December 27, 2011 9:06 pm

Far too soon to write off America


I hear a recurring refrain from China these days: America’s strength comes not from its democratic and free-market values, but merely from the size of its economy and the power of its soldiers and weapons. There is nothing universal about America’s democratic and economic ideals, Chinese officials insist. Democracy is a relative concept, and markets have a centuries-old habit of spinning out of control. The US remains a superpower only because its economy remains on top. Soon, they warn, this advantage will be gone.

It is no surprise that many Chinese love this argument. It flatters their system and their current success. No need for genuine pluralism or large-scale privatisation of state-owned companies. China’s economy will soon surpass America’s; so say economists on both sides of the Pacific. So, is America exceptional because it is strong, or is it strong because its values are exceptional? That is a question the next president must answer.


It is accepted wisdom that America is in decline, but what about its strengths? Its economy is not simply the world’s largest; it is twice the size of second-place China’s, and its per capita income is higher than those of China, India, Russia and Brazil combined. For all the worry over the US credit rating and emerging alternatives to the dollar, global volatility has only reinforced its dominance as the reserve currency. America’s military is not simply the most capable. It is the only force that can project power in every region. Washington spent more on defence in 2010 than the next 17 nations combined, and even significant expected cuts won’t much narrow that advantage.

The US does of course face formidable challenges. Spiralling federal debt, high unemployment, and lower real wages have taken their toll on its self-esteem. For the moment, Republican demands for smaller government have made new stimulus spending all but impossible. Abroad, Washington will have to do more with less, and developing states now have more power with which to obstruct US plans.

Yet investment in the future continues apace. No nation is home to more elite universities and graduate schools, more major multinational corporations, and more breakthroughs in state-of-the-art technology.

Silicon Valley’s latest tech start-ups have built enough momentum to fuel talk of a newbubble”. Development of unconventional gas technologies has been the single most economically significant innovation of the past several years; US-based companies have led the way. All these traditional measures of strength suggest the country is doing fine.

American values, on the other hand, have taken quite a beating. The US has been an indispensable force for stability and prosperity in recent decades, not only because its middle class is the world’s largest, its soldiers the best equipped, or its technology the most advanced. The true source of its lasting significance is that these advantages are a by-product of its faith in liberal democracy, the rule of law, and market-driven free enterprise.

The Soviet Union did not buckle beneath the weight of US economic and military might. It was pulled apart by millions of Soviet citizens who demanded the self-determination that Lenin once promised and Soviet power never delivered. It was not America’s tanks but its ideals that felled the Wall.

These ideals have lost lustre in recent years. The new century began with contested ballots and a presidential election decided in court, a spectacle that made it harder for Americans to champion democracy abroad. The September 11 attacks generated support around the world, but the opening of Guantánamo Bay prison, the Abu Ghraib scandal, and civilian deaths following US drone attacks inside Pakistan have done lasting damage to America’s ability to defend international law and human rights. Meanwhile, the collapse of Enron and WorldCom; the 2008 financial crisis; and bail-outs for American International Group and automakers have undermined confidence in US-style capitalism. As the US economy struggles to restore lost jobs, China has rebounded.

In the coming year Barack Obama and his Republican opponent in the presidential election will have extended debates over the nature of US power. It will not be easy to find differences on the details of their plans for Middle East peace, China, Iran or North Korea, but differences in their visions of America’s role in the world will be all too apparent. Mr Obama will argue that restoring the nation’s economic health is necessary for the US to project power abroad, and that values without strength cannot sustain a foreign policy. He will not use the politically clumsy phraseleading from behind,” but he will herald the principle of limited commitment that toppled Muammer Gaddafi with no loss of American life and a minimal taxpayer contribution.

His challenger will counter that strength without values leaves America without purpose, that it is and must remain an “exceptionalnation, and that it must defend its values everywhere they are challenged. Mr Obama’s vision will fail to inspire. His opponent’s will simply ignore a decade’s damage to US credibility, its leverage and US public tolerance for new commitments overseas.

Beijing’s values represent no greater ideal. They appeal only to those who dream of maintaining power and manipulating markets for political or personal gain. China’s tens of thousands of protests each year suggest a yearning for something beyond stability and state-driven growth. Like demonstrators in Russia, Syria and elsewhere, they want responsive governance, a chance to create their own wealth, and a system that respects their rights and extends their freedoms.

To be clear: the world still needs American ideals and it is up to the next president to seize the opportunities to practise what Americans preach.

The writer is president of Eurasia Group and author of ‘The End of the Free Market’

Copyright The Financial Times Limited 2011.

The French Don’t Get It

Martin Feldstein


CAMBRIDGE – The French government just doesn’t seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries.

French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, recently declared that, “You’d rather be French than British in economic terms.” And even the French Prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.

French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros.

If investors are unwilling to finance the French budget deficit – that is, if France cannot borrow to finance that deficitFrance will be forced to default. That is why the market treats French bonds as riskier and demands a higher interest rate, even though France’s budget deficit is 5.8% of its GDP, whereas Britain’s budget deficit is 8.8% of GDP.

There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels.

The eurozone fiscal deficits and current-account deficits are now the most obvious symptoms of the euro’s failure. But the credit crisis in Europe, and the weakness of eurozone banks, may be even more important. The persistent unemployment differentials within the eurozone are yet another reflection of the adverse effect of imposing a single currency and a single monetary policy on a heterogeneous group of countries.

President Nicolas Sarkozy and other French politicians are no doubt unhappy that the recent European summit failed to advance the cause of further EU political integration. It was French officials Jean Monnet and Robert Schuman who launched the initiative for European political union just after World War II with the call for a United States of Europe. The French regarded the creation of the euro as an important symbol of progress toward that goal. In the 1960’s, Jacques Delors, then the French finance minister, pressed for a single currency with a report, “One Market, One Money,” which implied that the European free-trade agreement would work only if its members used a single currency.

For the French, achieving a European political union is a way to increase Europe’s role in the world and France’s role within Europe. But that goal looks harder to reach now than it did before the beginning of the European crisis. By attacking Britain and seeking to increase British borrowing costs, France is only creating more conflict between itself and Britain, while creating more tensions within Europe as a whole.

Looking ahead, stopping the eurozone financial crisis does not require political union or a commitment of German financial support. It depends on individual eurozone countries – especially Italy, Spain, and Francemaking the changes in their domestic spending and taxation that will convince global financial investors that they are moving toward budget surpluses and putting their debt-to-GDP ratios on a downward path.

France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain or calling for political changes that are not going to occur.

Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan's Council of Economic Advisers and is former President of the National Bureau for Economic Research.

Copyright: Project Syndicate, 2011.

Production processes: A lightbulb moment

By Peter Marsh

The emergence of technologies such as three-dimensional printing offers manufacturers big and small the ability to combine the opposing goals of efficiency and flexibility.

A chandelier inspired by microscope photography of pollen spores and manufactured using three-dimensional printing processes

The link between the ethereal beauty of Venice and the hard certainties of the factory production system may seem less than obvious. But the connections begin in the very heart of the island city – in an array of buildings guarded by a pair of large stone lions, just a few minutes’ stroll from the Piazza San Marco.

Like many former industrial sites, the Venetian arsenal is now used mainly for cultural exhibitions. But it was here, more than 500 years ago, that modern manufacturing was born. The shipyard was the first significant user of standardised parts production – by 1500, 16,000 workers toiled there, turning out everything from firearms to large, wooden-hulled ships, some of which were made in a matter of days. Standardised parts have been one of the most critical influences behind the development of the 21st century factory system. The process makes possible the production of the 1bn artefacts that sustain and enhance human life, and employs roughly 10 per cent of the world’s working population. 

Manufacturers have always faced one problem, however: how to make complicated and novel items accurately in small quantities. The struggle has been to accommodate the opposing aims of speed and efficiency on one hand, and flexibility and variety on the other.

The emergence of “personalised manufacturingpromises to resolve the contradiction. Using computerised designs, techniques such as three-dimensional printing will enable businesses based in Birmingham or Belize to make complicated parts for products from forklift trucks to space rockets that could be assembled virtually anywhere. Customer choice over how the artifacts look will increase, with only minimal compromise concerning quality or cost.

This development places the world on the brink of the fifth era for manufacturing: “mass personalisation”. In 3D printing – also called “additive manufacturing” – machines based on advances in electronics, laser technology and chemistry build up complex shapes from granules of plastics or metal.

“It adds up to a new industry which reduces immensely the gap between design and production,” says Ian Harris, from the Additive Manufacturing Consortium, a US-based industry think-tank. Manufacturers will be able to say to their customers, ‘Tell us what you wantand then they will be able to make [specific products] for them.”

Mass personalisation opens the door to a period of much deeper creativity. Big and small companies will find the inherent restrictions of the interchangeable parts system that began in Venice start to melt away. Standardisation allowed for a remarkable panoply of products – as long as those making them stuck to the fixedmenu” of components. Otherwise, all benefits in terms of speed, accuracy and end price were lost.

Such restrictions will be reduced, according to David Abbott of General Electric – the US group developing applications for the new techniques, along with companies such as Siemens and BMW of Germany; Honda of Japan; Europe’s EADS; and Rolls-Royce in the UK. Additive manufacturing machines already being made by businesses including Stratasys and Z Corporation in the US, EOS in Germany and Sweden’s Arcam will be central to this development.

“The new technology will improve hugely the flexibility that manufacturers have to design new parts and products for a range of reasons – whether this is increasing the fuel efficiency of a gas turbine or changing the look of a kitchen appliance for a reason that is purely aesthetic,” says Mr Abbott. Product developers will be able to designoff piste”, becoming freer to devise new goods in fields ranging from medical devices to home electronics.


The techniques also potentially level the playing field for those who missed out in earlier periods of manufacturing development. Professor Brent Stucker of the University of Louisville in Kentucky says one of the most significant effects will be a re­duction in the amount of conventional industrial infrastructuremachine tools, testing equipment and related factory hardware – that companies and countries require if they are to be considered serious industrial players.

“It will make it easier for nations in the early stages of industrial development – such as in Africa – to leapfrog the conventional route towards building up production capabilities and make a valid contribution to global manufacturing much earlier than would have been regarded possible,” says Prof Stucker.

Such opportunities should also be open to smart individuals, says Prof Stucker. Although the competitive advantages of large and well organised global manufacturers will remain, the new ideas will usher in a return to prominence of the artisan production worker – a breed that in most rich nations has become almost extinct since the demise of the blacksmith.

In the epoch of personalised production, the first products likely be made routinely are items that need to fit in with the unique biological features of an individual. They will include bone and dental implants, hearing aids, stents for unblocking arteries and specialised surgical tools.

These are likely to be followed by objects where individual preferences are important, from fashion-related products and jewellery to lighting systems and furniture. Mass personalisation will also benefit the makers of essential, but often barely noticed, industrial products where the need for variation is linked to engineering function. Valve-makers, for instance, already make up to 500,000 varieties to meet the need for flexible operating procedures in different industries.

Humankind has reached this stage after a journey that began around 1,200BC with the use of craft-based techniques to make products, from pots and pans to arrow heads. During such “low-volume customisation”, everything was made on a one-off basis. Even with semi-formalised techniques such as glass-blowing, procedures were slow and expensive.

Standardisation paved the way for the making of interchangeable parts that, in late 18th-century Britain, helped to stimulate the first industrial revolution – the set of events that established manufacturing as the force behind civilisation’s progress.

Production systems based on standardised parts became embedded in sectors such as machine building and industrial engineering. Still, progress was not straightforward. As late as the 1890s, most industries stuck to craft-based techniques. Introducing the procedures necessary for low-volume standardisation involved considerable cost – investments in machine tools and design – that could seldom be justified unless the savings were also high. And for that to happen, products needed to be made in greater volumes something that would occur only when demand climbed substantially higher than was mostly the case at the time.

It was carmaker Henry Ford who adapted the interchangeable parts system created in Venice to the needs of the early 20th century. He did this by boosting the scale on which standardised parts production worked.

He also capitalised on new ideas in management and factory procedures, creating in the processhigh-volume standardisation” – the third big stage for manufacturing. The benefits could be seen in the price of his company’s Model T, which dropped from $850 in 1909 to $690 in 1912, and to less than half this a decade later. It was a great advertisement for “mass production” – a process others, from the makers of vacuum cleaners to power turbines, were quick to follow.

Ford’s cars were characterised by quality and relative cheapness – but also by the inflexibility of their design. (He famously offered customers “a car painted any colour . . . so long as it’s black”.) High-volume standardisation lent itself to making products that were the same; it worked less well with products that were different.

Some wondered, however, whether the system could be adapted. Among them was Peter Drucker, a management thinker, who in 1973 challenged companies to find ways of using the fewest interchangeable components to make the maximum number of products. Managers at Toyota took up the challenge, and found a way to match customer requirements – that particular colour or fender style – to a set of assembly procedures, all based around standardised parts.

So was created the fourth era of manufacturing. The Toyota production system, or more genericallyhigh-volume customisation”, is the system that gives the world the flexible format on which all kinds of consumer and industrial products are made on a large scale. Though it has proved a brilliant commercial success, the continued use of standardised parts makes it difficult to make fundamental changes in design for established products. With mass personalisation, by contrast, the world will have the chance to build up from basic materials parts that are fashioned according to whatever creative principles their designers and fabricators favour.

What comes next? For all the promise of personalised production, manufacturers will continue to manipulate materials on a molecular basis, as people have done for millennia. The challenge now is how they might work on a sub-molecular level, shaping materials on a scale of nanometresbillionths of a metre.

The challenge was laid down by US physicist Richard Feynman in a celebrated lecture in 1959: “I am not afraid to consider the final question as to whether, ultimately – in the great future – we can arrange the atoms the way we want; the very atoms, all the way down!”

His comment touches on the possibility of arranging the 100 or so available chemical elements into new molecules to create vast numbers of materials that at present can only be dreamed of.

Given the present pace of nanotechnological development, it seems likely that Feynman’s question will be answered in about 2050 – when the sixth era for manufacturing, that of mass-marketnano-productionlooks set to start up. The 3,000-year evolution of the global manufacturing system still has plenty of opportunity to progress.

HISTORY OF TECHNOLOGY:The evolution of humanity’s most essential innovations

Scientists and technologists rarely discover anything completely new; they generally build on what is already known, writes Peter Marsh.

Indeed, a small number of all-pervading technologies capable of many applications – “general purpose technologies” – have been central to human progress. The way in which they have reinforced each other over time supports indications of how new processes such as three-dimensional printing will transform manufacturing in the next 30 years.

The steam engine, mass-produced steel and electricity are examples of general purpose technology, nearly all of which have influenced manufacturing. Of the 30 so far identified, 11 emerged during the 20th century, of which seven made their presence felt only in the its final half.

The technologies can be divided into product innovations, such as the invention of bronze in 2800BC; innovations involving processes, including the development of moveable-type printing in the 1400s; and those involving organisation, such as 20th centurylean production” – a way of providing for low-cost customisation.

Many economic historians emphasise the linked aspects to such technologies – the way groups of ideas in emerging disciplines combine to provide new economic opportunities.

But rarely does much happen quickly. It often takes half a century or more for the ideas to have a full impact. Joel Mokyr of Northwestern University in Chicago, commenting on the origins of the industrial revolution in the UK in the late 18th century, has pointed out the inaccuracy of characterising this period as the “age of cotton, or the age of steam”. Rather, he says, it was the “age of improvement”, covering diverse activities, many of which had their roots in events years earlier.

Discussing the computer in 2003, half a century after its invention, Nathan Rosenberg of Stanford University observed that the “full impact” of the devicelies well into the future”.

Likewise, the discipline of 3D printing has not suddenly burst into use but has evolved over years. It is based on a number of general purpose technologies, including nanotechnology (the science of manipulating matter at an atomic level), lasers, the computer, the internet and lean production.

General purpose technologies have in the past combined to provide the basis for concentrated periods of economic uplift. Similarly, the links between relatively recent innovations are likely to create opportunities for a newgolden age” for manufacturing in the years leading up to 2050 or so – a welcome prospect in light of today’s economic woes.

The writer is FT manufacturing editor and author of The New Industrial Revolution: Consumers, Globalisation and the End of Mass Production, to be published by Yale University Press in 2012

Copyright The Financial Times Limited 2011.


DECEMBER 28, 2011

Gold Left Some Investors in the Dust


Gold has been among the best investments in 2011.

Shares of gold miners? Among the worst.

Gold is up 12% this year but shares of gold miners have fallen almost 16%. Smaller gold miners are down almost 40%, based on the returns of leading exchange-traded funds tracking those stocks.
The surprising gulf has caused pain for some of the biggest names on Wall Street—including John Paulson, George Soros, David Einhorn, Seth Klarman and Thomas Kaplanmany of whom piled into gold shares over the past year, sometimes by shifting away from gold itself.

Bulls figured that gold miners had more upside than gold, partly because mining stocks outperformed during past bull markets for the metal.

But this year, gold miners have been hit by concerns that haven't tarnished gold prices. Investors have worried that mining costs are rising, and that governments around the world are becoming more aggressive in taxing resources companies. They're also concerned that gold miners might squander any windfall with ill-conceived acquisitions or other moves.

Plus, in a turbulent year, gold shares have suffered along with most other stocks as many investors fled to the safety of U.S. government bonds.

"When you sell your portfolio, you say, well, what's cyclical, and that includes mining stocks," says HSBC analyst Patrick Chidley, who called gold-mining stocks a "buying opportunity" in a June research report and still thinks they will pay off.

Investors who once turned to gold miners to gain exposure to bullion now can purchase exchange-traded funds that are backed by gold.


"People who want to buy gold stocks for gold are disappointed," says Mr. Chidley. "That drives more and more of them to just buy the gold."

Mr. Kaplan, a longtime gold investor, runs family funds that held nearly 52 million shares of Novagold Resources Inc., a miner focused on Alaska and British Columbia, whose stock is down about 40% this year. He also owns more than 61 million shares of Gabriel Resources Ltd., which owns a huge gold project in Romania, and is down more than 20% this year.

The declines have cost Mr. Kaplan about $430 million this year, based on the change in value of his holdings, noted in regulatory filings. The figure is about $600 million if Mr. Kaplan's warrants, or rights to buy shares at stipulated prices, are included. Still, Mr. Kaplan bought in at prices much lower than today and is sitting on huge paper profits.

"Our focus is on adding to our holdings, especially mines and equities in safe" jurisdictions, says Mr. Kaplan, who believes gold shares are due for a rebound.

Seth Klarman's Baupost Group, a value-oriented firm, owned nearly 13% of Gabriel at the end of the third quarter. He added to his position through much of this year, according to regulatory filings. Mr. Klarman also bought five million shares of Novagold in the third quarter.

In the third quarter, David Einhorn's Greenlight Capital more than doubled its holdings of the Market Vectors Gold Miners Index ETF, making it the hedge fund's third-largest holding, or more than 7% of his firm's portfolio, according to FactSet Research.

Other well-known hedge funds, including Blue Ridge Capital Holdings, Moore Capital Management and Lansdowne Partners, also were major holders of this ETF, as of the end of the third quarter.

Mr. Einhorn is among investors who say they're holding on to gold mining stocks. "It has reached the point where gold mining stocks should do well even in a stable gold market," Mr. Einhorn wrote in his most recent letter to investors. "We expect the price of gold to appreciate further, so gold miners should do even better."

Mr. Paulson's Paulson & Co. was the largest holder of Johannesburg-based miner AngloGold Ashanti Ltd., with 9.6% of the company's outstanding shares at the end of the third quarter.

AngloGold is down about 14% so far this year. Mr. Paulson holds nearly 3.4% of shares outstanding of Gold Fields Ltd., which is down about 14% in 2011, and more than 8% of NovaGold. That helps explain why Mr. Paulson's fund dedicated to gold investments is down nearly 6.6% in 2011, after losing more than 7% in December, through Dec. 13, according to investors.

Billionaire George Soros sold almost all his bullion holdings in the first quarter, according to SEC filings, while upping bets on shares in a number of gold miners this year. Since then, gold has risen about 11%, while one of the investor's stock holdings, Barrick Gold, has fallen about 14%.

Spokesmen for Paulson, Soros, Blue Ridge and Moore declined to comment. Mr. Einhorn and Mr. Klarman also declined to comment. A representative of Lansdowne didn't respond to requests for comment.

Though all the investors were major holders of gold shares at the end of the third quarter, based on filings, it isn't clear what their holdings are today, or how they traded them throughout the year.

Investors have also been frustrated that gold itself has been falling recently, even though turmoil in Europe continues. That's a possible sign the metal may be losing some of its status as a safe haven.

"It's a little perverse that gold loses value when there's a currency crisis occurring in Europe" that should spark interest in gold, says Darren Pollock., who helps run Cheviot Value Management, LLC in Los Angeles and has been a fan of gold shares.

He notes that Chinese entities have purchased two gold mining companies in recent months, something that should help focus attention on the sector. "But nobody seems to care, yet," Mr. Pollock laments.

Other bulls note that gold-mining companies are seeing improving revenues, and that shares are more attractive relative to gold prices, making them bargains that investors eventually will recognize.

Not everyone is convinced a rally is imminent, however. After gold prices fell, and didn't show signs of a speedy rebound despite a turbulent environment, HSBC's Wealth Opportunities funds, which invest $2.2 billion for wealthy individuals and don't work with Mr. Chidley, the analyst at the bank, first sold silver companies, and then dumped gold mining shares. The funds continue to steer clear of these shares, the firm recently wrote to its clients.

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