“The one who has the gold, makes the rules”
The King of ID quotes the “golden rule”. I think that this shows a coming model of economic stagnation and reduced freedom. A new feudal system of aristocracy and hierarchy based on the favor of the king. When the gov controls the largest share of economic activity then we are serfs. Any rational business needs to find a way to become a critical supplier to the government.
Inflation is caused by spending, not money supply.
Fiscal policy where more is spent causes too much money in the system.
What was predicted in 2009?
1. *While our forecast projects a decline of 11% I believe that rational business planning should be prepared for a 25% decline in business levels for at least a part of the year.*
2. *Commodity prices are likely to remain lower than last year’s highs but not continue to decline.*
3. *Economic stimulus and infrastructure investment will help our business but not until 2010*
4. *Globalization will become more difficult as each region seeks to stabilize their own economic system. Overseas competitors will become less of a factor in the supply chain for capital equipment.* 5. *Purchasers will try but be unable to reverse the increase in pricing of most components.*
The drop to near zero for interest rates indicates a drop in demand for our products is imminent. Low commodity prices, significant increases in unemployment, massive bailouts suggest tough economic conditions.
On the other hand (speaking like an economist), it is hard to see the overall demand dropping to levels below 2002 or around 700,000 tons per year. Our current production is roughly 1,100,000 tons per year or a 40% drop in overall production. With the liquidation of excess capacity even this drop would not be as problematic a on a per plant basis. I think a rational business plan for 2009 should conserve cash and anticipate poor results for most of the year.
I believe that we should be prepared for a rapid deterioration in business conditions mid-year with the possibility of a slow recovery until things improve in 2010.
What about 2010?
Business conditions are likely to remain sluggish for the first half of 2010. While commodity prices for energy and materials are sufficient to justify significantly new investments, these investments with their equipment demands are likely to be delayed. There are several key factors causing a delay in investment.
Inventories are high for many of the commodities even with the higher prices. Some of this is an anticipation of stronger demand and even higher prices. Some is an attempt to secure supplies needed by developing economies before the recovery. Some of the pricing and inventory is a hedge against the likelihood of significant inflation. In any case high inventories make new investments difficult.
Economic uncertainty is another factor limiting investment. The instability of large financial institutions with the unprecedented intervention by central banks and regulatory agencies make economic conditions uncertain. No one knows the rules of the game or which player has the strongest pieces. No one knows whether the current policies have avoided a catastrophe or created the next crisis. No one is confident whether the future will deal with another round of deflation because of slack in the system or inflation because of liquidity flooding the system. The current conditions in big finance make it easy to take profits by following the policy of the Federal Reserve and availing your institution of their guarantees. No rational decisionmaker for a big project would move ahead without a clearer idea of the future economic conditions.
The economic uncertainty is complicated by political uncertainty. Proposed changes in the economic regulations are only one area of political uncertainty. Health care reform makes it difficult to know what costs and liabilities are going to be imposed on businesses. Taxes and other revenue enhancers make investment decisions difficult. Proposed Cap and Trade programs make large capital equipment investments risky. Geopolitical instability in the Middle East and Asia complicate the investment environment.
History is also a major impediment to investment. After three decades of excess capital equipment investment, current managers and investors are reluctant to commit to large capital equipment investments without clear and systemic payback expectations. In an environment of uncertainty, these investments will be minimized to protect capital and wait for a clearer market signal.
So what for 2010?
1. *Demand for steel castings will see stronger than forecast growth in non-railroad applications, over 20% from current levels or back to 60%* *of our higher production volumes by year end. This will be spotty and volatile.*
2. *Political and economic uncertainty will be reduced but not eliminated in the run up to the 2010 elections allowing for the possibility of a strong uptick in the final quarter next year.* 3. *China will see a significant reversal of fortune economically, but not next year. They will continue to grow and be a trade issue in the US.*
4. *Commodity prices will bounce in a trading range at a value high enough to justify investments.*
5. *Infrastructure spending and utility investments will add to demand in the second half of next year.*
6. *Other construction investment will remain slack.*
7. *Pricing will remain stable for commodities and for most steel cast products.*
In practical terms, O’Neill decided, that meant economists had to look more closely at how non-western economies could wield more power in the future. As he scoured the globe, he became increasingly fascinated by four countries: Brazil, India, Russia and China. In one sense, the four seemed disparate, separated geographically and culturally; they had never acted as a bloc in any way, never conceived of themselves as a unit. Yet what they all shared in 2001 were large populations, underdeveloped economies and governments that appeared willing to embrace global markets and some elements of globalisation. To O’Neill, these characteristics made them natural sisters: they all had the potential for rapid future growth.
Excited, he tried to work out how to label this bunch. Since China was easily the largest, it made sense to put its name first. “Lloyd Blankfein [Goldman Sachs’s chief executive] always teases me about it – he says I should have called the group the Cribs,” O’Neill recalls. But O’Neill thought that a word linked to babies would seem patronising. So on November 30 2001, he launched his Big Idea: Goldman Sachs’s Global Economic Paper #66, “Building Better Global Economic Brics”. He predicted, soberly, that “over the next 10 years, the weight of the Brics and especially China in world GDP will grow” – and warned, perhaps a little less soberly, that “in line with these prospects, world policymaking forums should be reorganised” to give more power to the group he had now dubbed Brics.
Moreover, roughly two-thirds of the total $857 billion in U.S. currency in circulation is held overseas — a de facto global currency. Foreign countries won’t give up their dollars easily, especially with no real replacement available.
Is Europe a model?
Paul Krugman extols “Europe’s economic success” in a recent NY Times column “Learning from Europe,” and writes that “…taking the longer view, the European economy works; it grows; it’s as dynamic, all in all, as our own.”
Greg Mankiw adds this caveat about Europe’s “economic success.”
The chart above provides some additional perspective on Europe’s “economic success,” based on data available here that compares 2007 GDP per person on a purchasing power parity basis for U.S. states and European countries, and shows that if various European countries became part of the United States:
1. Portugal would rank #51 as a U.S. state, below Mississippi in per capita GDP.
2. Italy and Greece as U.S. states would rank between the two poorest U.S. states – West Virginia and Mississippi.
3. If France became a U.S. state it would rank #48 out of 51 by per capita GDP, just barely ahead of America’s two poorest states – West Virginia and Mississippi.
4. Belgium, Finland, U.K. Germany and Spain would rank in the bottom 20% of U.S. states by per capita GDP, just barely ahead of Arkansas but below Kentucky.
5. Although Netherlands, Sweden and Denmark are among Europe’s wealthiest countries, as U.S. states they would be between 14.5% and 18% below the U.S. average.