North Korea, Nukes, and the US Economy

What's easier to cripple: the US military, or the US economy?

I'm sure everyone has heard about the latest round of tough guy rhetoric out of North Korea. And like many, I'm not too worried about nuclear capable missiles. Yes, they've moved two mid-range missiles to their coast for "testing" purposes, but they haven't proven the ability to actually hit anything. Remember, the Pacific Ocean is large. North Korea can certainly do serious damage to Seoul with its conventional artillery. There would certainly be some regional economic impact between South Korea, Japan, and maybe even China with stability questions.

No, I don't see anything so direct from North Korea that would allow the United States and South Korea to automatically retaliate.

Sailing the nuclear seas...

Instead, I see the possibility of Kim Jong-Un sending a nuclear device in an ocean container through China and to the United States, where 90% of all imports originate. Specifically, to Long Beach where over half of U.S. imports discharge. The volume per day is incredible (over 6 million containers in 2012; or 17,000 per day).

Long Beach operations are 24 hours a day. A few years ago, they were forced to implement a fee on any container handled during normal business hours, as an incentive to use the new night-time operations. Now, both the daytime and nighttime operations of the Port of Long Beach are at full capacity.

Any disruption at that port would cause the US economy to come grinding to a halt. US imports were basically backlogged for a year after the ILWU struck for a couple months in 2001. Docking and loading schedules are often down to the hour, and there's much, much more to economic logistics than just loading and unloading an ocean container. Warehousing, border protection, trucking, rail hubs, and various other necessary support functions can be found at our nation's ports.

All of these would be seriously affected with a small or dirty nuclear blast.

And how easy would it be to smuggle one in, and set a timer for detonation? Not very difficult. Shipping manifests can be altered, bribes are not unheard of in China, and out of a population of 1.8 billion people there are sure to be some anti-American reactionaries.

In the United States? Authorities took the "all cargo to be inspected" mandate off the table late 2012, and only about 4-5% of ocean cargo is inspected. Add the effects of the budget sequestration, and you'll see more border patrol cut at the ports and siphoned off to the southern border to protect against "illegals."

I'm sorry, but the threat of an "illegal" taking sub-minimum wage jobs away from unwilling Americans pales in comparison to our entire economy coming to a halt because we couldn't inspect enough ocean containers.Collapse this post

Gold Standard Fixed Exchange Rate Possible Balance of Payment Disaster

The fixed exchange rate for gold is one of the attractive qualities that a new gold standard holds for those like Ron Paul and his followers. It's the simplicity that makes their argument. It's the same with a flat tax. If it's even for everyone, then it's equal and non-discriminatory. 

But, just like the flat tax is highly regressive to poor citizens, using a fixed exchange rate is highly regressive for those countries that import more than they export. 

Galina Hale has an excellent primer on balance of payments: what it is, how they get out of whack, and the effects of a trade imbalance. From the opening paragraphs:

A balance of payments crisis typically arises when a country can’t finance its foreign transactions. A country’s balance of payments can be separated into two main parts: the current account, which reflects the trade balance in goods and services; and the financial account, which reflects the balance on net international financial transactions. In turn, the financial account can be broken down into, one, the balance on international private capital flows; and, two, changes in official holdings of foreign reserve assets, such as gold, foreign currency, and foreign sovereign debt.

Three things are noteworthy about current account deficits. First, they occur when a country’s imports exceed its exports. Second, they indicate that a country’s consumption and investment exceed its production. In such a situation, a significant share of payments for purchases goes to foreigners, meaning that aggregate savings are below aggregate investment. Third, because a country running a current account deficit consumes more than it produces, it is forced to borrow. In effect, the country is promising to pay for extra consumption today by consuming less than it produces some time in the future.

So, instead of a "basket of goods" that is typically used to calculate changes in currency and allows for adjustable exchange rates, let's tie currency to a fixed asset such as gold and assign it a fixed exchange rate (say, USD35.00 per troy ounce). This would quickly cause a trade imbalance for any two countries that consume and produce at differing levels. 

This is what caused Germany's hyperinflation of the 1920s. Germany was forced to pay restitution to their enemies at the end of WWI. Unfortunately, that restitution had to be in the form of gold. Once Germany's gold ran out, there was nothing for them to exchange. Prices shot up, the value of the Deutsche Mark dropped, and people were using wheelbarrels full of worthless paper money to buy a loaf of bread.

And gold standard-bearers are worried about hyperinflation caused by currency exchanges?

Galina Hale uses the current currency situation in the Euro-zone to highlight her point. The Euro is at a fixed exchange rate between Euro-zone countries:

The 1999 introduction of the euro set the stage for current account imbalances in some euro-area countries. A common currency reduced trade costs, thereby boosting overall trade volume. At the same time, labor costs rose in the periphery relative to core countries, especially Germany. As Figure 2 shows [below], this produced surpluses in Germany and widened current account deficits in Greece, Italy, Ireland, Portugal, and Spain (GIIPS), especially Spain. 

Prior to 1999, Germany and other Western European countries poured their own currencies into GIIPS, which helped shore up their trade imbalances. Notice, though, after 1999, how the trade surplus of Germany tracks the trade deficit of GIIPS?

Switching to a fixed exchange rate gold standard, coupled with our current trade deficit and already weak US Dollar, would cause the same type of currency crisis and devaluation that we're seeing in the Mediterranean now.

Do Demographics Affect the Debt?

Dr. Ed Yardeni discusses the changes in demographics with regards to marital status, and how that might help interpret our considerations of the national debt.

As you can see from the below chart, single Americans are catching up with their married counterparts. It's Dr. Yardeni's conjecture that the rise in single adults is driving our economic expectations. Basically, married couples have kids so are more concerned with long-term consequences of the debt; single adults are selfish and look to immediate gratification.

That's apparently why Barrack Obama was re-elected -- for all the free goodies (and no, I don't buy that line of reasoning).

I'm curious to your thoughts. Is the shifting demographic causing a change in social and economic expectations? Or, do you think changes in our social and economic expectations are shifting the demographics?

Euro versus United States Employment Changes

Antonio Fatas takes exception with the Wall Street Journal and its constant Eurozone fear mongering (subscription link). There's a valid argument to be made against the Eurozone's austerity measures, and their lack of job opportunities for younger adults. However, a typical WSJ Euro article will talk about, per Fatas:

A bloated welfare state, high taxes, heavily-regulated labor markets have led to a disappointing economic performance. The predictions are generally dire and after reading the article it seems that the only remaining question is how long the European countries and the Euro project will survive.

One of the most debated structural problem in the United States is "job creation." With that topic comes a whole host of economic theory: lower taxes, increased government spending, outsourcing consequences, insourcing benefits, bailouts, etc.

And one of the more constant "truths" in American economic debate is that the US has survived the Great Recession with better job growth than the anemic Europeans. 

But, is that really so? Fatas looks at the US and Euro's employment to population growth rates starting at 1999, which is when the EU formed. Here's the comparison graph:

Although the absolute numbers of employment participation favors the Americans (because of greater youth and female employment), the growth of participation favors the Europeans. Even during the Great Recession starting in 2008, the slopes (or, changes in rates) is better for the Europeans than the Americans.

Is there room for criticism of Europe's economic recovery? Absolutely. Does the Wall Street Journal need to pick better examples?

Absolutely.

Gold Investments and Behavioral Expectations

Noah Smith has an interesting blog post up about gold, how it tracks relative to stocks, and some common behavioral responses from goldbugs. 

Two major factors seemed to pick up the goldbugs' interests again: the unspeculated rise of gold prices relative to silver prices, and the vocal resurgence of "gold standard" rhetoric by American officials. One just needs to look at the historical constraints of the gold standard (or, Mercantilism, if you're old school). It stifled growth during the 16th-19th centuries, it was a direct cause of WWII, and it's simply an outdated mode of capital investment and global finance in the 21st century. 

I'm a firm believer in diversified portfolios, which includes non-stock items like precious metals. However, I don't believe that gold is the end-all-be-all for commodity investing or for protection against dollar depreciation. Silver is tracking lower than gold, which has historically tracked in lock-step with its sister commodity. 

As far as a monetary store, gold is all about tradition. Inherent value is much lower now compared with 50-100-500 years ago. And tradition is simply about behavior, and the slow evolution in changing that behavior. 

Noah Smith sums it up with an update:

Zero Hedge is probably just "talking their book". They own a bunch of gold, so right up until the point they're ready to dump it, they'll say "Buy, buy, buy!" Then they dump it, then they start yelling "Sell, sell, sell!" If it works, it's the old pump-and-dump scam, which is illegal when you do it to a stock, but perfectly legal to do when it's a whole asset class, like gold. Of course, Zero Hedge probably doesn't have a lot of ability to move gold prices, but why not try? In the meantime, they make money selling ads for their website. There's really no downside for them.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Noahpinion - Gold, gold, GOLD!!!
On November 11, 2011, Zero Hedge ran a post from a site called GoldCore. The title was: "Gold Over EUR 1,300 - On Way to ‘Infinity’ on Eurozone Contagion?" Here is what it said: