WSJ: Reinhart and Rogoff: Higher Debt May Stunt Economic Growth - By Mark Whitehouse

To all the reasons to worry about the rapid rise in government debt in the wake of the financial crisis, add another: It’ll stunt our growth.

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens.

…..

Link to Paper

Sonar wars in the night skies

When the idea struck him, he had already spent a decade studying moths' sound-producing structures, called tymbal organs, and how moths use sound to communicate with one another in courtship. From there, it was natural to ease into moths' communication with their predators.

Conner began to study bats and moths together and learned that just like military aircraft, at least one species of tiger moth can jam enemy sonar by producing a sound at the right frequency. Moths, of course, found it first.

Jamming sonar means the moths interfere with their enemies' fine-tuned way of bouncing sound off objects to navigate. However, the B. trigona moth seems to thwart its enemy, the bat, every time, and the military still can't claim that rate for foiling anti-aircraft missiles. Conner has only studied the one type of moth but has never seen a moth get eaten after producing the high frequency racket. So can the military learn a thing or two from a moth?

Maybe so, says Conner. He and graduate student Aaron Corcoran study how the signals produced by bats and moths have evolved, and by turns eclipsed each other, throughout their predator/prey history. For now, this steely grey tiger moth - dappled with orange to befit its name - has the advantage. While the military toys with one frequency or another in electronic jamming, the tiger moth easily sounds just the right frequency or mix of frequencies to avoid the bat's jaws.

"This is the first incidence of prey jamming a predator's sonar," said Corcoran. "There are a number of parallels to human military strategies. These animals have likely been using this strategy for millions of years, predating human technologies." The study was published recently in the journal Science.

After time spent in Wake Forest University bat facilities, the team has determined that the moth isn't simply warning the bat away or startling the bat out of a meal. No, they think the moth's distinctive ultrasonic clicking, which sounds to the human ear like the quick back-and-forth wiggling of a zipper, causes the bat to hear double or interrupted echoes when trying to locate prey. Ultimately, this means miscalculating the moth's location and losing the snack. But the team still really doesn't know how the clicking works.

Steve Nowicki, a Duke University animal communication expert who is not involved in the study, says that grasping how conversation systems work within and without a species, from the inch-long tiger moth to the flat-faced bat, is important for more than military technology.

"Communication is fundamentally a biological problem. By understanding how animals communicate, we might get some glimpses into the origin of our own language and therefore what it means to be human," Nowicki said.

....................

Another interesting science article from today: Self-cloning tree is 13,000 years old

TIME: Pimco's Bill Gross Sees 2010 as Year of Reckoning

But secondly, there's a ripple effect. Just speaking about Pimco's general portfolio strategy, we've sold our agency mortgage securities, Fannie and Freddie, in the billions to the willing check of the Fed. They're buying a trillion dollars of them, or have over the past nine to 12 months, and so we sold them a lot of ours. Now, what did we do with the money? We bought Treasuries, we bought corporate bonds, and so the bond markets in general have benefited, as have stocks, because this available money effectively flows through the capital markets. So it's a trillion-and-a-half-dollar check that won't be there as the Fed withdraws from the market. How that affects the markets, I just don't know. I'm not eagerly anticipating the answer, but I think it holds some surprises in 2010 — not just in mortgage securities but stocks as well. We could miss the money, put it that way.

The Fall of Mexico - by Philip Caputo

Found via The Manual of Ideas blog.

In the almost three years since President Felipe Calderón launched a war on drug cartels, border towns in Mexico have turned into halls of mirrors where no one knows who is on which side or what chance remark could get you murdered. Some 14,000 people have been killed in that time—the worst carnage since the Mexican Revolution—and part of the country is effectively under martial law. Is this evidence of a creeping coup by the military? A war between drug cartels? Between the president and his opposition? Or just collateral damage from the (U.S.-supported) war on drugs? Nobody knows: Mexico is where facts, like people, simply disappear. The stakes for the U.S. are high, especially as the prospect of a failed state on our southern border begins to seem all too real.

Astronomers say they could find Earth-like planets soon

Astronomers say they are on the verge of finding planets like Earth orbiting other stars, a key step in determining if we are alone in the universe.

A top NASA official and other leading scientists say that within four or five years they should discover the first Earth-like planet where life could develop, or may have already. A planet close to the size of Earth could even be found this year if preliminary hints from a new space telescope pan out.

At the annual American Astronomical Society conference this week, each discovery involving so-called "exoplanets" - those outside our solar system - pointed to the same conclusion: Quiet planets like Earth where life could develop probably are plentiful.

NASA's Kepler telescope, launched in March, and a wealth of new research from the suddenly hot and competitive exoplanet field generated noticeable buzz at the convention. Scientists are talking about being at "an incredible special place in history" and closer to answering a question that has dogged humanity since the beginning of civilization.

"The fundamental question is: Are we alone? For the first time, there's an optimism that sometime in our lifetimes we're going to get to the bottom of that," said Simon "Pete" Worden, an astronomer who heads NASA's Ames Research Center. "If I were a betting man, which I am, I would bet we're not alone - there is a lot of life."

How I Work: Bill Gates

Found via Simoleon Sense.

NEW YORK (FORTUNE) - It's pretty incredible to look back 30 years to when Microsoft (Research) was starting and realize how work has been transformed. We're finally getting close to what I call the digital workstyle.

If you look at this office, there isn't much paper in it. On my desk I have three screens, synchronized to form a single desktop. I can drag items from one screen to the next. Once you have that large display area, you'll never go back, because it has a direct impact on productivity.

The screen on the left has my list of e-mails. On the center screen is usually the specific e-mail I'm reading and responding to. And my browser is on the right-hand screen. This setup gives me the ability to glance and see what new has come in while I'm working on something, and to bring up a link that's related to an e-mail and look at it while the e-mail is still in front of me.

The Economist Magazine: Bubble Warning

A couple of articles from The Economist magazine.

Bubble warning

Markets are too dependent on unsustainable government stimulus. Something’s got to give

Excerpt:

THE effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.

For all the panic last year, asset values never quite reached the lows that marked other bear-market bottoms, and now the rally has made several markets look pricey again. In the American housing market, where the crisis started, homes are priced at around fair value on the basis of rental yields, but they are overvalued by almost 30% in Britain and by 50% in Australia, Hong Kong and Spain.

Stockmarkets are still shy of their record peaks in most countries. The American market is around 25% below the level it reached in 2007. But it is still nearly 50% overvalued on the best long-term measure, which adjusts profits to allow for the economic cycle, and is on a par with two of the four great valuation peaks in the 20th century, in 1901 and 1966.

Central banks see these market rallies as a welcome side- effect of their policies. In 2008, falling markets caused a vicious circle of debt defaults and fire sales by investors, pushing asset prices down even further. The market rebound was necessary to stabilise economies last year, but now there is a danger that bubbles are being created.

Link to Article

………………………………….

The danger of the bounce

Once again, cheap money is driving up asset prices

Excerpts:

Spotting the signs

Is this policy approach creating yet another set of bubbles? Some, including Alan Greenspan, chairman of the Federal Reserve during the euphoria of the 1990s and early 2000s, believe that bubbles can be spotted only in retrospect. Others, such as Jeremy Grantham of GMO, a fund-management group, argue that they can be identified by a surge in prices (and valuations) to way above their previous trends.

In the model of market madness outlined by Hyman Minsky, a 20th-century American economist, and by Charles Kindleberger in his book “Manias, Panics, and Crashes”, bubbles start with a “displacement”—a shock to the financial system, perhaps in the form of a new technology such as railways or the internet. This provides the “narrative”—the rationale that persuades investors to join in. They start to believe that this time around things will be different and that asset prices can reach new heights.

The next stage is rapid growth in credit, which inflates the bubble. As investors borrow money to buy the asset in question, the resulting price rise makes the narrative more credible. At the peak, however, investors no longer pay much attention to fundamentals, buying simply on the belief that prices must rise further. This stage is marked by very high valuations and by popular enthusiasm for asset purchases—marked in the 1920s by shoeshine boys passing on share tips and in the early 2000s by the popularity of property programmes on television.

Eventually, like a Ponzi scheme, a bubble runs out of new buyers. Prices slump. “Euphoria” gives way to the final stage, “revulsion”—until the cycle can begin again.

…..

If the authorities can do little to stop a bubble inflating, what can they do if markets suffer a further relapse? Interest rates cannot be reduced further and it is hard to see the markets tolerating even bigger budget deficits. That leaves quantitative easing (QE), the policy under which central banks create money to buy assets, usually government bonds. Even that may have its limits, if private investors decide to sell government bonds as fast as central banks try to buy them.

Bears argue that the global economy is already far too dependent on government stimulus. “Every basis point of [American] growth in [the third quarter] came from government stimulus, directly and indirectly,” says David Rosenberg of Gluskin Sheff, a Canadian asset-management firm. Schemes such as “cash for clunkers” temporarily boosted car sales but these quickly slipped again once government subsidies stopped. The latest example occurred when pending American home sales fell by 16% in November in anticipation of the end of a homebuyers’ tax credit (which has since been extended until the end of April).

These subsidies depend, in large part, on the ability of governments to fund huge deficits at relatively low cost. And that is perhaps the biggest issue of the moment.

…

The markets are beset by a series of contradictions. They are dependent on extraordinary amounts of government stimulus. But that stimulus is in turn ultimately dependent on the willingness of markets to finance governments at low rates. They should be willing to do so only if they believe that growth prospects are poor and inflation will stay low. But if they believe that, investors should be unwilling to buy equities and houses at above-average valuations. At some time—maybe in 2010—those contradictions will have to be resolved. And that will trigger another nasty bout of volatility.

Link to Article

………………..

Related previous post: Market Valuation, Revulsion, and a Few Things on the Horizon

Related books:

Manias, Panics, and Crashes: A History of Financial Crises

Devil Take the Hindmost

A Short History of Financial Euphoria

Tulipmania

Panic of 1819

The Panic of 1907

The Great Crash of 1929

The Go-Go Years

Bull: A History of the Boom and Bust, 1982-2004

Speculative Contagion

Mr. Market Miscalculates

Buffett’s Lunch Date, Surgeons Improve Results With Checklists

The first checklists in aviation went into use four generations ago, but their potential to prevent errors and save lives is only now beginning to be appreciated among other professions, such as finance.

Gawande tells the story of Mohnish Pabrai, an investment manager in Irvine, California, who may be best known for paying $650,100 along with a friend to eat lunch with the billionaire investor Warren Buffett. Pabrai says many types of investing mistakes -- even some made by Buffett -- can be avoided by using written checklists.

Lists help Pabrai analyze potential investments more efficiently, Gawande writes. He says Pabrai’s investments more than doubled in a year after he developed checklists to prevent about 70 kinds of errors, such as failing to look for effects tied to boom or bust cycles.

…

If lists help people make fewer errors, why isn’t their use more common? Gawande says many investors have no interest in procedures like Pabrai’s, and there are hospitals and doctors who don’t like checklists either.

“We are built for novelty and excitement, not for careful attention to detail,” Gawande writes. “Discipline is something we have to work at.” His fascinating book presents a convincing case that adopting more checklists will surely help.

………………..

Book: The Checklist Manifesto - By Atul Gawande

Hubble looks way, way, way back

The Hubble Space Telescope has captured the earliest image yet of the universe - just 600 million years after the Big Bang, when the universe was just a toddler.

Scientists released the photo Tuesday at a meeting of the American Astronomical Society. It's the most complete picture of the early universe so far, showing galaxies with stars that are already hundreds of millions of years old, with signs of the first cluster of stars.

These young galaxies haven't yet formed their familiar spiral or elliptical shapes and are much smaller and quite blue in color. That's mostly because at this stage, they don't contain many heavy metals, said Garth Illingworth, a University of California, Santa Cruz, astronomy professor.

"We're seeing very small galaxies that are seeds of the great galaxies today," Illingworth said at a news conference.

………………..

Related article: A Guide to the Cosmos, in Words and Images

Related book: Far Out: A Space-Time Chronicle

I, Pencil - By Leonard E. Read

Leonard Read’s famous 1958 essay. The first part of the section of this essay entitled ‘No Master Mind’ reminded me of the Atul Gawande’s talk at The New Yorker Festival entitled “The Death of the Master Builder: A Story of Risk, Medicine, and Skyscrapers” (also the topic of chapter 3 of Gawande's new book – see previous post).

Link to: I, Pencil - By Leonard E. Read