Op-Ed Contributor

February 22, 2012
Global Integration, Act II

As everyone knows, the world has been “flattening” for the past three decades. This has opened the door for dozens of nations and billions of people to enter the global economy. What many do not realize is that this era is coming to an end.

Not that global integration is over, or even slowing down. Far from it. But the developing world has reached the end of its rapid path to rising G.D.P. and per capita income. Some call this the “middle-income trap” — the idea that it is a lot easier to go from a low-income to a middle-income economy than it is to jump to the next level.

As if that weren’t challenging enough, this shift is happening at the same time all around the world. Every market is now in a competitive race with all the others, which have also been sprinting for the last 15 years to arrive at this same spot.

Simply put, these growth markets have plucked the low-hanging fruit of Global Integration, Act I. Now they face a radically more competitive arena, requiring higher degrees of regulation, higher standards and higher expectations for everything — from product and service quality to working conditions to protection of intellectual property and the rule of law.

Note: “higher,” notlower.” The playing field is still flat, but now it isn’t at sea level. The game is moving to a higher plateau.

Despite the gloom and doom one hears, this moment actually presents exciting new opportunities for the developed world. Many of the capabilities and skills sought by an innovation-based global economy are deeply engrained in Europe, Japan and the United States. However, these economies — and in particular their government leaders must also tackle some very big challenges if they are to compete successfully in the years ahead.

That’s because over the past three decades, something has been going on in addition to global integration. The world’s mature economies have been piling up massive deficits — not just financial, but deficits of competitiveness: aging populations, rusting infrastructures, out-of-date education systems and antiquated regulations.

Just as all emerging markets are facing the middle-income trap at once, so the developed world finds itself having to address all of its huge structural overhangs, and with great urgency, thanks to the ongoing financial crisis. The newgreat game” of global competition will not wait to start play while we get our house in order. How to do that? Let me suggest three broad steps.

First, we must invest in the future. We need increased investments in areas like infrastructure, education and deep research, along with greater flexibility through smarter labor and trade regulations. We cannot simply cost-cut our way to competitiveness. To pull that off, we will need both balanced fiscal policies and far deeper collaboration among government, business and all of civil society.

Second, every player in this game needs to deliver unique value. This is something every business knows: If you want to be competitive, you have to be really good at something people value.

The localities and economies that succeed will have clarity on the kind of economic and societal innovation they do uniquely well — what makes them stand out in the global competitive market for talent and investment. And they will invest in that.

Finally, government must become smarter, and I don’t just mean it should digitize its public services. Government is in desperate need of an infusion of modern subject-matter expertise.

Take public safety. We used to measure crime-fighting by the size of our police forces and the state of the art of their equipment. But more and more police departments are fighting crime with data. That’s why New York City is now one of the safest large cities in the world.

The same applies to traffic management, water systems, energy grids and more. The systems by which our world runs are being transformed before our eyes. Government has to be at the forefront of those changes.

The good news is that a new generation of leaders gets it, and they’re eager to get going. They embrace technology. They think in terms of large-scale, sustainable systems. And they’re highly pragmatic, rather than ideological. You find them especially in the emerging global cities of the world.

Here Europe holds a powerful trump card, with cities that are rich in intellectual life and knowledge resources.

Without question, the issues we face today are challenging, but they are solvable. I am optimisticnot because I expect human nature to change, but because we now have at our disposal an enormous new natural resource: a rising tide of data that enables us to see and understand our world as never before.

What the discovery of the Western hemisphere was to the 15th century, the discovery of steam power to the 18th century and the discovery of electricity to the 19th century, the explosion of data will be to the 21st. Its economic and societal value is almost incalculable.

If we seize upon this new resource, I believe future historians will look back on this moment not as a shift to lower expectations and growing gaps between haves and have-nots, but as the dawn of a new golden age of innovation, a time of widely shared economic growth and of global citizenship.

Samuel J. Palmisano is the chairman of IBM.

Scandal: Greece To Receive "Negative" Cash From "Second Bailout" As It Funds Insolvent European Banks
Submitted by Tyler Durden
on 02/22/2012 12:15 -0500

Earlier today, we learned the first stunner of the Greek "bailout package", which courtesy of some convoluted transmission mechanisms would result in some, potentially quite many, Greek workers actually paying to retain their jobs: i.e., negative salaries. Now, having looked at the Eurogroup's statement on the Greek bailout, we find another very creative use of "negative" numbers. And by creative we mean absolutely shocking and scandalous. First, as a reminder, even before the current bailout mechanism was in place, Greece barely saw 20% of any actual funding, with the bulk of the money going to European and Greek banks (of which the former ultimately also ended up funding the ECB and thus European banks). Furthermore, we already know that as part of the latest set of conditions of the second Greek bailout, an 'Escrow Account" would be established: this is simply a means for Greek creditors to have a senior claims over any "bailout" cash that is actually disbursed for things such as, you know, a Greek bailout, where the money actually trickles down where it is most needed - the Greek citizens.

Here is where it just got surreal. It turns out that not only will Greece not see a single penny from the Second Greek bailout, whose entire Use of Proceeds will be limited to funding debt interest and maturity payments, but the country will actually have to fund said escrow! You read that right: the Greek bailout #2 is nothing but a Greek-funded bailout of Europe's insolvent banks... and the Greek constitution is about to be changed to reflect this!
The smoking gun quote:
The Eurogroup also welcomes Greece's intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece's debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter's debt service directly to a segregated account of Greece's paying agent.

As for the priority of payments - it is more than clear:
Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible.

So there you have it: the Second Greek bailout is nothing but the first Greek bailout of Europe's banks! And the Greek constitution is about to be changed to reflect that.

Congratulations Greece - you just got royally raped by your own unelected rulers and you didn't even know it.

Full Eurozone document (source).

Grit is Good

Howard Davies



PARIS – The United States is widely recognized as possessing the deepest, most liquid, and most efficient capital markets in the world. America’s financial system supports efficient capital allocation, economic development, and job creation.

These and similar phrases have been common currency among American legislators, regulators, and financial firms for decades. Even in the wake of the financial crisis that erupted in 2008, they trip off the word processors of a hundred submissions challenging the so-called Volcker rule (which would bar banks from making proprietary investments). The casual reader nods and moves along.

But there are signs that these assumptions are now being challenged. Prior to the crisis, regulatory authorities focused mainly on removing barriers to trading, and generally favored measures that made markets more complete by fostering faster, cheaper trading of a wider variety of financial claims. That is no longer the case. On the contrary, nowadays many are questioning the assumption that greater market efficiency is always and everywhere a public good.

Might such ease and efficiency not also fuel market instability, and serve the interests of intermediaries rather than their clients? Phrases like “sand in the machine” and “grit in the oyster,” which were pejorative in the prelapsarian days of 2006, are now used to support regulatory or fiscal changes that may slow down trading and reduce its volume.
For example, the proposed Financial Transactions Tax in the European Union implies a wide-ranging impost generating more than €50 billion a year to shore up the EU’s own finances and save the euro.

The fact that 60-70% of the receipts would come from London is an added attraction for its continental advocates. Opponents argue, in pre-crisis language, that the FTT would reduce market efficiency and displace trading to other locations. “So what?” supporters reply: maybe much of the trading is “socially useless,” and we would be better off without it.

The Volcker rule (named for former Federal Reserve Chairman Paul Volcker) provoked similar arguments. Critics have complained that it would reduce liquidity in important markets, such as those for non-US sovereign debt.

Defending his creation, Volcker harks back to a simpler time for the financial system, and refers to “overly liquid, speculation-prone securities markets.” His message is clear: he is not concerned about lower trading volumes.

There is more grit on the horizon. In a penetrating analysis of the “Flash Crash” of May 6, 2010, when the Dow lost $1 trillion of market value in 30 minutes, Andy Haldane of the Bank of England argues that while rising equity-market capitalization might well be associated with financial development and economic growth, there is no such relationship between market turnover and growth.

Turnover in US financial markets rose four-fold in the decade before the crisis. Did the real economy benefit? Haldane cites a striking statistic: in 1945, the average investor held the average US share for four years. By 2000, the average holding period had fallen to eight months; by 2008, it was two months.

There appears to be a link between this precipitous drop in the average duration of stock holdings and the phenomenon of the so-called ownerless corporation,” whereby shareholders have little incentive to impose discipline on management. That absence of accountability, in turn, has contributed to the vertiginous rise in senior executives’ compensation and, in financial firms, to a shift away from shareholder returns and towards large payouts to insiders.

But Haldane’s main concern is with the stability of markets, particularly the threats posed by high-frequency trading (HFT). He points out that HFT already accounts for half of total turnover in some debt and foreign-exchange markets, and that it is dominant in US equity markets, accounting for more than one-third of daily trading, up from less than one-fifth in 2005.

The rapid, dramatic shifts brought about by HFT are likely to continue. It is only a decade since trading speeds fell below one second; they are now as fast as the blink of an eye. Technological change promises even faster trading speeds in the near future.

Indeed, HFT firms talk of a “race to zero,” the point at which trading takes place at close to the speed of light. Should we welcome this trend? Will light-speed trading deliver us to free-market Nirvana?

The evidence is mixed. It would seem that bid-offer spreads are falling, which we might regard as positive. But volatility has risen, as has cross-market contagion. Instability in one market carries over into others.

As for liquidity, while on the surface it looks deeper, the joint report on the Flash Crash prepared by the US Securities and Exchange Commission and the US Commodity Futures Trading Commission shows that HFT traders scaled back liquidity sharply, thereby exacerbating the problem. The liquidity that they apparently offer proved unreliable under stress – that is, when it is most needed.

There are lessons here for regulators. First, their monitoring of markets requires a quantum leap in sophistication and speed. There is a case, too, for looking again at the operation of circuit-breakers (which helped the Chicago markets in the crash), and for increasing the obligations on market makers.

Such steps must be carefully calibrated, as greater obligations, for example, could push market makers out of the market. But Haldane’s conclusion is that, overall, markets are less stable as a result of the sharp rise in turnover, and that “grit in the wheels, like grit on the roads, could help forestall the next crash.”

So the traditional defense of US and, indeed, European capital markets is not as axiomatic as it once seemed. Market participants need to engage more effectively with the new agenda, and not assume that claims of greater market efficiency” will win the day. Without more sophisticated arguments, they might well find themselves submerged under a pile of regulatory sandbags.

Howard Davies, a former chairman of Britain’s Financial Services Authority, Deputy Governor of the Bank of England, and Director of the London School of Economics, is a professor at Sciences Po in Paris.

February 21, 2012 6:58 pm

Prepare for a golden age of gas

The world is in the midst of a natural gas revolution. Even the sober International Energy Agency refers to a scenario it calls a golden age of gas. If such optimism proves right, the implications would not only be far greater than those of the eurozone’s painful dissolution, but would also be economically positive. Never forget that ours is a civilisation built on cheap supplies of commercial energy. The economic rise of emerging countries is bound to make the demand for commercial energy increase dramatically in the decades ahead. Gas matters.

This revolution has a name: “hydraulic fracturing”, colloquially known as “hydrofracking” or just “fracking”. As is true of nearly all of the technological revolutions of the past century, this one also originated in the US. The US Energy Information Administration explains that “[t]he use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to produce natural gas from low permeability geologic formations, particularly shale formations.”*

Click to enlarge

While some innovations date to the 1970s, the EIA notes that “the advent of large-scale shale gas production did not occur until Mitchell Energy and Development Corporation experimented during the 1980s and 1990s to make deep shale gas production a commercial reality in the Barnett Shale in North-Central Texas.” But, by now, it adds, “[t]he development of shale gas has become a ‘game changer’ for the US natural gas market.”

The new activity has increased dry shale gas production in the US from 0.39tn cubic feet in 2000 to 4.8tn cubic feet in 2010, or 23 per cent of US dry gas production. Vastly more is to come. The EIA estimates 860tn cubic feet of “technically recoverableUS shale gas against just 273tn cubic feet in today’s “proved reserves”. If this estimate is correct, shale gas on its own would give the US 40 years of gas consumption, at current rates.

How large are the world’s shale gas reserves? The EIA asked consultants to examine 48 shale gas basins in 32 countries. Their report estimatestechnically recoverableglobal shale gas resources at 6,600tn cubic feet, roughly equal to today’s proved reserves. The largest identified resources, apart from those of the US, are in China (1,275tn cubic feet), Argentina (774tn), Mexico (681tn) South Africa (485tn), Australia (396tn), Canada (388tn), Libya (290tn), Algeria (231tn), Brazil (226tn), Poland (187tn) and France (180tn). Regions excluded from this analysis include Russia, central Asia, the Middle East, south-east Asia and central Africa. Global potential should be far larger still.

What difference might the abundance of natural gas (including of more conventional gas) make to the global energy future? In its World Energy Outlook 2011, the IEA remarks that “[i]n all the scenarios examined ... natural gas has a higher share of the global energy mix in 2035 than it does today”.

Under its “golden age scenario, gas demand grows by 2 per cent a year between 2009 and 2035. Even under a more cautious scenario, which it callsnew policies”, demand grows at 1.7 per cent a year or by a total of 55 per cent over this period. As a result, gas substitutes for other fuels, particularly in electricity generation and heating. Gas also has substantial potential as a fuel for transportation. Overall, argues BP in its latest Energy Outlook, by 2030 gas might come to rival coal and oil as a primary energy source.

The substitution of gas for coal or oil is desirable from the point of view of emissions of greenhouse gases and many other pollutants. Gas emits slightly more than half as much carbon dioxide as coal and 70 per cent as much as oil, per unit of energy output. Emissions from gas of carbon monoxide are a fifth as much as from coal. Emissions of sulphur dioxide and particulates are negligible. In any plausible scenario for managing emissions of greenhouse gases, natural gas will have to substitute for other fuels, though development of cheap carbon capture and storage would also strengthen the case for coal. For China, in particular, with its burden of pollution from its use of coal, a “dash for gas” seems to make sense.

So is shale gas the beneficial transformation its proponents claim? Maybe not. The controversial aspect of the new technologies is the impact on the environment. In an article in the November 2011 Scientific American, Chris Mooney, a writer on science, notes that “horizontal fracking requires enormous volumes of water and chemicals. Huge ponds or tanks are also needed to store the chemically ladenflowback water that comes back up the hole after wells have been fractured.” A single lateral shaft requires 2m to 4m gallons of water and 15,000 to 60,000 gallons of chemicals. It is little wonder that critics allege the new technology threatens severe pollution of groundwater and is, for this reason, an environmental nightmare. The article suggests that it is not yet known whether such contamination has occurred.

At this stage, it concludes, risks are uncertain. The activities of the new industry need to be rigorously monitored, everywhere.

The wisdom of proceeding rapidly with this technology globally will depend on several considerations: first, the local opportunity costs of water; second, the abilities and reliability of the operators; third, the capacity of the regulators; fourth, the benefits of any extra gas, compared with those of alternative fuels (or conservation), including for security; and, fifth, better knowledge of the impact of the technologies. To take one example, the competing demand for water and dangers of pollution might make large-scale extraction of gas from Chinese shales dangerous.

Shale gas underlines the ingenuity of those engaged in finding new sources of energy. It also suggests the welcome possibility of cheap natural gas for many decades. But this revolution could prove to be a Faustian bargain.

Care needs to be taken over how – and how swiftly – the technology is introduced: environmental costs might prove heavy.Make haste slowly”, as the ancient Romans used to say.

*World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, April 5 2011, www.eia.gov

Copyright The Financial Times Limited 2012


FEBRUARY 22, 2012, 9:46 A.M. ET

Living to 100? That Will Be $3.5M

The average centenarian will spend more than he or she may expect in their later years. Here's where it goes.


Here's to your long life -- and the heaps of cash it will require.


The average American who lives to the ripe old age of 100 will spend $3.5 million in his or her lifetime, according to an analysis of data from the Bureau of Labor Statistics. A good chunk of that bill, more than $1.5 million, will have been racked by your 50th birthday. The next 30 or so years -- the average 50-year-old today can expect to live until 81 -- will run another $1.4 million.

Experts say these high costs of living often come as a shock to retirees, many of whom expect to dramatically cut back on their living expenses as they get older and stick to a fixed budget. "A lot of time people actually end up spending more money in retirement than they may have spent when they were working," says Heidi Schmidt, a wealth manager in Dallas with USAA.

Just where that money goes depends largely on your decade. Most people in their 60s spend a lot of their savings on entertainment -- finally buying that sail boat or splurging on trips to the Caribbean. Those in their 80s, on the other hand, typically swap a good portion of their leisure budget for medical bills.

Of course, not all expenses come down to age, experts say. A healthy octogenarian with wanderlust might have spending habits more in line with people twenty or thirty years younger. And certainly many Americans will spend much less in retirement -- either through careful planning, a good bit of luck or both. Whatever the retirement goals, here's a breakdown of how spending tends to vary through the retirement years.
  • Housing (mortgage, utilities and decor): $155,500
  • Furnishings and appliances: $15,000
  • Entertainment and eating out: $46,700
  • Transportation: $71,000

In this decade of transitioning into retirement, 60-somethings spend more than older age groups on everything from housing to clothes. Many who retire in their 60s often find themselves with the time -- and savings -- to finally splurge a little on traveling or a big-ticket item like a car. Or to indulge their favorite hobbies: According to the Bureau of Labor Statistics, the average recently retired American spends $2,300 a year on activities like going to the movies, caring for a pet and buying the latest gadgets. That drops to an average of $1,300 after age 75.

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  • Total health care costs: $48,400
  • Prescription drugs: $8,100
  • Household repairs: $16,400
  • Utilities: $33,900

Aging's challenges come with bigger price tags. When people hit their 70s, health care costs begin to spike. Longer life spans and the rise of chronic illnesses have pushed up national health care spending, according to the Kaiser Family Foundation. People in their late 60s and early 70s spend an average $4,900 a year on healthcare, an increase of almost 30% from people in their late 50s and early 60s, according to the Bureau of Labor Statistics. Adding to the burden, health-care costs are expected to grow faster than income over the coming years, according to Kaiser.

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  • Health Insurance: $30,300
  • Entertainment and eating out: $26,000
  • Groceries: $26,400
  • Gasoline: $9,800

Eighty-somethings spend 57% more on health insurance and half as much on entertainment as folks in their 50s. More retirees are saving money in their later years of retirement by moving in with their adult children. A survey by the Pew Research Center released in 2010 found that 21% of adults age 85 and above live in a multi-generational household that includes at least two adult generations or a grandparent. That is up from 17% of people in their late 40s and early 50s.

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  • Nursing home (private room): $87,200
  • Out-of-pocket long-term care: $14,000
  • Assisted living: $89,000
  • Adult day services: $36,400

Health costs grow exponentially from one's 50s to mid-90s. And America's 1.9 million nonagerians depend heavily on Social Security and pensions. But the former source may come up short by the time most baby boomers are in their 90s: the Social Security Administration has already started tapping its trust fund to cover benefits and current projections estimate that Social Security will only have enough funds to cover 75% of scheduled benefits after 2036.