How much is real estate as a percentage of total assets?

I often wonder what the does the fixed asset block at a country level looks like. 

Companies report their asset base in terms of land and property, plant and machinery, investments, cash and deposits, even goodwill (brands or excess payments for acquisitions) etc. In a company the investments we are told what is approximate value of this investment. (In some cases you have to work around but you can tell). 

If we have the total asset and those invested in real estate, then we know how much percentage change in real estate prices will impact the economy. True, it won't tell us GDP impact, but it will tell us the scale.  The impact will manifest in variety of direction but the quantum of impact is a critical variable. 

Let me give an example. A small meteor can strike anywhere on the planet and we really don't care. For a medium meteor, the point of impact matters. It creates a tsunami or a crater etc. But if a truly large meteor strikes then it does not matter where it strikes. The result is the same - total wipeout.

To parallel with financial crisis, I think we still do not know what is the size of real estate problem. The real estate problem encompasses the following:

1. Housing i.e. houses and residential buildings in possession of consumers.
2. Rental housing - those residential buildings owned by businesses but meant for renting.
3. Real Estate owned by companies. Like land for factories etc.
4. Commercial Real Estate like malls, theaters, office complexes.
5. Agricultural land owned by people and companies
6. It does not include lands that we cannot sell or lease like forest lands for example or gardens.

Then we need to find out  what is the amount of loan for which this stands as collateral. We can then estimate the impact of 1% change of valuations. My guess is the total size of real estate assets will be like 2/3rd of total global assets. The total loans outstanding against these assets is an unknown. We can agree that the problem is not small. The question is how big is it.

---

My book "Subverting Capitalism & Democracy" is available on Amazon.

Retaining US jobs

Yves Smith commented on Andy Grove's post about retaining US jobs. I am worried about the very idea of job exports.

Job profile of the economy

In an ideal state, every economy should have a job profile of its citizens. Job profile will be based on skills available in the workforce. For example, (pardon all the cliches across the post) France and Italy will have higher clothes designers than manufacturers while China will have more clothes manufacturers than designers. This is result of natural specialization and, as such, ties in with two great works by Michael Porter and Adam Smith. So there is nothing fundamentally wrong with exporting jobs. the problem is what jobs do you export.

America is exporting the keep-jobs

Based on the education, skills and experience of workers, we may possibly conclude that America needs these jobs. It needs the car-manufacturing jobs and IT hardware jobs. But these jobs are going overseas. Why? The only reason why jobs are being exported is because it is cheaper to get the job done elsewhere. The labour in developing countries is cheaper in US dollar terms. This could be true because of two reasons:

First is the well understood relative currency valuation reason. If in relative terms Chinese auto worker is paid the same as US auto worker, then the only reason will be currency disadvantage. But is Chinese auto worker paid the same as US auto worker in relative terms? I don't think so. The relative wages are similar in high-tech industry like Pharma, IT services industry, computer chip design, architectural firms etc. But not in auto basic skill industries like auto, garmenting etc.

Second, if there is relative difference in wages, it could be because Chinese labour is poor and hence ready to work at cheaper prices. This is a fundamentally sound case and more applicable to auto, garmenting and other basic skill jobs. These jobs will eventually move.

Implication of job migration

There are some critical points we can decipher from this reality.

First, every job profile seems to have an average purchasing power parity wage. So for each combination of skill, output, education, experience and productivity there is a world parity wage. I call this wage content of a job (in my book) where job refers to one requiring standard profile. If your wage is higher than the wage content of that job you are doing, then you are at high risk of being laid-off.

Second, if Americans are desperate for these jobs, it implies that skill levels in America are more aligned with these jobs. In other words, the American skills difference and wage difference does not reconcile. It means US wages are out of line and need to come down to international wage content levels. We can achieve it by deflation or by resetting the currency. Either ways, it is not pleasant.

---

My book "Subverting Capitalism & Democracy" is available on Amazon

Krugman, Ferguson and/on Zakaria

Fareed Zakaria is one of the most insightful host and journalist. In this episode, the presents the two sides of Austerity vs. Stimulus debate. I have already presented my thoughts about Austerity vs. Stimulus.

I want to make a few comments.

First, only certainty can fight uncertainty. In times of uncertainty, like today, the objective of policy is to increase certainty. So a roadmap for reform and policy changes for 10 years and a political consensus (bipartisan or multi-party political consensus as applicable in each nation) and commitment is essential. So Niall Ferguson is spot on with this point. I believe any reasonable certainty will work rather than a specific austerity oriented certainty.

Second, we can kill certainty by acting without a plan - or let me rephrase - by appearing to act without a plan. Conversely, just by acting decisively you can create certainty. I believe the US president should split his speech into two parts - the unchanging goals and course correcting strategies. In both aspects he should communicate decisive action communicating certainty. A plan will definitely help.

Third, Krugman is correctly pointing out that stimulus has not reached the masses. The objective of stimulus, to my mind, was to create income certainty. Whatever the reason, the stimulus has failed to achieve this objective. In this aspect, I think Keynes is being misunderstood and then derided for what may be out-of-context interpretation of his ideas.

---

My book "Subverting Capitalism & Democracy" is available on Amazon

Austerity vs. Stimulus

Paul Krugman has reignited the debate about proposed austerity and continuing stimulus. I think we need to understand one more side to the argument. 

The problem 

The economic problem relates to creating jobs and businesses. Basically, we need avenues for people to start earning. Once people earn, they will pay taxes and spend a little from the surplus. This will make the economy self-sustaining. This has two steps. First, we cannot increase the burden of the people further. Second, what we spend should be big enough to generate incomes large enough to pay for it. This is essentially the dilemma. This is the reason why we need stimulus.

But the stimulus is not yet efficient

Though we have been living off stimuli for past two years, the mechanics of stimulus is not fully developed.

To reiterate my earlier position, this crisis has its roots in the certainty of income. A stimulus is efficient if it improves the certainty of income. The certainty is more important than the amount of income. The certainty of income will come from jobs (created by businesses large and small) and small businesses. It is clear that small businesses are critical link as they reduce the owners and few other people from list of those who want jobs. This is where stimulus should reach. But the stimulus is not reaching the intended location - able and potent small businesses and individuals.

The flow of money is such that the beneficiaries of the stimuli are not actually the ones who need it. Sadly, the reverse is also true. Those who are supposed to pay for the stimulus are not actually the ones who can. This is a double blow to the effectiveness of stimulus. But the fact that stimulus is misdirected does not mean that it is not needed.

Austerity won't help either

Austerity will severely constrain the opportunities of the masses. It will definitely aggravate the problems. Worse, at this point, austerity will wipe out any gains from earlier stimuli and render them useless. The prior stimuli will now appear as a burden without any gain or impact. When we have a fire we need water. The fact that some people wasted water should not stop us from bringing more.

What it means

At the start of the crisis, I had mentioned that either approaches may work if we fully commit ourselves right at the beginning. At the beginning we started with stimulus approach. Now we should fully commit to it. Our commitment issues may make the situation even worse. We will end up with larger liabilities and no jobs to pay them. It will push the world over the edge. 

So

We need to get two things done:

1. Examine what is preventing the earlier stimulus from working. Get the efficiency of stimulus going IMMEDIATELY.
2. Get more stimulus to where it is needed, FAST.

---

My book "Subverting Capitalism & Democracy" is available on Amazon

Value of Gold relative to financial assets

Paul Kedrosky is a very insightful commentator and today he shared a linked from JP Morgan research titled Gold is Way Under-owned Compared to Other Times When the World Sucked. The post comprises mainly a chart shown below:

Now, shouldn't the real value created between 1982 and 2009 account for the difference?

Do we really believe we are creating real value? We believe stock markets are ways to invest into things that create value. Now what happens to the value we have created between 1982 and 2009. Gold is growing very slowly while we have (assuming) created a lot of real value. This real value will sit in as financial assets thereby reducing share of gold. Right?

---

My book "Subverting Capitalism & Democracy" is available on Amazon.