Comeback: America’s new economic boom

By Charles R. Morris
May 9, 2013

A natural gas well is drilled onto the Marcellus shale in Bradford County, Pennsylvania January 8, 2012.  REUTERS/Les Stone

Artie White, a squarely built young man of about 30, is a driller with Helmerich & Payne, an international oil drilling specialist based in Tulsa. He works 12-hour shifts, seven days on, seven days off. It’s dirty, fast and occasionally dangerous work, but White’s pay is within shouting distance of $100,000 a year. All six men on the rig team are on a similarly lofty pay scale; none has a college degree.

This is the world of shale gas and oil — which has revolutionized the U.S. energy position. These particular wells are in Oklahoma and are owned by Devon Energy Inc., one of the country’s larger independent exploration and production companies. Drills go two miles straight down, then turn to go another mile through shale rock steeped with gas and gas liquids. The shale is “fractured” with a high-pressure burst of water, sand and chemicals to start the product flowing. Once the flow is stabilized, the rig is removed and the well is connected to a permanent gathering pipeline. It should produce hydrocabons for 15 to 20 years.

By 2020 or so, the United States is expected to surpass Saudi Arabia in oil output, and Russia in gas, according to the International Energy Association’s best estimate. By then all of North America should be self-sufficient in energy, which will do wonders for the U.S. trade deficit. Daniel Yergin, one of the world’s leading energy experts, estimates that the U.S. turnaround in energy has generated 1.7 million new jobs, including direct and “induced” employment, and that number should almost double by 2020. U.S. energy industry capital investment this year is expected to be $348 billion, or more than 2 percent of the gross domestic product.

The collateral job creation is even more important, and it’s just beginning. The big attraction is the low price of natural gas, the lowest-carbon fossil fuel, which can be produced profitably at about a third the cost per unit of energy as other hydrocarbons. That is particularly attractive to chemical companies. Natural gas is an ideal “cracking” fuel, generating the intense heat needed to break up and rearrange molecules to make usable chemicals. But it is also the raw material for plastics, Styrofoam, tires, sealants, adhesives, films, liquid-crystal screens, nylons, polyesters — almost everything around us. Dow Chemical just restarted a long-mothballed plastics plant and is building or rebuilding three others. Other big players, including Shell, Chevron, Bayer and Formosa Plastics, are expanding plants and starting band-new  plants.

But it goes far beyond chemicals. Consider Nucor, the world’s “smartest” and most profitable steel company. It began as a “mini-mill,” melting scrap to make high-quality steel; now it is the nation’s top structural steel vendor. But scrap steel is getting scarce and expensive, so Nucor has been locking up long-term supplies of natural gas so it can make its own iron using a highly efficient, but energy-intensive, “direct reduced iron” technology, which is not feasible without low-cost gas. Nucor is about to open a mammoth plant in Louisiana and is starting to build another. The company plans for all its facilities to be run on natural gas within a few years.

Dow Chemical has compiled a list of 108 new energy-intensive manufacturing projects (which includes plants by more than 80 companies) either under construction or in development, with a total planned investment of almost $100 billion. About a third are under way or due to start construction this year; 60 percent are scheduled to start construction by 2015. A census of energy-intensive industries, including chemicals, steel, fertilizer, paper and refining, among others, by economists at the American Chemical Council, using a model like Yergin’s for direct and induced employment, suggests that growth in just those industries will generate 1 million new permanent jobs by 2017 and some $342 billion in additional annual GDP (yet another 2 percent).

The energy bonanza comes on top of powerful trends already flowing in America’s favor. A ferocious Chinese trade assault in the first half of the 2000s decimated U.S. manufacturing employment. But China’s great success has been transforming its own economy. Chinese and U.S. labor costs, when adjusted for worker productivity, are rapidly converging, according to the Boston Consulting Group and others, even without the energy bonus. Chinese worker productivity is still growing at about 8 percent a year, an extraordinary rate — but worker compensation is growing more than twice as fast. From 2000 to 2010, wages in the Yangtze delta, a manufacturing hotbed, jumped from 72 cents an hour to $8.62. That brings U.S. and Chinese costs close enough to parity to highlight the aggravations, including long delivery lead times, that come with offshoring.

The U.S. cost advantage over Japan and Europe is even higher — Boston Consulting puts it in the 25 percent to 45 percent range, and the U.S. may also have the world’s best trade logistics capabilities. Just within the past year, Japanese and Korean automobile companies have been expanding their U.S. plants, or building new ones, to service the European market. Siemens has begun producing gas turbines in Virginia for export to Saudi Arabia. “Re-shoring” has become a mantra at U.S. business schools.

Official economic forecasters, however, like the Congressional Budget Office and the Organization for Economic Co-operation and Development, still foresee only a long twilit road to nowhere, with the United States limping painfully along at 2 percent to 2.5 percent growth to the farthest horizon. They point to a shrinking and aging labor force, and the drag of debt and deficits. But growth only at the U.S. average since 1950 — 3.3 percent a year — quickly puts debt and deficits on a downward path as a share of GDP.

Labor force shrinkage has also been exaggerated by the sharp drop in male labor force participation, particularly among men without a college education. Consider, half all manufacturing jobs lost since 1979, the peak year of U.S. manufacturing employment, were lost from 2001 to 2007. Still-fresh shocks like that drive workers to the sidelines. As jobs open up again, however, participation rates can be expected to rise.

How can we screw this one up? One way is for the shale companies to keep doing a poor job of site management. The big headline issues are not the real problem. Shale energy production, for example, happens to be the least water-intensive of the fossil-fuel-recovery technologies. Coal and conventional oil drilling use far more water per unit of energy produced, while “renewable” ethanol production uses up to 1,000 times more. Shale energy’s share of national water consumption is less than 1 percent. Agriculture, on the other hand, accounts for more than 80 percent of all American water consumption — about half of it wasteful.

There is only one documented case of fracking chemicals contaminating drinking water supply. But there have been a great number of surface spills and many cases of methane contamination resulting from leaky, usually badly encased, wells.

The problems that drive people crazy are mostly eminently solvable with concentrated, detailed attention to process management. Like truckers dumping contaminated water in open fields rather than waiting in line at treatment plants. Like hundreds of giant water tanker trucks hogging rural roads or lining up early in the morning to fill up at small-town fire hydrants. Like open holding pits for noxious fluids that overflow in rainstorms. Like unnecessary open venting of methane, a potent greenhouse gas. Like careless cementing of well pipes that allow gas leaks.

The shale industry was jump-started by small, highly entrepreneurial companies, and the wildcatter ethos is still strong. Process management, however, requires intensive large-scale, General Electric -type inspection, measuring, documentation, quality policing and follow-through. Compared to opening a new gas field, it is dull work — and shale companies are not good at dull.

The industry is transforming rapidly, however. The most successful one- or two-dozen shale companies are becoming formidable enterprises, with multibillion-dollar annual revenues, and they can afford more orderly development processes. They’ve also seen the nuclear industry get stopped in its tracks. So most seem acutely aware of the need to raise their game and have started reaching out to environmental organizations.

The two most critical steps will be achieving greater control over methane leakage and improving water management with up-front planning, on-location treatment and recycling, and replacing truck transport with pre-positioned pipelines. Time will tell.

The biggest longer-term threat, however, is the lobbying drive for permits to export massive amounts of natural gas. Deep in its corporate heart, the industry fervently believes that all energy should be priced at the highest cost of its next nearest substitute ‑ which is usually a barrel of crude. The current cheapness of American gas therefore looks like an offense against free-market economics, which would be corrected if it were sold freely on global markets.

Ignore for the moment that the cheapness of American gas is a major factor in America’s attractiveness as a manufacturing venue. Ignore, too, the fact that crude prices are currently set more by Saudi budget requirements than by free markets.

In fact, it is difficult to export gas overseas. It must first be liquefied at a super-low temperature (minus-162C) that turns it into the viscous liquid known as liquefied natural gas (LNG), which has roughly the same energy density as crude. Facilities to accomplish that cost tens of billions of dollars. Special plants are required at both the export and import ends to liquefy and then “re-gasify” the fuel. It must be shipped in specially adapted tankers. But it could be worth the investment if the gas were sold at current East Asian prices, which, in the wake of Japan’s Fukushima nuclear plant disaster, are as much as five times higher than in the United States.

The crucial question is whether U.S. gas prices would become “oil-linked.” That would depend on how large the foreign sales were. The industry is now trumpeting a study by an economics consulting firm that claims there will be no price linkage because the volume of potential exports would be very low. (See a refutation here.) But the industry clearly doesn’t believe the study, for the current pipeline of export permit requests would consume almost 45 percent of current U.S. production.

Accommodating this volume, or anything approaching it, is not possible in the near term. In fact, it would push total output higher than the Energy Department now projects for 2040. If even most of those plants are approved, the bidding wars for gas will spike prices and end hopes of a manufacturing recovery. Inevitably as well, the rush to expand production will degrade industry environmental practices. In the worst case, the United States could slip into the role of raw material supplier for an East Asian manufacturing juggernaut.

In that sad event, the only winners would be the global oil majors, which view no country as their home.

Charles R. Morris’s new book, Comeback: America’s New Economic Boom, is due hout this week as an e-book and as a paperback in June. 

 

PHOTO (Insert A): A Chesapeake Energy Corp. worker stands beside a Chesapeake oil drilling rig on the Eagle Ford shale near Crystal City, Texas, June 6, 2011. REUTERS/Anna Driver

PHOTO (Insert B):An oil derrick at a fracking site for extracting oil outside of Williston, North Dakota, March 11, 2013. REUTERS/Shannon Stapleton

PHOTO (Insert C): A natural gas well is drilled in a rural field near Canton in Bradford County, Pennsylvania, January 7, 2012. REUTERS/Les Stone

PHOTO (Insert D): A Chesapeake Energy Corp. worker walks past stacks of drill pipe needed to tap oil and gas trapped deeply in rock at the Eagle Ford shale site near Crystal City, Texas, June 6, 2011. REUTERS/Anna Driver

24 comments

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“according to the International Energy Association’s _best_ estimate”…which AFAIK threats shale gas wells like they’re conventional – which they are not, they’re much less durable. 15-20 years? AFAIR currenty it’s 2-5, and after that well output falls so drastically that you need to drill anew. And there were some “creative accounting of reserves too…

Of course USA has no other choice than try this – unlike Eurasia and Africa, this is really LAST reserve of light liquid fuels in Northern America, rest is used up. But currently it’s their “prime swampland” they try to sell.

Posted by chyron | Report as abusive

chyron is correct that, left to themselves, production from shale gas wells drops off very rapidly – but wells can and will be reworked to restore high levels of production whenever gas prices go up enough to warrant it. Identified, undrilled reserves are also plentiful.

Exporting gas is a great idea for the US. It is both difficult and profitable. The “difficult” part is the development of necessary infrastructure and capacity – which means jobs, jobs, jobs and very well paid jobs. Profitable means great news for our trade balance.

Will exporting gas harm US industry? Not really. The difficulty of infrastructure development, limited capacity of ships vs pipelines, and profit margin for the exporter means that US industries will always maintain a very significant price advantage over foreign users. Also more gas production can be turned on with well rework and new wells drilled for known reserves far more quickly than export capacity can be added – so US prices will not climb much beyond the actual costs of drilling.

Posted by QuietThinker | Report as abusive

I basically agree with the author, but globalization cannot be reversed based on what is presented in this article. Thus, America will NOT experience a new economic boom. That is the fatal flaw in his argument.

For example, Australia, with its vast raw material resources is nothing more than a raw materia suppier for China, and will never become anything more than that.

The ONLY thing that matters under globalization is that the only winners would be the global oil majors, which view no country as their home.

Posted by EconCassandra | Report as abusive

The U.S. does not operate in an energy “vacuum”. The technologies developed in the U.S. are transferable to other countries–so exporting LNG to other countries may end up being a short term (15 years?) phenomenon and we will continue to adapt as we have in the past. There are more than sufficient energy supplies in the U.S. to be both energy independent and an exporter of high value energy end-products.

Just think…we produce cheap energy here, creating high paying jobs, process it (creating more high paying jobs), and then export the high value finished products to other countries. Producing $2.50/MMBTU natural gas, liquifying it, and selling it to Japan and Korea for $10/MMBTU is a good deal for America and the American worker.

Even if the importing countries figure out where their own energy reserves lie, they will still need American technology and know-how to exploit it. That translates into more jobs for America. Should we become energy independnet that eliminates about $200 billion each year that currently goes to the Middle East producing countries. That’s $200 billion a year reinvested in American companies. And should our energy costs remain low, that will motivate manufacturing to return to America–as evidenced by the auto manufacturing companies continuing to expand here. We are still the largest consumer market in the world, and economic dictate it is cheaper to manufacture close to your markets. Cheap energy allows us to secure that benefit.

This is a sea-change relative to our balance of trade and diminishes the necessity of being involved in the politics of the Middle East. Let them sell 100% of their production to the Chinese and other Asian countries. And let the Chinese deal with the headaches that comes with it. (How does one think the Chinese would respond if the Iranians blocked the Straits of Hormuz and crippled their economy? U.S. military involvement would not even need to be considered.)

There is the opportunity to be North America energy independent by 2017. That means among the U.S., Canada and Mexico we would not need to import one BTU of energy of any type from anywhere else. We already move large volumes of energy across the borders with these two trading partners. (Mexico is large consumer of our natural gas, and we buy their oil.) And Canada and Mexico are our largest trading partners for other goods as well.

The single biggest obstacle to achieving that goal resides inside the Beltway.

Posted by COindependent | Report as abusive

@ COindependent –

While I basically agree with the author, globalization cannot be reversed based on what is presented in this article. Thus, America will NOT experience a new economic boom. That is the fatal flaw in his argument.

For example, Australia, with its vast raw material resources is nothing more than a raw material suppier for China, and will never become anything more than that.

———————–

Thus, your comments that — “There are more than sufficient energy supplies in the U.S. to be both energy independent and an exporter of high value energy end-products.

Just think…we produce cheap energy here, creating high paying jobs, process it (creating more high paying jobs), and then export the high value finished products to other countries.

Even if the importing countries figure out where their own energy reserves lie, they will still need American technology and know-how to exploit it. That translates into more jobs for America.

And should our energy costs remain low, that will motivate manufacturing to return to America–as evidenced by the auto manufacturing companies continuing to expand here. We are still the largest consumer market in the world, and economic dictate it is cheaper to manufacture close to your markets. Cheap energy allows us to secure that benefit.

This is a sea-change relative to our balance of trade and diminishes the necessity of being involved in the politics of the Middle East.” — are ALL TOTALLY WRONG.

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WHY?

CHEAP LABOR WILL ALWAYS “TRUMP” ANY OTHER FACTOR OF PROCTION IN A GLOBAL ECONOMY.

(By the way, “as evidenced by the auto manufacturing companies continuing to expand here” is proof of my comment, since auto manufacturing is indeed exapanding, but in China, NOT the US.

GM, the auto company the US government “saved” IS prospering, but in China, not here. Another dirty little secret the government won’t tell the American people as it touts “renewable energy” vehicles, which are, in reality, not feasible from the standpoint of physics and subjec to the real laws of physics. It’s ALL scam.

You are correct, however, that “The single biggest obstacle to achieving that goal resides inside the Beltway”, but for reasons other than what you imply.

A complete reversal of tax, trade and banking legislation that was passed over the last 30+ years, WOULD bring back American jobs. NOTHING else will accomplish that fact.

As the author points out, “The ONLY thing that matters under globalization is that the only winners would be the global oil majors, which view no country as their home.”

What he fails to mention is that oil companies are not some entity unto themselves, but consist of stockholders who profit from the sale of oil products.

THAT is the weak point in the chain — attacking the profitability of the stockholders in ANY multinational corporation is the key to succes in reversing globalization — and why we must reverse all the tax, free trade and banking legislation of the past 30+ years.

This isn’t rocket science, guys!

All you need to do is follow the money and take action to “redirect” the profit stream to where we need it to go — in other words, US manufacturing jobs.

DUH!

Posted by PseudoTurtle | Report as abusive

@ psuedo Auto production in this country is expanding by companies other than the Big 3. There is a tendency to believe that because UAW jobs have been in decline, that the total production is in decline. Not true.

Secondly, one cannot overlook jobs and materials being produced to support domestic energy development and the ripple effect it has in the economy.

I may not be exactly correct, but being totally wrong (which guarantees you will be)is based on the expectation that our economy is incapable of adjusting to the factors in play at any given point in time. I will take exception to that statement in that it is important to acknowledge that this is not one big economy, it’s a combination of anywhere from 6-10 regional economies, all of which may be in various stages of growth and decline simultaneously. Thus California is in decline, while North Dakota, Texas and many of the energy producing states are expanding.

As for the second half of your comments (beyond the paragraph starting “A complete reversal…”) I am struggling to understand your point.

Posted by COindependent | Report as abusive

New Boom…? where do you live..? Obviously you do not buy gas or food or any other staple of life which is conveniently swept under the rug when the numbers for inflation are assembled…or looking for work that pays enough to make a living wage.

Posted by rikfre | Report as abusive

@ COindependent –

I attempted to answer your question fully and completely, but it just vanished when I hit “submit comment”.

Evidently, Reuters heavy-handed censorship, which of course doesn’t exist in this democracy.

So, you will never know what I said, and neither will anyone else, which of course is the wealthy class control of this nation that will cause it to crash shortly.

Posted by PseudoTurtle | Report as abusive

@pseudo Acknowledged.

Posted by COindependent | Report as abusive

Aside from exporting new energy resources, and using them to fuel more domestic manufacturing, there is a chance to export American know-how. This chance will increase if we innovate to manage the containment, treatment and sometimes, reuse of wastewater from ‘fracking’; and to avoid undoing the carbon savings of gas over coal by finding ways to minimize leaked vs. recovered gas. Labor or ‘know how’ sent abroad may have higher margins for our business, can build cooperative relations with other countries, and ultimately support the long term benefit at home from a larger and more skilled workforce.

Posted by Decatur | Report as abusive

All we need is a good solar battery…

Posted by UauS | Report as abusive

The real reason this mineral wealth will not lead to a general boom in the USA is that the wealth it generates will be exported by the political system to foreigners. In the new political “thinking”, the American People own nothing at all. Everything here, whether material or immaterial, belongs to whoever can steal it, much as in Russia. In fact, the future of the American people and the American economy will most likely follow Putin’s Russia.

This is not optimistic for anyone other than a plunderer. And the plunderers here, unlike in Russia, need not be from here if they are willing to pay off powerful local politicians. “Globalism” has failed the American people as much as our “representative” political system has. Neither has a place in our future.

Posted by usagadfly | Report as abusive

@ COindependent –
I did not anticipate my comment would be censored, so I typed it straight in. I will attempt to resubmit it from scratch again.

———————————————

Disclaimer and Warning: To the best of my knowledge, there is not a single person, regardless of their personal or official status anywhere, who has advanced this global economic “theory of everything” I have created. If anyone out there reads this and uses my theory, I demand whatever share of book receipts or Nobel Prize winnings you obtain from your work, as well as proper recognition for the original economic thesis that I am about to advance. I will take appropriate legal action against anyone, or any organization, that seeks to use my theory without proper compensation and recognition. Likewise, if you have a published work regarding this or a similar theory, please let me know because I would certainly like to read what you have written. As far as I know, this is “original research” to arrive at a “unique economic theory” developed from that reasearch, and that all rights to it are totally and legally mine alone.

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Prior to around 1980, the pivotal year that began ALL of what we see today, the US economy was fundamentally different in terms of its political and economic structure. The most obvious difference that occurred during the 1980s is the paradigm shift in technology of the internet, which is the sole reason for the massive difference between “before and after” of the US economy.

So what, you say? Everybody knows that.

What no one seems to “know” (i.e. “understand”) is exactly “why” the internet has had the massive effect on capital investments that it has had, with the attendant massive rise in the stock markets as a result.

Prior to the advent of the internet, virtually ALL capital investment occurred in the US and US occupied territories (e.g. Japan). Thus, compared to now, capital investments were severely constrained, as well as any profits derived from them.

The post-WWII boom in the US economy was a real, sustainable boom that benefitted both investors and the US middle class (which was a phenomenon that has never been seen in this country before, and a paradigm shift in itself).

However, AFTER the introduction of the internet, it opened up the entire global economy to virtually risk free investing. THAT IS THE CRITICAL DIFFERENCE. Buried within the obvious changes wrought as a result of the internet it is the ABSOLUTE KEY TO EVERYTHING that has happened, which is due to a fundamental change in the investors’ “ATTITUDE TOWARDS RISK PREMIUM” related to capital investment.

The proof that this thesis is indeed global lies not only in the US economy, but it is the basis for the collapse of the EU as well. The perception of a “risk adjusted rate of return” changed so radically and subtly after the internet, that it literally devolved down to a “zero risk” scenario for sovereign bonds. THIS was a major factor in the collapse of the eurozone economy. Risk was wrongly totally disregarded in the pricing models for capital investments with the result that the risk adjusted rate of return was/is grossly underpriced ON A GLOBAL BASIS. This allowed an inflationary environment to build up virutally unnoticed because of internet effect, which seemed to remove all risks associated with foreign investment.

The iternet itself would aruguably not been enough to tip the scales in terms of capital investment.

It was the fact that the percieved “risk premium” instantly dropped risk of capital investment effectively to zero in the minds of the investors, and thus had an immense impact on the global markets, which are a reflection of their combined invest is the SOLE REASON why the global economy began what is now the largest speculative bubble in investment history.

This also resulted in a massive drive by the wealthy investors to begin investing globally. However, the problem was that none of the present tax, trade and banking legislation was set up to take advantage of the paradigm shift in capital investment. At that point, there began to be applied immense pressure to change the laws to accommodate unrestricted global trading. This process took several decades to accomplish, but all of the old legislation has now been replaced by laws favoring foreign investment.

This change, beginning in the 1980s, gradually began to erode the US economy to the point where it collapsed in the “housing crisis” of 2007, but the underlying speculative bubble went much deeper to the core than simply the US housing market. It went to the basic issue of a risk adjusted rate of return, where massive amounts of profits were being reaped by investors. The demand was so great that the banking system, hard pressed to find suitable investments to sell, began its creative financing. The incentive for profits was so great that all thoughts of any sensible banking procedures, regardless of the laws, went out the window. The fact that banking regulations also permitted the repackaging and resale of investment instruments — thus forever burying an audit trail for anyone to discover the true nature of what they were buyinng resulted in the debt which might have been held for 30 years previously, was not simply passed on to unsuspecting investors around the world. In retrospect, the “subprime” housing market collapse was the RESULT, NOT THE CAUSE of the meltdown and market crash in 2008.

In summary, ALL that you see now in terms of a global economy in trouble can be traced back to an unreasonable investor euphoria of unlimited profits without any risk premium at all. Now, we are face to face with the hard truth, that in the real world there is ALWAYS RISK. Yet, the global economy is still in “denial” of that fact. Therefore, the ONLY solution that will work is to return to the point just prior to the delusional “irrational exhuberance” of risk free capital investing.

——————————————————–

You may or may not know from my previous comments that, while presently retired, I worked for several decades as a Plant Controllor and Finance Manager primarily in the high tech industry at the same time this massive paradigm shift was beginning to take place, so I got to see this whole thing happening in “real time”, as well as its pernicious effects.

I am also a CPA/MBA with an intense interest in the present day “totally abnormal” global economic theory and its impact on various existing politcal systems, especially in relation to its impact on the “historically normal” global economic theory and politics that existed from the early 20th Century, both prior to the paradigm shift of the internet and to the present global economic situation, since these form two distinct political and economic periods within the general historical trend. This interest is a direct result of my extensive background in plant accounting operations and economic forecasting for these firms for the better part of twenty years, and which were already global in terms of the scope of their operations before the internet. My particular specialization was SE Asia, where most of the semiconductor manufacturing activity was taking place at the time.
My personal interest, however, really lies in European history of the late 19th to early 20th century, with a special emphasis on the underlying causes of both the “Great War” and its misnamed continuation of WWII, since they and the economic, social and political situation of the global economy between those two periods is critical to understanding the same issues we have today. Most, if not all of today’s issues are either directly or indirectly related to the political and economic factors of that period. I have spent many thousands of hours of research in an attempt to understand what is happening today and why. I have literally done enough research work to write a book, but no one would read it because it is not even close to what is taught as mainstream history in schools.

——————————————————–

I will use this DOW chart to prove my point. If you have any trouble understanding my instructions, let me know because it is essential that you see “real time” proof of what I am saying.

Go to this website:

http://www.google.com/finance?q=INDEXDJX  :.DJI

Select Zoom: ALL

What you are looking at is the chart of a massive, decades’ long speculative bubble, ALL due to the wrongful complete disregard of any risk in capital investments, which was and still must be an integral part of capital investing ananysis.

The real world is NOT completely without risk.

That is a fact and that is what is wrong with the global economy, as shown in the graph you are looking at.

————————-

COindependent –

Thanks for acknowledging that you understand I was prevented from giving you this information previously.

Would you please acknowledge that you have indeed received my second attempt?

Thanks!

Regards.

Posted by PseudoTurtle | Report as abusive

Really? We have oil, but not that much oil. And you guys better take into consideration interest rates, because they cannot be suppressed forever. IMO, the oil will be needed a lot more for foreign countries once they stop propping us up. It’s good that we’ll be able to sell it to them.

Posted by AJ876 | Report as abusive

@PseudoTurtle,

I would never have believed one of your claimed education and work experience could put together so many words addressing the ups and downs of world economies in history without acknowledging the increase in actual business productivity made possible by inexpensive computers and software that has put hundreds of thousands, if not millions of clerks, lower management and “production” workers on the street in recent decades.

Those jobs were not “offshored” They are just GONE. Forever. For the most part these were “good, middle class jobs”! The sons and daughters of today’s “middle class” and their sons and daughters are inevitably going to be chasing fewer and fewer jobs that pay enough to start a family, buy a house or new car.

It is PROFITABLE COMMERCE, the production, distribution and purchasing of goods that drives world economies. Investments and securities are but one leg of a three legged stool.

No one produces anything for long for which there is no willing and solvent buyer (except the immediate post-WW II Russian “managed” economy). What has changed today is that fewer and fewer workers are needed to produce goods for those that can afford them.

No economist has yet credibly postulated how to maintain or raise living standards in a world of decreasing national affluence, decreasing population and decreasing GDPs. Whether or not that nut can be cracked, it’s obvious our world will soon be caught up in accelerating change as it seeks to restore some “natural” balance of human populations. We live in interesting times.

Posted by OneOfTheSheep | Report as abusive

What I am proposing in my comment above is basically that the present the “new neoclassical systhesis” (i.e new synthesis) is fundamentally flawed because it fails to take into account the real world human behavior of investors, which is what underlies the global economic crisis. The efficient market hypothesis does not accurately represent the behavior of individuals engaged in investing. They quickly become “irrational” as they become absorbed with “winning profits”, much like a gambler absorbed with “winning bets”. When this occurs, the market takes on the qualities that typify mob behavior.

What is missing from these ALL of these theories is the connection to behavioral economics, which would link real world human behavior with the supposedly rational markets. THAT is the basic disconnect that I see in every single analysis on the causes of the 2008 crash, ALL of which invariably blame varous factors related to the US housing bubble,

However, as I said above that, while the housing bubble crash of 2007 may have been the first sign of an impending global economic collapse in 2008, it WAS NOT the cause, but simply another casualty of mispriced CAPM models, which is the real underlying “fatal flaw” of the internet.

The internet subtly changed investor behavior, mainly because it offers a false sense of security in terms of one’s investments. Previously, time and distance were insurmountable obstacles which had to be included in CAPM models. But the “seduction” of the internet gave the false impression of more control and stability for investments that could now be “safely made” anywhere in the world, which resulted in assigning a much lower risk than was warranted, which spurred investment, that caused massive profits never seen before, that cause the banking industry to begin “creative financing” to satisfy the monumental surge in investment vehicles being demanded.

In my mind this has had the same effect as lowering interest rates by the fed to spur growth, and is responsible for the “irrational exhuberance” Alan Greenspan apparently did not understand either. In truth, I don’t think anyone understood what was really driving the global investment binge at the time. It is only later that we begin to analyze what went wrong and why.

But, to the best of my knowledge, ALL of the analyses are totally wrong because they describe the effects, but not the actual cause — risk adjusted rate of return on capital investments had been seriously underpriced or in the case of sovereign bonds allowed to to go to zero!
THAT is where the problem of the global overinvestment really began. Everything that came later was the result, not the cause of the 2008 meltdown. I am not aware of ANYONE making this direct connection.

What current market analysis needs to make its theories complete, but does not include is the concept of the “PSEUDOCERTAINTY EFFECT”. The concept of a “riskless investment” was implemented without ANY consideration of the “pseudocertainty effect” might be a major factor in moving from historical capital investment procedures to those which were fundamentally altered by a paradigm shift in technology that no one understood completely. Thus, its effects were either ignored or grossly understated.
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New neoclassical synthesis or new synthesis is the fusion of the major, modern macroeconomic schools of thought, new classical and new Keynesian, into a consensus on the best way to explain short-run fluctuations in the economy.[1] This new synthesis is analogous to the neoclassical synthesis that combined neoclassical economics with Keynesian macroeconomics.[2] The new synthesis provides the theoretical foundation for much of contemporary mainstream economics. It is an important part of the theoretical foundation for the work done by the Federal Reserve and many other central banks.[3]
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The efficient-market hypothesis (EMH) asserts that financial markets are “informationally efficient”. In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.
There are three major versions of the hypothesis: “weak”, “semi-strong”, and “strong”. The weak-form EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong-form EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong-form EMH additionally claims that prices instantly reflect even hidden or “insider” information. Critics have blamed the belief in rational markets for much of the late-2000s financial crisis.[1][2][3] In response, proponents of the hypothesis have stated that market efficiency does not mean having no uncertainty about the future, that market efficiency is a simplification of the world which may not always hold true, and that the market is practically efficient for investment purposes for most individuals.[4]
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Prospect theory is a behavioral economic theory that describes the way people chose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics. The model is descriptive: it tries to model real-life choices, rather than optimal decisions. The theory was developed by Daniel Kahneman, a professor at Princeton University’s Department of Psychology, and Amos Tversky in 1979 as a psychologically more accurate description of decision making, comparing to the expected utility theory.
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The pseudocertainty effect is a concept from prospect theory. It refers to people’s tendency to perceive an outcome as certain while in fact it is uncertain (Kahneman & Tversky, 1986).[1] It is observed in multi-stage decisions, in which evaluation of outcomes in previous decision stage is discarded when making an option in subsequent stages.
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The capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset’s non-diversifiable risk. The model takes into account the asset’s sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.
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Again, as I stated above, unless and until proven otherwise by a previously published work that clearly links the gross underpricing of risk adjusted rate of return on capital investment as the most important factor in the growth of the speculative bubble since the 1980s, I will continue to exercise my “intellectual property rights” relating to this economic theory, granting no one the right to use the ideas I have expressed in any of my writings without my specific permission.

Posted by PseudoTurtle | Report as abusive

It’s interesting to see a well-balanced article on the subject that presents two diverse scenarios, one optimistic and the other pessimistic, or realistic depending on one’s worldview. The responses by the ideologues are interesting too. It seems that no amount of logical compilation of facts will ever satisfy them. Now we know how those corrupt Members of Congress get their jobs.
“The economy will never turn around!”
“Computers have stolen our jobs!”
“The aliens are coming!”
Good grief! Where did these people go to elementary school?

Posted by ptiffany | Report as abusive

If you can understand (i.e. accept) the true reason for the crash in the global economy, then it should be intuitively obvious that the wealthy investors literally did this to themselves.

Thus far, only ordinary people have been required (i.e. forced) to make up for the losses that rightfully should be borne by those who gambled away fortunes like Monopoly money, but now expect others in society to pay for their excesses.

What is happening is wrong, just about any way you care to look at it.

This is especially true of the worldwide economic insanity of QE programs, which are basically nothing more than printing money.

It is highly unlikely the global economy can continue on this binge of debt just to placate the wealthy investors, who are now living on “Wealthy Welfare”, and intend to do so for as long as we are stupid enough to allow it.

Posted by PseudoTurtle | Report as abusive

Thoughts on the Electronic Printing Press
May 10, 2013 posted by Doug Noland

http://www.prudentbear.com/2013/05/thoug hts-on-electronic-printing-press.html#.U Y_9ZsqU-yw

Posted by PseudoTurtle | Report as abusive

@ COindependent –

You were arguing that the US auto industry is in recovery, but I said it was nothing compared to the Chinese auto market.

May 9 – Bloomberg: “China’s passenger-vehicle sales rose 13% in April on rising demand for new models in the world’s biggest vehicle market. Wholesale deliveries of cars, multipurpose and sport-utility vehicles climbed to 1.44 million units in April…”

Posted by PseudoTurtle | Report as abusive

Oil and gas does not constitute maanufacturing. It is manufacturing America needs for real long-term job creation. That will only come if corporations become good world citizens. Right now they aren’t. They support inhuman work conditions and serious polution.

Posted by Tom_MacKnight | Report as abusive

@Tom Oil and gas is a combination of both extraction and classic process manufacturing. How do you think crude oil and natural gas are processed to create finished goods?

As for the “inhumane working conditions and serious pollution” you have obviously not been exposed to North American oil field operations or noted the investments made in both worker safety and minimizing the environment issues. Oil field workers, individually and collectively, are very sensitive to the environmental impacts associated with their work.

Even “renewables” require massive energy inputs to convert sun and wind power to create the watts and BTU’s consumed. So, the issue is what form of energy would you prefer to consume, as there is not any way to can not be an energy consumer (starting with the computer you typed your comment on and the electricity that powers it.)

Posted by COindependent | Report as abusive

@Tom_MacKnight

What do you believe ‘good world citizen’ means? Do you expect businesses to disregard profitability and to operate in un-economical ways for the benefit of the countries they were founded on?
I don’t think they would simply do that by themselves. Therefore, legislation would be necessary. I, personally, am against such legislation. The result of car manufacturers moving to China is because it’s more profitable to do so. The US lost that competitive advantage long ago. Therefore, the country should look over the horizon to develop new competitive advantages that are sustainable on today’s global economy. It’s called moving forward.

Posted by theAntagonist | Report as abusive

@Tom @COindependent Tom’s view of manufacturing is too narrow. I like Coindependent’s terminology of “process manufacturing.” Getting back to the article itself, the low price of natural gas both as a feedstock to a broad array of manufacturing and as an energy source for many other forms of manufacturing is going to create many jobs and a huge competitive edge for U.S. manufacturing.

My previous comment (way back up there) is that there is no need to restrict natural gas exports at all. The abundance of US reserves and the high cost and limited capacity of LNG shipping vs pipelines will continue to maintain a lid on gas prices and a huge price advantage for North American manufacturers. Meanwhile the development of the export infrastructure will create many great jobs funded by the profitability of LNG exports. Dow Chemical and others are funding a massive propaganda and lobbying campaign to restrict exports which is greedy, goes against free markets, and completely unnecessary. Unfortunately the author’s article is somewhat tainted by this propaganda campaign.

Posted by QuietThinker | Report as abusive