March 5th, 2009
07:57 PM GMT
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Richard uses a cocktail fountain to explain how quantative easing might work.



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  1. Nadeem Naqvi

    After being shielded from competition for almost four decades, purely as a consequence of political decisions in 2000 – 2001, the American population of 300 million was virtually overnight hit by a tsunami eight times its own size, namely a population of 2,400 million living in China and India. The U.S. abruptly dropped virtually all commodity-trade barriers and capital-flow controls during 2000 – 2001that had been imposed by the US government on China and India for almost four decades. This created a super highway to low-wage heaven in these countries, on which American-owned capital travelled at break-neck speed, year after year. However, in ascertaining what is happening in the American economy in early 21st Century, the academic discourse has tended to ignore this gigantic external shock which, as we know, has very extensive ongoing immediate effects and lagged effects of staggering proportions, predominantly because of its exposure to colossal international wage differentials. To ignore such a sudden and massive external jolt in an examination of the American economy during the first decade of this century would be a very serious error of omission. The purpose of this paper is to remedy this omission from academic discourse. As I argue, the other economic and financial problems in the rest of the world are a straightforward consequence of that.

    When Capital left the U.S. for China, year after year, manufacturing in American started to die: today GM has a market cap less that $1.5 Billion, while Microsoft $140 Billion. When Capital left the U.S. for India, year after year, white-collar jobs started to disappear. contrasting 1928 with 2008, there are an astronomically higher number of skilled-worker categories in the 21st Century. And, a bloke who has worked on an automobile-assembly line, or on Wall Street for 25 years CANNOT be instantly or costless-ly converted into a Nurse or a School Teacher for whom there are shortages; it takes time and it takes money. moreover, out of every 4 high school graduates in America, only one finishes college, thereby leading to a very slow rate of production of EMPLOYABLE workers. Finally, the definition of literacy is treated to be 'knowing how to read and write.' This can hardly be considered sufficient capability to be employable in any modern economy, and certainly not in America in the 21st Century.

    So, even if one cleans up banks, feeds all the money into the economy, and raises government expenditure on public works, it will still leave vast numbers of American unemployable, especially in light of the Chines willing to the same work of $6/day and Indians for $12,000/year. If these fundamental (Real economy versus Monetary economy) structural skilled-labor market imbalance – a a very wide array of skill categories – are not remedied, and that would take a minimum of 4 years, the American economy is bot about to come out of the Great Deprivation of early 21st Century. and, if a $14 Trillion-a-year-GDP economy does not recover, what hope does the rest of the world have.

    Richard, you are about the only one, perhaps in addition to Fareed Zakaria, who is capable of understanding this argument. the other reporters and anchors never went to law school, or ever learned to dissect an argument. That is what is so sad.

    President Obama has understood the problem, but no human being can solve this problem until the American workers become sufficiently literate – in the modern sense – to become employable. Indeed President Obama in his February 24 speech said,

    "The third challenge we must address is the urgent need to expand the promise of education in America.
    In a global economy where the most valuable skill you can sell is your knowledge, a good education is no longer just a pathway to opportunity – it is a pre-requisite.

    Right now, three-quarters of the fastest-growing occupations require more than a high school diploma. And yet, just over half of our citizens have that level of education. We have one of the highest high school dropout rates of any industrialized nation. And half of the students who begin college never finish.

    This is a prescription for economic decline, because we know the countries that out-teach us today will out-compete us tomorrow.

    … And so tonight, I ask every American to commit to at least one year or more of higher education or career training. This can be community college or a four-year school; vocational training or an apprenticeship. But whatever the training may be, every American will need to get more than a high school diploma. And dropping out of high school is no longer an option. It’s not just quitting on yourself, it’s quitting on your country – and this country needs and values the talents of every American.

    … These education policies will open the doors of opportunity for our children. But it is up to us to ensure they walk through them. In the end, there is no program or policy that can substitute for a mother or father who will attend those parent/teacher conferences, or help with homework after dinner, or turn off the TV, put away the video games, and read to their child. I speak to you not just as a President, but as a father when I say that responsibility for our children's education must begin at home."

    These could easily have been the words of a leader of a poor country that was suffering from a high rate of illiteracy.

    Nadeem Naqvi, PhD
    Professor of Economics
    American University in Bulgaria

    For further details, google "Great Deprivation."

    March 5, 2009 at 8:32 pm |
  2. Peter Dough

    Spectacular display Richard. I don't dispute the benefits of quantitative easing, however don't lose sight of the fact that the global financial system must be stabilized before those benefits can start to flow.

    There has to be consensus on how to proceed: stress test systemically important financial institutions, close non-viable banks, recapitalise viable banks, neutralise all toxic assets on bank balance sheets, and price toxic assets using a transparent and simple formula.

    The problem is people don’t like bailing out bankers, and bank shareholders and bondholders don’t like seeing the value of their shares and bonds diluted or wiped out by government appropriation, which is really the only viable option.

    But one thing is certain, the time for hesitation is long past. G20, governments and banks must ensure steps are taken swiftly and effectively. We need a decision, a process, and an implementation.

    March 5, 2009 at 8:39 pm |
  3. Ramsi Hashash

    Nadeem very good post.

    @ Richard I liked the simulation. As a matter of fact I believe that the simulation and the solution in real is a good one, simple, does not meet the current paradigms, actually goes economic wisdom of the past, but could very well work.

    PS: I was hopeing it would have been champagne or at least red bull not just water :-)

    March 6, 2009 at 4:19 pm |
  4. Nadeem Naqvi

    In February 2009, Manufacturing lost 168,000 jobs, Construction 104,000 jobs, while Health-care gained 27,000 jobs, among others. Some sectors contracted, while others expanded, but there was a NET loss of 681,000 jobs in America in February, the highest number lost since 1949 – almost 50 years ago.

    How does a worker who lost a job in manufacturing, or in construction, become employable in the health-care sector, without costly and time-consuming re-training? As long as such workers remain unemployed, they will not make mortgage payments; there will be more foreclosures, more bankruptcy filings, and reduced private spending, leading to additional ob losses.

    Clean up the banks now, but such additional job losses, without corresponding additional employment in the American economy, will render banks insolvent once again due to additional private-sector-spending cuts.

    The problem is not lack of jobs, but lack of workers in the U.S. who are employable – with sufficiently high education and at a wage rate comparable to that in India for similar workers. An exception is jobs in the internationally non-traded sector, where contact is required between the provider and the recipient, such as that of a school teacher or a nurse.

    Such skilled-labor-market imbalances have to be cured for there to be a recovery. Economy-wide monetary injection or indiscriminate government-spending increases simply cannot lift us out of the Great Deprivation of Early 21st Century. What is so difficult to understand about this? Indeed, Richard!

    March 7, 2009 at 2:27 pm |
  5. mark

    Hi Richard,
    I saw your explanation on the downward flow of cocktail fountain. But with due respect, you probably missed out something... The size of the top layer of champaign glasses ie. the Banks, are apparently growing and is still growing. This will inadvertently reduce and/or cut off any possible overflow of the cocktail to the next lower levels. Practically, unless we know the real size of the top layer of the champaign glasses, no overflow will be possible.ie Even if the Government pour and pour money into the market, all money will be swallowed up by the Banks until such time the Banks think they have enough to allow the overflow....judging by past experience, nothing would be sufficient for the Banks..ie no lending will happen for a long long long time. So all governments should wake up and not be naive to put more money into the champaign glasses. Maybe they should stop the cocktail fountain and give to all glasses instead.

    March 24, 2009 at 7:53 am |

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