China’s economy doubling every 6 years; hopefully the IHT will write about it well by then

Caught this story in the IHT (on my mobile phone, waiting for my wife’s bus). I think it might actually be a New York Times story. China’s economic growth is hardly news. Here the story is that we’d been told to expect 8% but got 11.5%. I never believed in 8% anyway, seeing it as more an estimate by the Chinese designed to assuage our angst for a few months, which it did. What struck me was how poorly the story was written.

China said Thursday that its economy grew 11.9 percent in the second quarter of this year, the fastest pace of growth in more than a decade, and that inflation rose sharply, reigniting fears that the economy was overheating.

The explosive growth was fueled by a huge trade surplus, booming retail sales and immense investments in new factories, roads, bridges and real estate projects.

The use of the phrase “China said…” is okay, I guess – but re-igniting fears that the economy is overheating? Leaving aside terms overdone like “re-igniting”, when did those fears go away? Here’s a picture from an old Treasury Select Committee in the UK:

Which is why China will be 3rd in the World’s economies, soon enough (over-taking Germany).

Members of the U.S. Congress are trying to put greater pressure on China to revalue its currency and import more American goods to narrow the trade gap between the two countries.

Congress is putting pressure on the Chinese government to import more US-made goods? How is that supposed to work, exactly?

Another concern arose Thursday when the government announced that inflation had reached its highest level in years, with the Chinese consumer price index jumping 4.4 percent in June, almost entirely because of rising food prices.

The prices of eggs and pork have risen more than 20 percent in the past year largely because of tighter grain supplies and the outbreak of blue-ear pig disease, the government said.

Many analysts have said inflationary pressure could be even greater when measured by a broader basket of goods, and that this could signal big problems for the country, particularly if food prices continue to rise.

So, inflation with food prices is bad for China, but not ‘core’ for the US?

The government has already used dozens of measures over the past few years – including interest rate increases – in an effort to slow the economy, moderate export growth and tame a wild stock market.

But most of them have failed, or achieved only moderate success. Instead, the economy has roared ahead, unperturbed by attempts at intervention.

That’s just…if this author has a crystal ball, showing him what would have happened without the contractionary policies of the Chinese government, could he use it to tell us when the war in Iraq is finally going to be over? I’d appreciate it.

One cool move to which the article does refer is this:

Gong, of JPMorgan, said China was already signaling that it would allow its currency to do just that. He said China should import more agricultural products from the United States, which might help ease the trade deficit and constrain rising food prices.

With food prices going the way they are, that’s not a bad idea – economically and politically, it’s a good move. What it might do to also-increasing food prices in the US will depend on exactly what China makes a move for. Imagine the US government pushing legislation for even higher subsidies for agriculture, to stop farmers exporting to China. A universe would have to implode, somewhere, surely, to balance out such un-reality.

Anyway. I realise the New York Times is lousy, and it’s hardly an economics or business newspaper, but they can do better than this. It’s so careless. Or maybe it’s me, and my old-fashioned insistence that words mean something.

Peak oil and the (US) National Petroleum Council

Watching someone discuss energy on C-SPAN. Very impressive. The fellow talking was discussing peak oil before I went to out clothes in the dryer, and now showing a chart that demonstrates various degrees of energy efficiency in light bulbs (i.e. incandescent bulbs are 90% heat; LEDs are almost zero heat, with equal amounts of light).

Ah! It’s Roscoe Bartlett, Republican member for Maryland’s 6th district. And it isn’t the first time he’s done this.

I can be forgiven for my surprise. These are the people who put Crazy Ted Stevens in charge of your internet, for Cliff’s sake. I like the fact that he says the US ‘can’ become a world leader in this, rather than the usual obnoxious presumptions that the US already is the world leader in everything. Gets on my tits – and on those of most people elsewhere in the world, actually.

He’ll discuss nuclear energy while I type, it seems. I’ll keep you updated. I’m waiting for a pan to show just how many/few members of Congress are actually in the house, listening. I’m guessing next to none – what, you think Congressional members show up to work?

What impressed me most is that, when I flicked over from a ridiculous ‘interview’ on the Newshour (to which what has happened, incidentally? It used to be very good), was his discussiong of Peak Oil – when it peaked, recoverable oil vs. non-recoverable and, importantly, proven vs. non-proven reserves (more on that in a moment), including sorted according to politcal risk (most of the reserves upon which our happy optimism is based lies in political risk areas: “above ground” problems (in that the oil is there, and gettable, but you might be blown up trying, or lose your money to the government), as opposed to “below ground” problems (just try drilling for gas in Sibera sometime, or getting that last few inches out of the Gwahar superfield).

Hee! Bartlett just equated hoping for fusion to fix our energy problems to hoping the lottery will solve your financial problems, because the odds are about the same (Jason). Very amusing.

I had been planning an oil post anyway, since visiting the Oil Drum this morning to read the news concerning the report of the National Petroleum Council. You can pick up the full report here. Now, first: the NPC was asked by the Energy Secretary, quite sensibly, to examine peak oil from the perspective of global supply, now and potential, vs. demand for the same, globally, now and in the future.

However:

The purpose of the NPC is solely to represent the views of the oil and natural gas industries in advising, informing, and making recommendations to the Secretary of Energy with respect to any matter relating to oil and natural gas, or to the oil and gas industries submitted to it or approved by the Secretary.

He sighs. The Oil Drum recommended Secretary Berman try the National Academies of Science, next time.

I won’t go through the report. When the Oil Drum exists, I am in fact chopped liver (as, I believe, the saying goes). Here’s what set me off, though:

That’s right. According to the NPC, there’s no problem. The Middle East will have the oil. All the oil we could ever need. Leaving aside, for the moment, the silliness of a 26-year timeframe (I doubt any of my readers will be dead by then), even the current reserves, as claimed by Middle-Eastern states are doubted – and not even close to this. For a start:

What a pleasant surprise it will be when they suprise us with that extra 16 million barrels-per-day of oil they’ll need to have for us by 2030 (by the way, has anybody told them?). They can’t even match the repeated OECD dare do come up with an extra 1 million barrels per day. Their reasons are good enough – but I still don’t buy it. Nor does the International Energy Agency, for that matter.

So there’s that. According to the NPC, the OPEC reserves are secretly even more vast. The other expectation that makes their Alfred E. Neuman numbers work is commonly called Undiscovered Oil (there is believed to exist more oil than has been discovered). What the NPC make Peak Oil disappear:

Score! Problem solved. Until – even in this report – 2030. At which point something seems to be going to happen about which we do not know, which is a little frightening. From the Oil Drum:

As you can see, the growth in total liquids supply comes by and large from about 40mbd of “Exploration Potential”. Now, to put this in context OPEC liquids production at the moment, according to Table 16 of the OPEC Monthly Oil Market Report (PDF)) is just around 30mbd. So the NPC wants us to believe that there is a whole other OPEC plus a third waiting to be discovered.

These two experiences could not be more stark. On one hand is Representative Boscoe doing what looked to me like everything right, on the floor of Congress (or a committee room somewhere on the Capitol), while the Energy Secretary invites a bad report, from a biased industry organisation, doing everything wrong. Did he not learn from Enron and Cheney’s secret energy taskforce?

Cripes. Funnily enough, the primary demand-reducing recommendation of the NPC report is doubling fuel economy standards (their the oil industry, not the Auto industry – I’d love to see Detroit or Representative Dingell respond to this). Also amusing: while channel surfing I saw an automobile advertisement in which a woman said her new car got 28 miles-per-gallon, meaning she could “drive forever”. Mind-boggling, isn’t it? Europeans, piss yourselves laughing at will.

Second on the list was greater efficiency in household energy use, followed by industrial energy use. The post by the Oil Drum is well worth reading. The actual report by the NPC is 422 pages, but it too is well worth scanning, at least. They have a section also on carbon management which is quite interesting. Failing that, there is always the Executive Summary.

What happens in private equity stays in private

This is a relatively link-free post, sorry. I’m waiting for a break in the rain to bolt to the laundry. Or to do the laundry, whichever is the common usage in your country.

Movement on both sides of the Atlantic. In yesterday’s Financial Times, the leading opinion piece discussed taxation (or effective lack thereof) of many private equity gains.

The fair way to tax private equity

The United States, even in its present mood of economic discontent, is less given than most countries to outbursts of animosity against the working rich. But strength of feeling on the subject is driven by the fact that the tax treatment of these managers, as compared to the treatment of other very highly paid individuals, really is anomalous. Take the anger and disgust away, and disinterested considerations of efficiency and fairness urgently demand a change.

…

To tax carried interest as ordinary income when granted would require an options-based valuation, which is not straightforward. Another complicated remedy would be to treat carried interest as an interest-free loan from the fund’s investors, and then collect tax in two parts: on the interest forgone, taxed as ordinary income, and on the subsequent capital gain, taxed at the lower rate required by current law. The simplest approach, and most likely the best, would be to set the question of deferral aside, and tax carried interest as ordinary income on realisation. To emphasise, this would not be to single out private equity or hedge fund managers as deserving of a new or specially punitive regime. It is a matter of even-handedly applying the logic of the present code.

For another day are bigger questions of whether it ever makes sense to tax capital gains at a lower rate than ordinary income (the policy that gave rise to this problem in the first place) and, in the American case, whether the tax system as a whole should be made more progressive. The case for reform on both points is strong, in fact. But the carried interest anomaly can be dealt with promptly, and should be.

They get to use ‘fair’, since it’s an opinion piece – although the suggestion to treat carried interest, which is basically income, as income, counts as fair in my book. Sorry, Dave.

The key, amongst the rough, is that private equity should not be taxed punatively for the money it makes. That Equity chiefs can admit to paying less tax than their cleaners is certainly an indication that something needs repairing, but the fact that some such chiefs are taking home more than USD1bn in salaries should not make them special targets. Just properly-targeted targets. Heh.

This is a legitimate issue, though, for once. It is not merely a straw-man employed by Wall Street Journal wankers to insist we’re all commies. Talk of a Private Equity Tax Rate is, unfortunately, being heard (whether it is being heard in earnest, or is from inception that straw man, I do not know. Frankly, either is a needless waste of time). Private Equity should not face a specific higher tax rate. Income should be properly identified, and taxed appropriate to society’s wishes. As long as the income is earned legally, its source should not warrant special attention. I’d sooner see New York City slumlords taxed to hell and gone before Private Equity, anyway.

In the UK, meanwhile, which is closer to actual action, little action, in fact, has resulted from all those entertaining committee meetings (i.e., the meetings were entertaining. They were meetings of the Treasury Select Committee on Private Equity, not the Entertainment Committee, or anything. Come on, that was hilarious). From – where else – the Guardian:

Private equity firms yesterday escaped the threat of tighter regulation and demands for closer scrutiny of pay and fees after a review rejected imposing public company-style rules on the industry.

…

In a consultation document, Sir David proposed a code of conduct that he said would greatly increase the supply of information to employees, customers and other stakeholders of the firms private equity acquired.

The code should be voluntary, he said, though he hoped some 200 large private equity buyout firms based in London would adopt it. He expects to produce a final report in October ahead of a review by the Treasury of allegations that private equity firms have been abusing tax rules to enrich their senior executives and investors. A further review of the industry will be completed by the Treasury select committee in the autumn.

Unions are not happy:

Unions said they were disappointed with Sir David’s report and it would fail to alleviate the fears of workers at private equity-owned companies. The GMB and other unions have accused private equity firms of profiteering at the expense of workers and the taxpayer through unfair tax breaks, asset-stripping techniques and anti-labour practices.

The TUC’s general secretary, Brendan Barber, said: “It will do little to reassure the staff of private equity takeover targets that the quest for short-term returns will not continue to threaten their jobs, pensions and working conditions.”

Personally, I don’t see that Public Company Rules would have done much to protect workers anyway, but this a game, and whatever keeps one’s opponent on their back foot would be welcomed. The secrecy surrounding the industry – who’s in, who’s making money and how much, the little details about financing and leveraged buy-outs that would land football clubs in a lower division, for example, is an issue that I had hoped the committee would manage. At the moment they have kicked this one for touch (Americans: they ‘punted’).

A later review, mentioned in the article, keeps the fire somewhat lit, but I won’t hold my breath. I would say that Private Equity can call this one a win. Moreso if it means greater room to maneouvre with the US Congress, when it comes time over this side (assuming Congress ever gets anything done again).

Looking the code of conduct over, it is essentially the equivalent of what is required of public companies, but it isn’t required. Just politely suggested. Mind you, given Private Equity’s fascination with not being villainised, they ought to, and most likely will, go in for at least some of the recommendations.

This, by the by, did not touch on the matter of tax paid on income earned via carried interest. So legislation shutting that opportunity down is probably – should be – on the cards, both in the UK and the US. And anywhere else it is employed.

Private equity to pay higher price for done deals

Keeping with the costs of doing the business of Private Equity. You will recall I mentioned the Wesfarmers’ buy-out of Coles Group (the reassuringly old-fashioned one). I commented at the time that two other groups, headlining Blackstone and the Carlyle Group, had failed to find lenders for their bids for the Coles Group. Well:

Private equity firms can now be in no doubt that they are going to have to pay more to fund the debt for buy-out deals they have already sealed.

This week alone has seen two of the biggest deals on either side of the Atlantic – buy-outs of Alliance Boots and Chrysler – forced to increase the premium, or interest rates, on loans they are trying to sell. Bankers in a flurry other deals have had to act likewise.

…

This means it is going to cost the US carmaker, which is being bought from DaimlerChrysler by Cerberus, the private equity group, an extra $20m annually to service this debt, plus whatever it has to give away in discounts, which could be another $20m up front.

…

On the same day it also emerged something similar was going on at Alliance Boots, the record UK leveraged buy-out, which is seeking some £9bn worth of loans from investors.

The changes are likely to cost anywhere between an extra £15m and £31m annually, according to investors’ expectations, plus some more in terms of fees.

However, it is not yet certain that even this will be enough to get the buyers in. One London-based investor said he thought the Boots loan had little chance of getting the commitments it wants from investors by a tentative deadline on Friday.

It goes on to other deals, similarly afflicted (it’s worth the read). Couple that with the news that financial offerings are becoming less popular with ordinary investors (another ripple in the pond from that sub-prime skipping stone), and a picture forms, thank you Mr. Squiggle (Brits: think Rolf Harris. Americans, I don’t know. I’ll ask my wife), of a market that is coming to remember that debt has risk attached.

If only the re-awakening would extend to casinos and bloody pokies (Brits: fruit machines. Americans: slot machines), I’d be ecstatic. Not just regular ecstatic. Just-been-told-Joss-Whedon-got-the-cast-back-together-for-5-more-seasons-of-Firefly ecstatic. And if you don’t get that reference, you’re God’s problem.

Making fun of Cheney’s inability to keep a secret

This is miles from an economic post.

There are of course many reasons to hate Dick Cheney. I’ve never even worked with him, or been in college with him. For all I know he was a dick then, too.

But as the number of felony convictions resulting from Cheney’s office losing classified information comes to two, it’s fair to say that a Vice President who belongs, apparently, to his own branch of government, and has the worst record on protecting classified documents, is fair game.

The first-remembered, best-known, of course is Libby. Or Rove, or Cheney himself. Who knows, since Libby obstructed the investigation into a blown CIA cover, damaged WMD investigations the world over. Even the President’s father, a former President and former head of the CIA, considered the leak equivalent to treason.

The second is today’s sentencing, finally of old what-his-name, the spy:

White House Spy Sentenced to 10 Years

The former Marine at the center of the first case of espionage at the White House in modern history was sentenced to 10 years in prison Wednesday for stealing and passing on top secret documents.

He was recruited right at the end of his work under Al Gore, and spied in the office of Dick Cheney until he was finally busted in 2005. We can of course believe the Bush administration is just smarter than the Clinton administration, because it’s managed to catch these people. Right?

I prefer to side with Josh Marshall:

The Cheney OVP seems to have a serious issue safeguarding classified material — one so serious it has led to two felony convictions. So Bill Kristol may think it’s annoying to have government ‘bureaucrats’ checking on how classified material is being safeguarded. But the Cheney crew could really use the help.

Second, I think we see here a hint of a too-little noted pattern — the connected and mutually-reinforcing bonds of authoritarianism and incompetence. The Libby case (and the Plame case generally) is somewhat separate in that it was the intentional breaching of national security secrets. But is it a coincidence that the most paranoically secrecy obsessed office in the executive branch is the one that actually managed to have a spy working in its midst?

China wakes up to the dangers of pollution

That hardly seems fair. Guardian, shame on your paternalism!

Hundreds of millions of people are being made ill every year or dying prematurely from pollution caused by China’s breakneck economic growth, a leading economic thinktank has concluded following an 18-month investigation.

The OECD study, prepared at China’s request, draws on work by the government, World Bank and Chinese Academy of Sciences to spell out the scale of the ecological crisis now engulfing the country, poisoning its people and holding it back economically.

It says up to 300 million people are drinking contaminated water every day, and 190 million are suffering from water related illnesses each year. If air pollution is not controlled, it says, there will be 600,000 premature deaths in urban areas and 20m cases of respiratory illness a year within 15 years.

China’s water quality gives the researchers greatest concern. One third of the length of all China’s rivers are now “highly polluted” as are 75% of its major lakes and 25% of all its coastal waters. Nearly 30,000 children die from diarrhoea due to polluted water each year

They do, however, have a raft of excellent photographs. A sample:

Wuhan, Hebei province: A man collects dead fish in Donghu lake, where officials say an estimated 30,000kg of fish have been killed by a combination of pollution and hot weather

Benxi: Pollution from steel mills blows over residential buildings

Yutian, Hebei province: Cyclists ride through a cloud of pollution produced by a nearby factory

The thing that may work to China’s advantage is that the same phenomenon (population) generating the growth in industry, wealth and pollution (up yours, Oxford comma!) makes said pollution undeniable:

Blue-green algae blooms choked Lake Taihu – China’s third biggest source of freshwater – in May, forcing 5 million people to use bottled water for drinking and bathing.

Soon after, local media were reporting outbreaks across the country. Rancid blooms contaminated Dianchi Lake in southwestern China, then Xinlicheng reservoir, the main source of water for Changchun – a northern city of almost 3 million people. In every case, pollution – either from factories, fertilizer or untreated sewage – was to blame.

Algae blooms are nature’s response to discharges of nitrogen and phosphorus. Grown to excess, they choke waterways of oxygen, killing fish and fouling the air with a putrid smell.

When prime minister Wen Jiabao visited Lake Taihu, he reportedly described it as an environmental wake-up call to the nation.

There is no out-of-sight, nor any out-of-mind, when you have bursting dams or 5 million people with algae blooms where their municipal water used to be.

High urban density living and immense populations means a political response, Party or no Party. The real question is whether it can be enough, or in time. “The Party”, considered centrally, is not party officials handing out contracts for bribes, to corrupt and incompetent factories, firms, etc. Dams will continue to break, lakes will continue to blossom with algae and dead, toxic fish, as long as there is a central government with such short arms. Even the projects upon which it does focus – cleaning Beijing for the Olympics, highways to Lhasa, the Three Gorges dam – are borderline catastrophes, both in enviornmental terms and potential human terms in the future.

What to do? Beats me. Their economy still grows at 10% or so per year. It still demands the resources, it still gets them overseas. It still faces massive fronts of desertification, and increasing rates of urbanisation – bringing with it increasing demands for water, housing, energy, etc. on one hand, but declining agricultural production on the other. How US trillion-dollar foreign reserves but declining faith in Chinese-made goods and (potential) political devolution work in with this can be the subject of a later post.