Deflation and Inflation in the World System

The Economist recently commented on the possibility of deflation after the world-wide financial crisis of 2007-2010. The major worry is deflation in the core countries and inflation in the peripheral economies of the world system. Current events demonstrate the strong dependency relationship between the core and the peripheral countries (core countries in deflation, peripheral countries booming or vice versa). Currency manipulations and tighter monetary policy in the core countries are being offered as the appropriate policy response to get the world system back on the track to unlimited growth.

History suggests, however, that none of these policies will be a panacea. When monetary conditions in the rich world are loose, emerging economies are prone to lending binges and asset bubbles. The price of avoiding deflation in the rich world today may be a bust in the emerging world tomorrow.

The NY Times is also reporting that Latin American economies are booming based on increased Asian demand for commodities (iron ore, tin and gold). Latin America has had its share of debt crises since the 1980's. We're probably witnessing the beginning of another cycle. It's a fundamental feature of the current world system and the division of labor between core and peripheral countries. Policies designed to increase short-term growth (especially in extractive industries which are subject to swings in commodity prices) will only make the next crisis that much more severe in the future.

The "Ultimate Failsafe Device"

Today's New York Times reported an in-depth investigation of oil well blow-out preventers (BOP), the "failsafe" devices that were supposed to have prevented the on-going Deepwater Horizon oil spill. Above is pictured the shuttle valve and blind shear ram that is supposed to prevent blow outs. Hydraulic fluid is piped through the shuttle valve to the blind (as in window blind) shear ram to cut through the drilling pipe and close the well (the NY Times has a nice animation and graphics on its web site). The problem is that there was only one shuttle valve and only one blind shear ram creating a single point of failure.

The details of how the BOP was allowed to operate with a single point of failure provide fascinating reading. The free-market did not insure that BP or any of its contractors would operate safely. Government regulation did not insure that the BOP was tested, installed and maintained properly. And, we are left with the backup plan of drilling two relief wells.

My worry is that increased government regulation focused on BOPs will not be enough to prevent future environmental catastrophes. The technology is simply too flaky, too difficult to test, too complicated and too difficult to maintain for the Mineral Management Services to regulate. That's why I conclude that drilling two wells from the start is the only fail-safe mechanism.

Stent vs. Bypass

I recently participated in a study at the University of Wisconsin asking about patient preferences for coronary stents or coronary artery bypass surgery. The question of the study was "given a range of probabilities for death from either procedure and ranges of probabilities for having to repeat the procedure, which one would you choose". Conventional bypass surgery is quite invasive (although newer, minimally invasive procedures exist).

Stents inserted using cardiac catheterization are minimally invasive although there are some risks. Patients are quite often awake, if mildly sedated, during the procedure.

Blocked arteries (indicated with arrows above) are opened and a stent is inserted in each blocked area.

The arteries are then held open by the stent. There are two types of stents, bare metal and coated. Bare metal stents must be used with larger arteries (as pictured above). The coated stents fight accumulation of plaque on the stent (although drugs such as clopidogrel are used to act as an antiplatelet agent).

Since I'm basically very conservative, the chances of death from stent insertion had to be 100% before I would be willing to undergo bypass surgery. What the study questionnaire should have asked is whether one would choose either procedure if neither decreased mortality (as the current studies seem to indicate).

Had they asked the question, I still would have chosen the stent, but...

Double Thinking Deepwater Drilling

The NY Times yesterday reported that the US Federal government is thinking about developing

...a kind of parallel technological universe in which government would have the robots, the coffer dams and the other tools necessary to help control a big blowout.

At the same time, BP seems to be running out of it's own options to stop the leak. BP is currently drilling a relief well (estimated completion in August 2010) as the last best solution to a deepwater well blowout. Relief wells have worked before (above is pictured the Montara wellhead platform in the Timor Sea which started leaking on August 21, 2009). The problem is that relief wells take a long time to drill and a lot of oil can leak while we're waiting.

Rather than have a parallel technological universe set up by the Federal government (expensive and unlikely to work when needed), the obvious solution seems to be drilling both wells at the same time. Yes, drilling two wells will be twice as expensive. The equation, however, is cost-benefit = 2 x (cost of oil) - 1 x (environmental catastrophe). Another benefit is that 2 x (cost of oil) for deepwater drilling will marginally increase the cost of gasoline which will marginally increase the incentives for carbon neutral technology. Seems like a win-win.

Unfortunately, the double-think proposal is a close-the-barn-door-after-the-horse-is-gone solution. Prince William Sound in Alaska has still not recovered from the Exxon Valdez spill. The Deepwater Horizon spill is much larger and the recovery will be much, much longer.

Can we count on markets to prevent future oil-spill catastrophes? BP will certainly be damaged by the event and other oil companies will be re-thinking safety procedures. However, markets fundamentally reward risk, cost-cutting and externalization of cost (government bailouts, environmental damage, pollution, etc.). Safety costs money and there will always be market pressure to cut corners.

Hey, Slick! Don't Sheen Me On!

On ABC's "This Week" program, BP America Chairman Lamar McKay said that the Deepwater Horizon oil spill was the result of a fail-safe mechanism that failed to fail safe.

So, just what are the rules for reporting oil spills to the EPA? If I jump into the Gulf of Mexico with some "greasy kids stuff" on my hair, do I have to report it to the EPA? Here's the EPA Rule:

The requirement for reporting oil spills stems from the Discharge of Oil Regulation, known as the "sheen rule." Under this regulation, oil spill reporting does not depend on the specific amount of oil spilled, but on the presence of a visible sheen created by the spilled oil.

So, maybe I would have to report myself and BP's problem is really the amount of "sheen" and not the 5-25 thousand barrels of crude oil being discharged daily from Deepwater Horizon or what remains of it. Interestingly enough, Haliburton (Dick Cheney's old company) may have been involved or will be involved in this disaster.

Honestly, you can' t make this stuff up! OK, I can make some stuff up: Sara Palin is putting on her waders and going to help with the clean up. Spill, Baby, Spill!

Financial Crises, Income Inequality and a Return to "American Values"

Today, in a CNN interview, Republican Marco Rubio (former Florida House Speaker) said that we need a return to "American values" that encourage the accumulation of wealth. Also, on Fareed Zacharia GPS, Lloyd Blankein CEO of Goldman-Sachs said no one should be "ashamed" to make a lot of money. Finally, it turns out that part of the reason for the Greek financial crisis is that wealthy people in Greece (there are a lot of them) are underreporting (OK, lying about) their income.

I'm, not sure what Mr. Rubio wants to return to, possibly the high levels of income inequality right before the Great Depression and the current Subprime Mortgage Crisis. For Mr. Blankfein, it probably doesn't matter (what's a million or two when you made $53.4 million US$ in 2006). And, of course, the wealthy use their accumulations for the benefit of society, just look at Greece and the US.