Advancing on Chaos and the Dark

Spending a significant time outside of the US gives one an interesting perspective on US news and politics. Watching clips and seeing pictures from the Republican Primary debates from afar has been fascinating, as I am not engaged in any day to day conversation about the elections in the way I have been in every election in the past. This morning, when I saw the picture of the four remaining candidates headlining The Drudge Report, I was struck by the fact that a couple of months ago there were eight or nine candidates on the stage and now it is down to four. 

The US primary election system is intensely flawed, and highly undemocratic. Essentially, the voters determine very little in the selection of nominees. Fundraising, ‘momentum,’ press coverage, etc., are much more influential in primaries than in general elections. General elections tend to be almost fair. But when there are fields of seven, eight, or nine candidates, the media has extraordinary influence in who the public gets to know. Moreover, early states like Iowa, New Hampshire, and South Carolina more or less make the ultimate decision.

I have long been a proponent of utilizing the Condorcet Method for elections, but do not foresee any kind of widespread adoption of it in the near future due to the fact that although it is not complicated in and of itself, it is a bit difficult to describe in a simple way.

It strikes me, though, that there is another way. With Presidential elections now starting almost two full years in advance, we might as well embrace that fact and use it for good. Debates should start being organized eighteen months from the date of the general election, and declared candidates should participate in many different formats—town hall, Lincoln-Douglas, round-table, etc. Then, rather than having Iowa and New Hampshire vote, there should be a national elimination vote by the registered voters of the party. No more than four candidates standing by the end of January. Then, in March, two, and by the end of May a final vote to select the nominee.

With ever-improved internet security, such an idea is not so far-fetched, but there is no doubt the media and the early primary states will strongly oppose any kind of changes to the system. American democracy needs an upgrade, though, or the people are going to lose faith in it—if they haven’t already.

The Wall Street Journal reports that physical stimulation of the brain, in addition to having cured tremors in Parkinson’s patients, is now being utilized to cure depression and other forms of ‘mental disorders.’ 

I wonder if this is an actually positive development. Depression is an important part of the human experience—it drives us to make corrections to our lives, to examine ourselves, to change, to grow. Art, music, and literature would become sterile without suffering. Can we imagine Kierkegaard without his depression? Or Van Gogh? Can we even fathom Jesus in the Garden of Gethsemane or on the Cross after ‘brain therapy?’ 

There is no doubt a lot of illegitimate suffering in the world that we should do everything we can to remedy—famine, infectious disease, warfare. But legitimate suffering plays an integral role in the evolution of the human species and the development of individual people. 

Some things should be met, not with a surgeon’s scalpel or pills but with fortitude, emotional resolve, and community support. I fear we try to medicate too many things these days, and we may just medicate ourselves out of being human.

In his blog today, British MP Douglas Carswell makes the following point concerning the prospects of a Scottish referendum on independence:

During the coming referendum campaign, I hope that no one in Scotland will be put off by the idea that Scotland is somehow “too small” to prosper as a self-governing nation. Norway, Switzerland and Singapore are each of a comparable size, and seem to be doing okay. Indeed, look at the most successful nations around the world in terms of per capita GDP, and there seems to be something of a small state advantage.

The United States is the one large-state/high GDP per capita anomaly, but we should consider that up until recently the US was governed by its constituent states, especially on domestic/economic matters. Its decline of late can no doubt be in some part attributed to the more European metropolis-colony economic model it has adopted during the post-World War II “imperial” era. Indeed, outside of Silicon Valley and the technology revolution, nothing meaningful has happened in the American economy since prior to World War II. 

Countries like Chile, looking to accelerate growth and bring their economies into the First World should consider the power of devolution, decentralization, and local control. If Chile were a loose confederation of 10-20 Singapores (which would clearly be feasible in a country that is never more than 265 miles wide), it could rapidly increase its population through immigration, facilitating new centers of commerce and innovation and becoming a trading conduit not only for the rest of Latin America, but for the Asia-Pacific region, not to mention a natural place for the coming tide of US emigration, particularly amongst the young, borderless creative class.

Unfortunately, Chile seems committed to marginal solutions that will lead to incremental economic growth but otherwise preserve the status quo, especially when it comes to the power relations of Santiago to the regions.

I may have found reason to doubt my bearish position on the Chilean real estate market. Business Week is reporting that Chile is set to debut 20-Year peso bonds. This is a significant development for the country, since most debts are denominated in UF (unidad fomento), which is an inflation-linked currency unit. This means that long-term fixed rate mortgages do not exist.

20-year peso bonds would change that, allowing banks to potentially launch 20-year nominal rate mortgages. Depending on the private sector response to this development, Chile could avoid a housing crises even if copper prices soften in 2012.

Business Week reports on Silicon Valley’s alternate reality:

In Silicon Valley, all the Sturm und Drang of 2011 seemed as relevant as the Cricket World Cup. High Unemployment? Crippling debt? Not in Silicon Valley, where the fog burns off by noon and it’s an article of faith that talented, hard-working techies can change the world and reap unimaginable wealth in the process. “We live in a bubble, and I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world,” says Google Chairman Eric Schmidt. “And what a world it is: Companies can’t hire people fast enough. Young people can work hard and make a fortune. Homes hold their value. Occupy Wall Street isn’t really something that comes up in daily discussion, because their issues are not our daily reality.”

The article goes on to question the long-term viability of an insular culture as a mechanism for continued innovation, something I think is worth questioning. The rest of the world lives much differently than the people in San Jose and San Francisco, and they need products and services that are unique to their own local circumstances. This isn’t to say that Silicon Valley is going to go bust, but rather that it isn’t the whole story when it comes to innovation. 

Roger McNamee, a longtime venture capitalist and managing director at private equity firm Elevation Partners, also wonders if Silicon Valley techies have grown insular. “Too many startups make products for people like them, which is predictable, but not interesting,” he says.

Herein lies the real question: does our relatively centralized system of higher education contribute to this effect? Should Chile and India and Brazil be sending their best and brightest to Stanford, to become absorbed in the Silicon Valley Alternate Reality to the point that they are no longer capable of solving problems in their own countries?

It’s worth considering.

From Business Week:

The inflation rate in the 17-nation euro area fell to 2.8 percent from 3 percent in November, the European Union’s statistics office in Luxembourg said in an initial estimate today. Euro-area services and manufacturing output contracted less than initially estimated last month and French consumer spending unexpectedly declined in November from October, separate reports showed.

The article claims that this gives cover to the ECB to further reduce interest rates and relieve pressure on the Mediterranean debtor states in Southern Europe.

It is unlikely, however, that it will be enough to offset austerity measures being imposed by Berlin Brussels. 

Sebastian Boyd, writing in Business Week, explains the strengthening of the peso in the last 48 hours:

Chile’s pension funds had $133 billion of assets under management at the end of November, the equivalent of 65% of the country’s gross domestic product. The funds must take long peso positions to offset their foreign currency exposure when they buy assets abroad. 

Despite protestations from my friends in Chile, I am still a short to midterm bear on the Chilean peso due to weak manufacturing data from China as well as growth issues in the US & Europe and the Eurozone debt crisis. As a country whose main exports are commodities (mining and agricultural), it can’t help but be hit. This is, however, good for the rest of Chile’s export sector, as a weakened peso increases competitiveness. Since Chile needs further economic diversification (away from commodities), it could present a unique opportunity for the country’s budding tech sector to shine.

“Never believe anything in politics until it has been officially denied.”

-Otto von Bismarck

Chile’s Central Bank has issued a report on the status of the real estate sector here. From Chile’s newspaper, El Mercurio:

A study of the Central Bank concluded that the Chilean real estate sector does not indicate any risks of being in a bubble. The study said that the price of housing as a percentage of revenue has been stable, unlike in countries with problems, and local companies do not face deteriorating financial conditions.

The article goes on to outline the Central Bank study’s reasoning behind its conclusion, comparing overall housing prices in Chile to housing prices in Europe, and especially to the US in the lead-up to the sub-prime crisis. Undoubtedly, this report is meant to calm the nerves of anybody currently observing the skyrocketing costs of commercial property in Santiago and bare land in the periphery, not to mention the incredible increase in housing prices in the upper middle class and high-end real estate market since 2009. 

The numbers cited in the El Mercurio article are generalized residential housing numbers for the entire country. They also assume that the economic growth is sustainable and discount the possibility of Chile being hit by a recession in the next 2-3 years. There are several reasons this approach is foolish.

1. Chile is a country without a real middle class, and income disparity applies doubly to the growth of the past few years. This means that one must look at specific sub-sectors of the housing market, since most Chileans have not seen significantly improved income in recent years. In Vitacura, Lo Barnechea, and Las Condes, where the upper middle and upper class live, housing prices have doubled or tripled (depending on the particular neighborhood) since the financial crisis. Moreover, unimproved lot prices have gone up five-fold. In the budding suburb of Chicureo in the comuna of Colina, just north of Santiago, it has been even more pronounced, with speculators gobbling up every 5,000 square meter parcela in sight, in most cases on bank credit. If there is even the slightest damage to the economy due to any form of external shock, the aspiring middle classers that are moving into many of these neighborhoods (and who are already carrying high debt to income ratios in order to afford such houses) will in some cases be forced out of their houses or at least it will stem the tide of people moving into such neighborhoods. There are not enough borderlined upper class buyers to move down into that market to absorb such a surplus.
2. Chile is not really one country, but two. Here there is Santiago and there are the Regions. They might as well be on different planets. To examine the entire Chilean market as a whole would be like generalizing Manhattan apartments with farmhouses in Nebraska. Santiago (and the mining region in the north) has been the greatest beneficiary of the recent economic boom here. As a result, Santiago has been disproportionately affected by rising real estate prices.
3. Chilean GDP growth in the past 3 years has primarily been due to the massive rise in commodity prices in the global markets. As a country whose top exports are natural resources, agriculture, and pulp & paper, rising commodity prices alone account for 75% of the growth in the economy. Of course this is not the story that policymakers in the government are telling, especially as the embattled center-right government of Sebastian Pinera struggles for survival in the wake of massive student protests this year. As China goes through a period of growth contraction (if not contraction in absolute terms), and as US and European consumption are hit even harder by their debt crises, commodity prices will inevitably collapse (unless, of course, the US and Europe resort to inflation as a ‘solution’ to their problems). This will hurt Chile more than it will hurt most countries. In the long-run, it will be net positive, as it will force the country to innovate, become more efficient, and attract more diversified entrepreneurs from abroad (which it is already trying to do), but in the short-run, it will pop the commercial and upper middle class residential real estate bubble.
4. Interbank lending in Chile is already facing illiquidity. The Central Bank of Chile itself this week reported this fact. When interbank lending is squeezed, it usually indicates that the banks do not trust the collateral of each other’s balance sheets. Given that the most significant components of bank balance sheets here are commercial paper and real estate, any minor downturn will cause the credit markets to freeze up (especially given the general aversion to inflation found in Chile and amongst its monetarist Central Bankers). This icy blast will wipe out speculators and bring prices down to earth.

I could be wrong about all of this, but I have witnessed it first-hand, from a private sector perspective. The problem in Chile isn’t that official data is objectively false like in China or Venezuela, but that given the country’s many different kinds of disparities, it is easy to manipulate statistical data to produce a desired outcome. It reminds me of the old joke…

A student wanted to know the answer to the question 2 + 2, but he wanted an explanation for the answer as well. First he went to his maths professor, who explained that 2 + 2 = 4, and provided a lengthy proof for it. Then he went to his philosophy professor, who explained the logical requirement that 2 + 2 = 4 in a priori terms. Finally, he went to his economics professor and said “What is 2 + 2?” to which the professor responded, “What do you want it to be?”

Ambrose Evans-Pritchard, writes in The Daily Telegraph

There will be no Chinese credit explosion this time, no real help from post-bubble India or over-stretched Brazil. It will be a global downturn on all fronts, aborting what remains of recovering even before industrial output in the OECD bloc has regained its pre-Lehman peak.

The second wave will hit with youth unemployment already at 45% in Greece and 49% in Spain; and with the US labour participation rate already at depression levels of 64%. We will hear more about Italy’s Red Brigades, Greece’s Sect of Revolutionaries, and America’s militia groups, and how democracies respond. Proto-fascism in Hungary is our warning. China’s surgical soft-landing will slip control, like Fed tightening in 1929 and 2007, or Japan’s squeeze in 1990. Once construction has run amok, bears will have their way.

He goes on to describe a world in which a devalued yuan sparks a move toward trade closure, acceleration of capital outflows, a bankrupt Japanese State, and the obliteration of the Euro.

In general, his predictions are merited and based in (grim) reality. However, one must hold out hope that where politicians fail (as they always and inevitably do), entrepreneurs will unleash their creative-destructive forces and forge a new economy, a third Industrial Revolution, that lifts the world from its debt-induced mire.

It is only the will of the demos to stand up in the face of its elitist oppressors and embrace change in industry and commerce that can fix our current malaise. The leaders of this century must be voluntarist, private sector innovators and not another generation of corrupt career politicians, bureaucrats, and bankers.