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Man-made wonder of the world

The standing obelisk in this photo is about 100 feet high, and is visible for 50 miles. It was erected about 3,500 years ago, and stands today in the Temple of Karnack in Luxor, Eqypt. It is made of a solid piece of granite that was quarried a few hundred miles from the temple. It is almost 100 feet high and weighs about 300 tons (almost two-thirds of a million pounds). Today, it still stands almost vertically without the help of rebar or cement. How it was carved out of a mountainside and transported over hundreds of miles thousands of years ago and raised to a vertical position is beyond my power of comprehension.

Egypt-inspired thoughts on productivity

Jude Wanniski, one of my mentors and perhaps the most prolific writer on the interaction between politics and economics, once related to me an allegory about productivity that has stayed with me for many years. (I'm sure he got it from someone else, but I can't remember right now.) I was reminded of this a few days ago when I was visiting the site of the Russian monument to cooperation with Egypt that stands near the Aswan High Dam.

The original allegory goes something like this, though I'm sure to mangle it: A politician and a union boss are walking by a construction site. They see two giant machines excavating the ground in preparation for the foundation of a large building. Each machine is operated by a single person. The union boss laments that if it weren't for the machines, there could be hundreds of workers digging the foundation with shovels, creating so many more jobs and (presumably) so much more prosperity. The politician sneers, and says, "just think how many thousands of people could be employed here if it weren't for shovels, and they had to dig the foundation with their hands!"

What this illustrates is that the economically illiterate don't understand the virtues of productivity. It is always better to find a way to do something with fewer people. Why have thousands scooping sand out of the ground, when one could do the job with a big earth mover? If thousands weren't needed to perform a task that could be accomplished by just one, then the thousands could spend their time doing something else, and we would all be better off.

And so it was that I was reminded of this when I walked up to the Russian monument and saw three workers sitting on the grass on each side of the entrance, cutting the grass by holding it with the fingers of their left hand and cutting it with a knife held in their right. I saw another example on the way to the airport in Luxor this morning, when I spotted a half dozen workers sweeping debris from the side of the highway (a few miles long at least) with push brooms. Undoubtedly there are at least a few politicians in Egypt who are reluctant to replace those workers with lawn mowers and street sweeping machines, out of concern for the jobs that might be otherwise lost. If only they would think about how much more productive those workers could be (and how much more they could earn) if they could be part of a more worthwhile enterprise.

Yes, many will be thinking that the real problem is that Egypt doesn't have the money to buy lawn mowers and street sweeping machines. But that is what politicians here should be focusing on. It takes capital to buy machines that increase workers' productivity, so attracting capital to Egypt should be job #1 for smart politicians. Here's how: Enforce the rule of law. Enforce property rights. Eliminate corruption. Promote free markets. Offer incentives to new investment by keeping taxes low and flat. Minimize the expansion of government and regulatory burdens. Avoid social engineering and tax breaks for favored industries. Make Egypt a haven for investment, and watch living standards rise. With enough capital, capitalists would be quick to grab workers off the streets and teach them to operate the productive machinery.

Instead, I am left to ponder, especially after visiting the Egyptian Museum in Cairo this afternoon, just how it is that a civilization so advanced 3-4,000 years ago that it figured out how to transport millions of tons of stone over hundreds of miles, and how to erect massive edifices that have survived for millennia, could today be struggling to catch up with the accomplishments that are driving so many other countries to levels of prosperity that give the common man a level of comfort and prosperity that was unavailable to even the most powerful of Pharaohs? (King Tut's bed would make any camper cringe.)

UPDATE: Good friend Don Luskin reminds me that the allegory I was trying to remember here was originally told by Milton Friedman.


Here's a shot of a granite statue of the Egyptian god Horus, found at the Temple of Edfu which we visited this morning. It can be found inside the Temple of Edfu, which is the largest and most perfectly preserved Egyptian temple in Egypt. So big, in fact, that I couldn't get a shot of the whole thing. The next photo is a shot of part of the interior. This structure was completed about 85 years BC. Now I know where the European cathedrals got the idea for big columns.

No deflation at the producer level

The Producer Price Index fell by 0.5% in June, but that was mainly due to lower energy prices. Over the past year it is still up 2.7%. The core PPI is up 1% over the past year, and it has risen at a 2% annualized pace over the past six months, which is a definite pickup from the zero increase that occurred over the last six months of 2009.

Weekly claims resume their decline

After having been relatively flat since early this year, claims appear to have resumed their decline with today's release. To be truthful, of course, actual (non-seasonally-adjusted)claims have risen in the past few weeks, but they have risen by less than usual, as automakers and other manufacturers have not laid off as many people this year as they normally do. Thus the seasonally-adjusted number has dropped. Fewer-than-expected layoffs are still a good thing, and one more sign that the economy continues to gradually improve.

The dollar is weak because the world is not ending as expected

The title of this post is a bit tongue-in-cheek, but it's clear that the only time in recent years that the dollar has managed to rise above historical lows has been thanks to widespread concerns that the global economy was approaching an Armageddon of sorts. The most recent spike in the dollar was fueled by concerns that the Euro was about to collapse, but now we see that those fears were overblown.

The dollar's value since early 2008 has been pushed up by panic-driven demand for dollars, but it has been depressed by extremely expansive monetary policy. Given that fears still abound (witness 3% 10-year Treasury yields and $1200/oz. gold prices), the fact that the dollar is only about 10% above its historical lows against other major currencies, and only about 5% above its all-time lows in inflation-adjusted terms against all currencies, as the second chart shows, suggests that the Fed's willingness to supply dollars has on balance exceeded the world's demand to hold dollars. Thus, my continuing concerns that we will see higher inflation in the years to come, and my continued belief that if the U.S. economy is struggling it is not because of a general shortage of money. The problems out there center around the unprecedented expansion of the federal government, the threat of higher tax burdens, increasingly burdensome regulations, and and the general anti-business sentiment which seems to thrive in Washington these days. These are legitimate problems, to be sure, but they do not mean the end of the world.

Industrial production still rising globally

U.S. industrial production was up only 0.1% in June, but over the past year it has increased more than 8%, recovering almost half the ground it lost from 2008-2009. Japanese industrial production is up some 20% in the past year, having recovered more than half what it lost. Eurozone industrial production is up by an impressive 9% in the past year, while U.K. production has only eked out a 1% gain.

The global economy is still a long way from making a full recovery, but progress toward that end continues. This is a picture of a disappointing recovery, but compared to the global depression/deflation that was expected just over a year ago, things look fabulous.

Cruising the Nile

Here is one of the more unusual sights you see while sailing down the Nile. Carved into the barren hillside here are some military tombs. The two ramps on the left are stairways that intrepid souls can use to visit the tombs.

Cruising the Nile

I'm told there are some 400 floating hotels like ours that cruise the Nile—though at this time of the year a lot are idle. Ours, the Oberoi Philea, seems like one of the nicer ones. 55 staterooms, all with views of the river and little balconies. Reasonably spacious rooms. The ship is well appointed, and the food is delicious. Our trip started in Aswan and will take us this afternoon to Luxor, where tomorrow we will see some sights and then head for the airport to fly back to Cairo. Despite the unbelievable heat this time of the year (it must be 120 and unusually humid), we have thoroughly enjoyed the experience.

A few shots from the trip

We spent our first night in Egypt at the Mena House Oberoi, which is right behind the pyramids as most people see them. This shot was taken from the balcony of our room at the hotel. The original Mena House (the building on the right) was originally a hunting palace for the king, and it's filled with historic things like the suite where Churchill and FDR met to discuss WW II. As you can tell from this shot and others, the air in Egypt seems always to be somewhat brown, even far to the south where there is no civilization to produce smog, so I take it to be dust.

We got up at 3am the next day and flew south to Abu Simbel, to see some magnificent temples that had been relocated to higher ground to avoid being flooded by the dam created by the Aswan High Dam (Lake Nasser). This shot is of the smaller of the two temples. Very impressive. Very hot.

Then we flew a bit north to Aswan, the southernmost and most popular of the cities in Upper Egypt. We went sailing on one of the feluccas you see here. Amazing boats that sail very well but appear ungainly. I'm posting all this while sitting inside our boat as it cruises down the Nile. The boat must be getting a 3G signal from cell towers along the way, and passing it along in the form of (usually pretty responsive) WiFi inside the reception and bar areas. The Nile passes through what is the driest desert I have ever seen—a moonscape. Not a speck of anything grows anywhere outside the immediate vicinity of the river. Along the river all is green. 95% of the population of Egypt lives within shouting distance of the Nile, and it's easy to see why.

Retail sales sluggish

I'm not going to try to spin the retail sales data, since they were definitely weak in June, and below expectations. But this is a volatile series, and auto and gasoline station sales contributed significantly to the reported weakness. I offer this chart to suggest that the growth rate in sales over the past year or so has been greater than it has been over the past 10 years on average. If U.S. consumers borrowed too much and spent too much (and I know many who did), then we could be living through a time of "payback." But sales growth is still positive nonetheless. It is also the case that we are only about 5% below the peak level of sales in late 2007. A set back and an incomplete recovery to date, but certainly not the end of the world.

European crisis fades

More evidence that the financial crisis in Europe is fading. Euro swap spreads are down 25 bps from their late-May highs. Greek 5-yr credit default swaps are down over 300 bps over the same period. US swap spreads are firmly in the range of what would be considered "normal."

I wish I had time to elaborate, but to me it is apparent that the real risk that everyone worries about is a systemic problem, such as a Greek default, that pushes the international banking system to the verge of default—a cascading series of defaults that leaves most developed economies paralyzed. The action so far suggests that this is simply not going to happen. What we're left with is the concern that there are still lots of debt defaults that are likely to occur. The question of the day is whether these defaults will disrupt global growth significantly. I doubt they will. Debt gets defaulted on all the time, and the world has suffered through pretty massive defaults (e.g., the serial defaults of Latin American countries in the early 1980s, the Mexican default of the early 1990s, and the $100+ billion Argentine default several years ago) without really skipping a beat. After all, debt doesn't create growth, so wiping out debt doesn't necessarily destroy growth. It can be disruptive, to be sure, but it's not a growth killer per se. All it amounts to is tearing up pieces of paper that say that party A will devote some of his future cash flows to party B.

Controversial, I know, but perhaps it will spark some debate. Meanwhile, I've got to get ready to explore another Egyptian ruin, this time at Kom Ombo.

Fear subsides, prices rise

Meanwhile, what's not to like about this? The fears of a double-dip recession were rampant not too long ago, and now they are being slowly replaced by facts which suggest a double-dip is far from imminent (e.g. declining swap spreads, strong corporate profits, strengthening federal revenues, to name but a few). The Vix is declining as fears decline, and stock prices are moving up.

The budget picture continues to improve

Here's a quick update for the Federal budget numbers released today. The good news is that revenues really seem to have bottomed out and to now be increasing. That's not too unusual given the nature of the recession, and it confirms the good news that we have been seeing; namely that employment and incomes are picking up. The bad news is that spending appears to be stuck at a relatively high plateau, and is likely to increase further if an extension to unemployment benefits is passed, and if Obamacare is actually implemented. For now the budget deficit has subsided to 9.5% of GDP, but that is still a very large number given that the U.S. economy is by far the biggest in the world. This is going to be a festering problem that will take a long time to fix.

The trade picture continues to look bright

I'm on the river in Aswan, Egypt, on a mini ocean liner; tomorrow we set off down the Nile to visit various interesting things. We had a wonderful dinner tonight that seemed right out of a movie. Plus, I just discovered they have WiFi! So I thought I would make a quick post, seeing as it's after dinner and we had a big day. It's been wonderful, but also VERY hot.

US exports are growing nicely, and imports are doing even better. Double-digit growth in both means all sorts of good things are happening. Strong growth in exports, as has been presaged for a long time by outbound container exports, means that exports are adding to the growth picture in the U.S. Even stronger growth in imports means that demand has U.S. consumer demand has rebounded nicely, and it also means that foreign manufacturers are benefiting. Eventually, what is good for overseas exporters is good for overseas demand for U.S. goods and services, so this is just a good old-fashioned virtuous cycle.

I just can't seen anything to complain about in the overall trade picture.