Charting Death (and Life) in America

(Originally published here.)

Graphic: Bloomberg Visual Data
GRAPHIC: BLOOMBERG VISUAL DATA

Who dies — and how — can reveal a great deal about life in the U.S.CHECK OUT this interactive exploration of the changing nature of American mortality. 

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Is Bitcoin Like High-Speed Trading?

(Originally published here.)

Bitcoins have something in common with high-frequency trading: both are seen as either a huge waste of resources or a useful new technology that will lower costs in the financial industry for the benefit of consumers.

The knock against HFT is that it’s pointless for programmers to write software that executes profitable trades infinitesimally faster than software written by other programmers, instead of working on projects that may have broader applications. One of the arguments in favor of HFT, though, is that it discourages people from engaging ineven more wasteful attempts to discover private information.

As for bitcoins, each one has a unique signature and every transaction is recorded in a single ledger that is verified multiple times by every computer in the bitcoin network as they solve cryptology puzzles. Since all of those calculations require time and energy, those who help confirm transactions are rewarded with the chance to earn new bitcoins via lottery.

Initially, it was easy to create bitcoins with nothing more than a home computer and some spare time. This encouraged early adoption. But the bitcoin network keeps making it harder to enter the lottery for newly issued bitcoins in an attempt to protect the value of the holdings amassed by the first generation of bitcoin “miners.” One result: an enormous increase in the amount of processing powerdevoted to solving elaborate but pointless puzzles.

According to blockchain.info, which tracks data on bitcoin mining, there is about a half-million times as much computational energy used for bitcoin now as two years ago, with almost all of that increase occurring during the past six months. So-called application-specific integrated circuits that aren’t sufficiently powerful to compete are now being sold on eBay Inc. Those ASICs are “utterly and totally useless for anything other than bitcoin computation,” according to technologist Fred Trotter.

The biggest cost for miners nowadays isn’t computers, however, but electricity. Electricity is so crucial that has become the most important variable for understanding the price of bitcoin. Many miners are relocating their operations to places with cheap electricity, or, in the case of one young man, using energy donated from his father’s power plant to subsidize his cost of operations. Bitcoin enthusiasts claim that efficient miners could recoup most of their energy costs by conserving the heat generated by their processors but it isn’t clear who does this. 

Yet, the tremendous costs associated with running the bitcoin network might be worth it if the stateless currency ends up displacing the existing payments networks run by the big banks. After all, banks collected more than $1.3 trillion in revenue from transaction services in 2011, according to consulting firm McKinsey & Co. The sums spent on electricity and specialized computers are tiny by comparison. If competition from bitcoin ends up lowering the costs of transactions, the extra burdens imposed on the power grid could end up being a small price to pay.

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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Where’s the Golden Age for Investors?

(Originally published here.)

Investors who are eager to fund businesses that can’t make money worry people like New York magazine’s Kevin Roose. At the same time, the hot new book in economics — Thomas Piketty’s “Capital in the Twenty-First Century” — argues that we need large wealth taxes to offset the tendency of investors to do better than workers. At least one of these people is wrong, and it’s probably Piketty.

Roose’s main argument is that many savers are subsidizing unprofitable businesses, benefiting consumers and workers. What’s more, savers will never be able to recoup their investments. As Roose says:

When these venture-backed price wars happen in dozens of high-end service sectors all at once, you have a strange cultural phenomenon in which Main Street dollars are being used to finance the lifestyles of cosmopolitan yuppies.

There’s a lot to be said for this view. Interest rates adjusted for inflation are much lower than 10, 20 or 30 years ago, which means that you need to sock away even more money to achieve a given standard of living in your golden years — or take a lot more risk with your investments. It wouldn’t be much of a stretch to say that the entire financial crisis was caused by savers’ inability to earn a decent return without having to take excessive risks. (University of California Berkeley economist Brad DeLong has some worthwhile thoughts on how to define the real rate of return on capital, for those interested in a deeper discussion of that issue.)

After the dot-com bubble of the 1990s; the subprime bust and collapse in housing prices; and now the willingness of investors to plow money into unprofitable technology companies, it’s hard to buy Piketty’s thesis that capital is over-compensated. Inequality has certainly increased but even Paul Krugman, in anotherwise favorable review of Piketty’s book, notes that its findings don’t really apply to the U.S.

The income distribution in the U.S. has changed mostly because pay for top executives and financiers has grown so much more than wages and salaries for other workers. Wealth inequality, in turn, has increased because people with high incomes tend to save and invest more of their money than those who live hand-to-mouth. That’s different from the notion that it’s gotten a lot easier to be a passive investor living off holdings acquired by your parents and grandparents.

In fact, a recent paper from Emmanuel Saez, a frequent collaborator of Piketty’s, and Gabriel Zucman shows that the bulk of the rise in the U.S. wealth-to-income ratio since the 1970s can be attributed to the growth of pensions for the elderly. Similarly, they find that the rising importance of capital income can be explained in part by the aging of U.S. society, which means a smaller share of the population is working and a larger share is living off of pension assets accumulated in the past. Wage inequality also increases as a society ages because there is greater variation among people at the peaks of their careers than among those just starting out.

The polarization of the income distribution creates serious macroeconomic costs, but that doesn’t mean policy makers should try to lower the returns to capital. The markets have already done that and we’re living with the results.

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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No Need for Stock-Market Hysterics

(Originally published here.)

Sensationalists are warning that recent declines in stock prices are thestart of a crash. While that may be possible, it’s hard to see why. And even if stock returns during the next few years are disappointing, that still won’t tell us much about the U.S. economy.

First, let’s note that the Standard & Poor’s 500 Index is down about 3.2 percent from its high of a little more than a week ago. The biotech and Internet stocks that had gone up the most took the biggest hits, with declines of about 20 percent from their recent highs.

My colleague Barry Ritholtz recently noted that nobody has a good explanation for the market reversal although that hasn’t stopped fear-mongers from renewing their calls that the end is nigh.

Some perspective is in order. U.S. shares are up about 30 percent since the start of 2013. After a brief stumble at the end of January, the S&P 500 reached all-time highs. The recent decline is a blip when put into context.

Besides, there are other financial markets out there suggesting that all is well. One of the best ways to judge whether investors are nervous is to look at the option-adjusted spread of junk-bond yields against U.S. Treasury debt of comparable maturity. This fear index has been heading straight down for two years and is now lower than it was before the start of the crisis in August 2007.

Investors now think that highly indebted companies are less likely to default than at any point since the recovery began. Just by way of background, junk-bond spreads started rising a few months before the last cyclical stock market peak in October 2007, if you want to have a reason to trust the fixed-income market more than the equity market.

There also hasn’t been any move in U.S. Treasuries, which contain estimates of growth and inflation. When the economy is expanding, fewer investors want to own low-yielding assets that offer limited appreciation in exchange for safety. If something bad were happening in the U.S. economy, you would expect bond yields to fall. That hasn’t happened.

There are also plenty of real economic data, such as tax withholdings, that indicate the economy is getting stronger.

My suggestion: Ignore the fear-mongers, the day-traders and the hysterical wing of the financial news media. Don’t make big changes to your portfolio or hoard canned food just because a few expensive tech companies are now a little less expensive. If I’m wrong and we end up repeating 1929, just remember that I would have spent today relaxing on my super-yacht if I really knew what the markets were going to do, instead of writing this post.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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U.S. Takes the Spendthrift Cure

(Originally published here.)

The U.S. current account balance has had a remarkable turnaround over the past eight years. In mid-2006 the deficit peaked at about $858 billion, or more than 6 percent of gross domestic product. Since then, it has plunged to $325 billion, or less than 2 percent of GDP. What happened?

One popular explanation is shale oil. After all, the U.S. now exports more oil to the rest of the world than it imports from the Organization of Petroleum Exporting Countries — something that hasn’t happened in more than four decades.

But oil turns out to have been relatively unimportant, since the collapse in net oil imports by volume was canceled out by the huge increase in prices.

I broke down the total change in the current account balance since 2005 into four categories: net trade in petroleum and petroleum products, net trade in all other goods, net trade in services, and everything else.

Two forces stand out: an increase in net exports of services and a massive improvement in the dividend and interest payments we get from the rest of the world relative to the dividends and interest payments we pay to overseas investors.

About a third of the total improvement in the net services balance came from tourism and passenger fares. Revenue from foreign visitors has almost doubled since 2005, while U.S. spending abroad has only grown by about a third. Coming in second place were royalty fees on intellectual property, while financial services excluding insurance came in third. Together, those three categories explain about 76 percent of the total increase in net exports of U.S. services.

The odd thing, though, is what has happened to income payments. In 2005, Americans owned $2 trillion fewer assets abroad than foreigners held in the U.S. and collected about $68 billion in net income. By the end of 2013 foreigners owned $4.7 trillion more U.S. assets than Americans held abroad, yet we managed to earn $258 billion more on our investments than we paid out to the rest of the world. The implication is that Americans are better investors (on average) than people in other countries, and have improved over time.

What’s the secret? Americans tend to buy high-paying equity stakes while overseas investors buy debt, often low-yielding U.S. Treasury bonds.

Shale is becoming increasingly important, however. Since the start of 2012, the current account deficit has narrowed by $158 billion, of which $133 billion came from an improvement in the oil trade balance.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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Greek “Recovery” Is Just More Agony

(Originally published here.)

Financial markets respond more to changes in people’s beliefs than to changes in reality, which helps explain why Greek stocks and bonds have been doing so well recently even as the economy keeps shrinking.

Reuters’s Hugo Dixon makes the optimists’ case, arguing that the troubled Mediterranean country is “undergoing an astonishing financial rebound” thanks to the combination of fiscal austerity, useful reforms of the public sector and relatively generous bailout terms.

Last June, I wrote about the Greek government’s relatively successful efforts to attract foreign investment by offering valuable assets at rock-bottom prices. Even though the Athens Stock Exchange General Index has done much better than the German Stock Index during the past year, Greek equities have a price-to-earnings ratio of just 4.2 compared with 18.3 for German shares. You could make a lot of money buying Greek stocks if valuations ever converge.

Another bullish data point is that the Greek government has just managed to raise billions of euros from private investors by selling five-year notes at an interest rate of only about 5 percent. Part of the appeal of these instruments is that they will be governed by English rather than local law, unlike the Greek sovereign bonds that wereforcibly restructured in 2012. The debt sale comes after a big decline in yields on existing Greek bonds since they peaked in 2011. Yields are still much higher than on German equivalents, which suggests investors demand compensation for the risk of lending to weaker economies in the euro area.

These developments are impressive but they don’t mean Greece’s problems are solved. The best that can be said of the Greek economy is that things are getting worse at a slower pace than they were a few years ago.

And while employment is a lagging indicator, the fact that it’s still falling isn’t particularly bullish either.

The most depressing number, however, is 2025 — the year Greece’s gross domestic product is expected to return to its 2007 level under a relatively optimistic set of forecasts.

Two lost decades would be a catastrophe for a developed country in peacetime far worse than anything experienced since the Great Depression. But by all means, call it a recovery.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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Choking on the Cost of China’s Toxic Air

(Originally published here.)

Governments sometimes support rapid growth in manufacturing and construction by going easy on polluters. But the short-term benefits probably aren’t worth the trouble once you properly account for the long-term damage.

Two recent stories out of China are useful reminders of this point. Here is Bloomberg News describing the reluctance of expatriates to work in China because of the risks pollution poses to their health and that of their families:

About 48 percent of respondents to a survey in 2014 by the American Chamber of Commerce for Beijing and Northeastern China said they had difficulties recruiting or retaining senior executives in China due to the pollution. James McGregor, Greater China chairman of consultancy APCO, is moving to Shanghai in May after being in Beijing for 25 years and says his wife spends more time in Minnesota now, partly due to the pollution. To provide a clean work place, his firm installed air filters every 25 feet (7.6 meters) in their Beijing office, about a dozen devices for 30 staff members. Even so, employees need more medical leave than 18 months ago. “There are a lot of sick days, and sometimes our office in Beijing sounds like tuberculosis wards,” McGregor, 60, said. “People in our office are complaining they don’t feel good, they don’t have energy.”

Talented foreigners have provided Chinese companies with superior technology and managerial prowess. Good managers are hard to find in emerging markets, though they can have a big impact on productivity. If pollution makes China a less attractive place to live, the people who contribute the most to innovation and long-term growth will leave. That’s obviously undesirable.

Even worse is what happens to all the people who can’t escape China’s pollution. Pregnant women exposed to emissions from coal-fired power plants have children who seem to have much higher rates of genetic learning disabilities. Few things could be worse for a country’s growth prospects than an entire generation of people whose brains have been damaged by chemicals.

Then there are all the other diseases associated with air pollution that will lead to shorter working lives in the future and higher health-care costs. That means there will be less money spent on things people actually want. Michael Pettis, a finance professor at Peking University’s business school, has gone so far as to argue that China’s lax pollution regulations are among the many ways that the government transfers wealth from regular people to the owners of big politically connected businesses.

China’s new leaders seem to appreciate the magnitude of the challenge; whether they can accomplish much is debatable. One can only hope people in other countries have been paying attention.

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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