has in turn led to inflation turning negative in many parts of the world including Sweden, where inflation was -0,7 % in november, in other words; deflation. It has also led to rising unemployment, the worst recession since the WWII and global financial markets in crisis and interest rates close to or at zero. Although these current low interest rates are not a result of deflation but rather conscious decisions by central banks, they have however put many central banks including the Fed in the situation that Bernanke was discussing in his speech 2002, leaving them without their traditional weapon to stimulate the economy.

(This post is continued in the post below)

An assessment of a 7-year old speech. Part 2

(Continued from the post above)

So, let us look at what Bernanke in 2002 said could be done in a situation as the one we have today when interest rates are at zero and then look at what has been done until today during the crisis.
(Worth considering is that deflation during current condtitions is rather something positive, since it cushions the otherwise inflationary measures that goverments and central banks has been taking. That is however a subject for another post.)

• "To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities."

Yes. Done. The Fed has expanded its purchases and the type of assests through its QE-program and continue doing so (see the $ 1,4 trillion above). It has cooperated with fiscal authorities in the T.A.R.P-program and banks has been able to borrow from the Fed at essentially no cost.

• "One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities…/…/…One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period."

Yes. Done. The promises by the Fed and other central banks to keep the interests rates low for a long period of time has been vital to keep the economy going and perhaps the most debated subject today is when they will begin to rise again.

• "A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields." 
  

Yes. Done. First the Fed announced that it would buy long term debt which brought down interests rates and then began to buy them to keep them down. It does however not seem to have helped. Right now 10-year or longer treasury bonds all have rates above 3 %. Maybe all the billions have not been unlimited enough to calm the markets.
 

• ".../…/…the Fed has the authority to buy foreign government debt, as well as domestic government debt"

No. Has not been done and will probably not happen. Probably because the Fed does not want to intervene in the foreign exchange markets.

So to end this post, Bernanke has done almost everything he talked about seven years ago, something I do not think you can say that about alot of people in the politic or economic realm. What is more interesting is seeing that theories can work in the real world as well. Although it is too early to say anything about the final result, most people seem to agree that the actions taken by the Fed and other central banks has helped avoiding the recession getting alot worse.

Bernanke himself back in 2002 also expressed the uncertainty surrounding the measures he then only discussed.

"I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise…/…/…One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies."