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June 2, 2009

By Peter Zeihan

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·                       Special Series: The Recession Revisited

·                       Special Series: The Financial Crisis

The global recession is the biggest development in the global system in the year to date. In the United States , it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.

Let’s begin with some simple numbers.

As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world. (Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, read the China section below.)

World GDP Change

But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.

The United States and the Free Market

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States . Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexicoas a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).

With geography empowering the United States and hindering Canada and Mexico , the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.

Like the transport network, this also helps the U.S. focus its resources on other things.

Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.

Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States , the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.

Russia and the State

If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of the Eurasian landmass, and as such is subject to climatic conditions much more hostile to human habitation and agriculture than is the American Midwest. Even in those blessed good years when crops are abundant in Russia , it has no river network to allow for easy transport of products.

Map: Russia

Russia has no good warm-water ports to facilitate international trade (and has spent much of its history seeking access to one). Russia does have long rivers, but they are not interconnected as the Mississippi is with its tributaries, instead flowing north to the Arctic Ocean, which can support no more than a token population. The one exception is the Volga, which is critical to Western Russian commerce but flows to the Caspian, a storm-wracked and landlocked sea whose delta freezes in the winter (along with the entire Volga itself). Developing such unforgiving lands requires a massive outlay of funds simply to build the road and rail networks necessary to achieve the most basic of economic development. The cost is so extreme that Russia ’s first ever intercontinental road was not completed until the 21st century, and it is little more than a two-lane path for much of its length. Between the lack of ports and the relatively low population densities, little of Russia ’s transport system beyond the St. Petersburg/Moscow corridor approaches anything that hints of economic rationality.

Russia also has no meaningful external borders. It sits on the eastern end of the North European Plain, which stretches all the way to Normandy, France , and Russia ’s connections to the Asian steppe flow deep into China . Because Russia lacks a decent internal transport network that can rapidly move armies from place to place, geography forces Russia to defend itself following two strategies. First, it requires massive standing armies on all of its borders. Second, it dictates that Russia continually push its boundaries outward to buffer its core against external threats.

Both strategies compromise Russian economic development even further. The large standing armies are a continual drain on state coffers and the country’s labor pool; their cost was a critical economic factor in the Soviet fall. The expansionist strategy not only absorbs large populations that do not wish to be part of the Russian state and so must constantly be policed — the core rationale for Russia’s robust security services — but also inflates Russia’s infrastructure development costs by increasing the amount of relatively useless territory Moscow is responsible for.

Russia’s labor and capital resources are woefully inadequate to overcome the state’s needs and vulnerabilities, which are legion. These endemic problems force Russia toward central planning; the full harnessing of all economic resources available is required if Russia is to achieve even a modicum of security and stability. One of the many results of this is severe economic inefficiency and a general dearth of an internal consumer market. Because capital and other resources can be flung forcefully at problems, however, active management can achieve specific national goals more readily than a hands-off, American-style model. This often gives the impression of significant progress in areas the Kremlin chooses to highlight.

But such achievements are largely limited to wherever the state happens to be directing its attention. In all other sectors, the lack of attention results in atrophy or criminalization. This is particularly true in modern Russia , where the ruling elite comprises just a handful of people, starkly limiting the amount of planning and oversight possible. And unless management is perfect in perception and execution, any mistakes are quickly magnified into national catastrophes. It is therefore no surprise to STRATFOR that the Russian economy has now fallen the furthest of any major economy during the current recession.

China and Separatism

China also faces significant hurdles, albeit none as daunting as Russia ’s challenges. China ’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.

Central control is also threatened by China ’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China ’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.

Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.

Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China ’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China ’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.

China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China ’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan ’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China ’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.

Discordant Europe

Europe faces an imbroglio somewhat similar to China ’s.

Europe has a number of rivers that are easily navigable, providing a wealth of trade and development opportunities. But none of them interlinks with the others, retarding political unification. Europe has even more good harbors than the United States , but they are not evenly spread throughout the Continent, making some states capital-rich and others capital-poor. Europe boasts one huge piece of arable land on the North European Plain, but it is long and thin, and so occupied by no fewer than seven distinct ethnic groups.

These groups have constantly struggled — as have the various groups up and down Europe’s seemingly endless list of river valleys — but none has been able to emerge dominant, due to the webwork of mountains and peninsulas that make it nigh impossible to fully root out any particular group. And Europe’s wealth of islands close to the Continent, with Great Britain being only the most obvious, guarantee constant intervention to ensure that mainland Europe never unifies under a single power.

Every part of Europe has a radically different geography than the other parts, and thus the economic models the Europeans have adopted have little in common. The United Kingdom , with few immediate security threats and decent rivers and ports, has an almost American-style laissez-faire system. France , with three unconnected rivers lying wholly in its own territory, is a somewhat self-contained world, making economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The Jutland Peninsula interrupts the coastline of Germany , which finds its sea access limited by the Danes, the Swedes and the British. Germany must plan in great detail to maximize its resource use to build an infrastructure that can compensate for its geographic deficiencies and link together its good — but disparate — geographic blessings. The result is a state that somewhat favors free enterprise, but within the limits framed by national needs.

And the list of differences goes on: Spain has long coasts and is arid; Austria is landlocked and quite wet; most of Greece is almost too mountainous to build on; it doesn’t get flatter than the Netherlands ; tiny Estonia faces frozen seas in the winter; mammoth Italy has never even seen an icebreaker. Even if there were a supranational authority in Europe that could tax or regulate the banking sector or plan transnational responses, the propriety of any singular policy would be questionable at best.

Such stark regional differences give rise to such variant policies that many European states have a severe (and understandable) trust deficit when it comes to any hint of anything supranational. We are not simply taking about the European Union here, but rather a general distrust of anything cross-border in nature. One of the many outcomes of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks tend to use local capital and are subject to local regulations, while stock exchanges tend to be internationalized in all respects. Spain , Italy , Sweden , Greece and Austria get more than 90 percent of their financing from banks, the United Kingdom 84 percent and Germany 76 percent — while for the United States it is only 40 percent.

And this has proved unfortunate in the extreme for today’s Europe. The current recession has its roots in a financial crisis that has most dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will remain mired in recession. And since there cannot be a Pan-European solution, Europe’s recession could well prove to be the worst of all this time around.

Please feel free to distribute this Intelligence Report to friends or repost to your Web site linking to www.stratfor.com.

Bob Springmeyer and Jon Springmeyer of Bonneville Research made this presentation to the Vestpocket Business Coalition on May 20, 2009.

Bob is principal of Bonneville Research and has consulted with local governments for over 30 years, directing Economic Development Planning Studies for Brigham, Salt Lake, Sandy, Bountiful, Riverton, West Valley and South Jordan Cities. He directed the Economic Analysis/Tax Studies completed for the Downtown Alliance, the Utah State Tax Review Commission and Salt Lake County. Formerly with the international consulting firm, Booz Allen & Hamilton, Bob is educated in Political Science, Economics and Business Management. Bob is a past president of the Salt Lake Rotary Club and a founder of the Mountain West Venture Capital Club.

Jon is the Vice President of Bonneville Research and has over ten years experience in commercial property management, construction management industries and the recreation industry. Mr. Jon Springmeyer directs all Urban Renewal/Redevelopment (RDA) projects for Bonneville Research and has been involved with numerous UR/RDA projects along the Wasatch Front including Taylorsville, Holladay and South Salt Lake cities. Prior to joining Bonneville Research, Jon was the Director of Properties for Amsource Development; a Salt Lake City based Real Estate Development Company.

  • Who and where are our small businesses?

  • What is and who are the future? 

Key words:

  • Barbell Economics
  • Niche Markets
  • Collaboration
  • Growth from the edges
  • Women & Immigrants  

CLICK HERE TO VIEW COMPLETE PRESENTATION

Published: Wednesday, May 20, 2009 10:33 p.m. MDT

WEST VALLEY CITY — Plans for an international marketplace to complement the Utah Cultural Celebration Center could be economically infeasible, according to city employees and a consultant paid to study the ethnic food market.

However, West Valley City officials have offered a private developer about $7.2 million in tax breaks and land value to develop the long-sought project.

Plans for the 18-acre marketplace have been in place for nearly a decade, but its construction has been slowed by legal issues regarding ownership of the land in question and staffing turnover at the city.

Tuesday, the City Council approved a contract to sell the land, but council members still want to force Ascent Construction to meet specific tenant requirements.

For example, the city could require that no more than 30 percent of the project space be represented by any one ethnicity, said Councilman Mike Winder.

Winder's fears were raised after West Valley economic development director Nicole Cottle told the council that the project could easily turn into more of a Latino market than an international one.

Current plans call for the city to retain control over the project's architecture. The purchase price of the land would be about $2 million, almost the exact price paid for the land 10 years ago, said West Valley Redevelopment Agency administrator Brent Garlick. That's $2.5 million less than the land is worth, according to city officials.

Tax-increment funding, which comes from property taxes not paid by the developer, is expected to garner about $4.6 million for Ascent.

The city-owned Utah Cultural Center is tucked away on a dead-end street near The Westerner private club on Redwood Road. The area is a gateway to the city, but that fact is far from obvious to the casual observer.

For now, the cultural center is bordered by a telecommunications business and a multifamily housing complex on one side. On the other, a flock of geese reside on the banks of the Jordan River near picnic tables and aromatic bushes blossoming in pink and purple.

Plans call for the picnic tables and plaza to be replaced by a major through street.

"We look forward to having it here, whatever it ends up being," cultural center executive director Ross Olsen said of the marketplace project. "It should speak to the international community. It should be something special."

A study by Bonneville Research found that more than 47 percent of West Valley residents can be considered ethnic. The ethnic food market is growing, but the project will only succeed if it draws customers from more than 10 minutes away, the study found.

City officials want shovels in the ground for the project as soon as possible, but Ascent President Brad Knowlten admitted that tightened financial markets and a slow retail sector could delay the development.

But the clock is ticking on the tax-increment funding option, which expires in 11 years.

The international marketplace is expected to include representation from Latino, Asian, Pacific-Islander, African-American and American Indian cultures. No leases have been signed — or offered — but project marketer and recruiter Katherine Quinlan said it will ultimately be like an indoor farmers market with retail space at various size and price levels.

"Usually, those smaller independently owned boutique retailers are looking to be clustered together with other like businesses," Quinlan said.

The project could also include housing, office space and recreational access to the Jordan River.

For more information, visit www.wvc-ut.gov/index.aspx?nid=735.

E-MAIL: rpalmer@desnews.com

 URL: http://www.deseretnews.com/article/1,5143,705305584,00.html

 

Wednesday, 13 May 2009
Reva Bowen - DAILY HERALD  

Wheels are turning in Orem this week, and it's not too late to bike to work, take a bike ride with the mayor or give input on a soon-to-be developed trail and bike plan for the city.

By proclamation, Orem is following the lead of the League of American Bicyclists in observing "Bike to Work Week" this week, and "Bike to Work Day" on Friday.

The designation is a nationwide endeavor to educate the public about the benefits of bicycling, and to increase awareness of and respect for bicyclists, according to Orem's proclamation.

"For me, 'Bike to Work Week' is not just one week, or one day -- it's every day," said Brad Woods, manager of Mad Dog Cycles in Orem and a member of the city's transportation advisory commission. "I'm grateful to Orem city. They're willing to recognize it and recognize bicycles can make a difference, and do something about it."

Cities across the county are observing the week. In Provo, about 100 people showed up bright and early at the Utah County Historic Courthouse on Tuesday for the city's Bike to Work Day event. Provo Mayor Lewis Billings led the crowd on a three-mile ride through city streets before returning where they started.

The event also included free helmets and bike tune-ups for participants.

"Many people who live or work in Provo already enjoy the benefits of bicycling regularly," said Billings, who cycles regularly. "This event gives those of us who already love bicycling a chance to encourage others to try it."

Orem's big ride will be Friday. The public is invited to meet at the City Center, 56 N. State St., at 8 a.m. for a continental breakfast, to be followed by a 15- to 20-minute bicycle ride with Mayor Jerry Washburn, members of the City Council, and city staff.

Paul Goodrich, Orem's transportation engineer, said those participating in Friday's bike ride will first meet in the rotunda of the City Center, where there are displays and maps showing existing trails and parks, schools, and open spaces, and information about how the public can give input on trail and bike planning.

Goodrich said federal funding has been obtained through the Mountainland Association of Governments. A connectivity study that will be done for the east central area of Utah County will involve developing a trail and bike master plan for Orem. That plan will then be integrated with the plans of Provo, Lindon and Vineyard.

Community support of and involvement with the trail and bike plan is one of the "biggest goals," said Connie Douglas, associate transportation engineer in Orem.

"We want to find those who like to ride bikes and want to see them more in the transportation system," Goodrich said. "We want to get to the grass roots -- to people who walk, bike and jog. We want to get their thoughts before we get deep into anything [with the study]."

Right now, Orem may be "just a little behind the curve" in the development of trails and bike paths in comparison to other communities, Goodrich acknowledged.

But at the same time, Orem ranked third highest in "walkability" among 41 Utah cities in a recent study conducted by Bonneville Research. The study scored cities on factors such as having a center (shopping district, main street or public place), neighborhoods compact enough for businesses to flourish and public transportation to run, mixed incomes and mixed uses, plentiful parks and public spaces, and nearby schools and work places.

"We're already a pretty decent community," Goodrich said. "We just want to improve on things if we can."

Members of the public who would like to provide input on Orem's proposed trail and bike plan are encouraged to contact Paul Goodrich by phone at (801) 229-7320, or by e-mail at cpdouglas@orem.org.

URL: http://www.heraldextra.com/content/view/308661/17/

 

Published: Saturday, May 9, 2009 11:04 p.m. MDT

A cap and trade proposal supported by President Barack Obama would increase electricity bills in the Beehive State by $1,115 per capita, Rep. Jason Chaffetz, R-Utah, said Friday at the Utah Taxpayers Association's annual conference.

Chaffetz obtained the information from an analysis created for Republicans on the House Ways and Means Committee, and he described the increase as a tax on businesses and regular folks.

"This cap and trade will be at the heart of what is debated in Congress between now and Memorial Day," said the freshman Utah congressman.

With cap and trade, the government would put a cap on the amount of carbon emissions allowed. If businesses invested in reducing carbon emissions, they could sell their allowable emissions to someone else. The idea is to clean the air and reverse humankind's impact on global climate change.

"I don't buy the whole global warming scheme," Chaffetz said.

Chaffetz is more concerned with how, if emissions are traded on a market by investors and speculators, energy prices will increase, which would be "devastating to the economy," he told conference attendees. Businesses are the largest supporters of the association, and they feel they unfairly pay the bulk of taxes.

"Fundamentally at their core, environmentalists want higher energy prices," Chaffetz said. "There is a fundamental core belief that if the energy prices go up, people will use less."

While Chaffetz believes there is some truth to that idea, cap and trade will be too expensive, possibly the largest tax increase ever, with billions generated in cap and trade sales — and the franchise taxes the government collects from utility bills — over the next decade.

However, not everyone believes cap and trade amounts to a tax.

Bob Springmeyer, a former Democratic candidate for Utah governor who works in economic and public policy analysis, said when contacted by the Deseret News that he believes there are only three ways to clean up the air: restricting emissions, cap and trade or taxes.

If government restricted emissions, companies that couldn't conform would close and people would lose their jobs. With cap and trade, emissions would be traded on a market, and with a tax, the government would collect revenue from companies that polluted.

When he ran for governor, Springmeyer said he supported a tax because Utah is a coal-mining state. "If you do it in taxes, that revenue can stay in Utah and can offset the dislocations of our coal industry," he said.

In addition to cap and trade, Chaffetz said he has been surprised at the casual attitude in Washington when spending taxpayers' money. Trillion is the new billion, which was the new million, and sometimes, Chaffetz said, he stares at the fiscal allocations in bills just to make sure he's not confusing "million" with "trillion," for instance. "If you were to spend $1 million a day every day, it would take you nearly 3,000 years to get to $1 trillion," he said.

E-mail: lhancock@desnews.com

 URL: http://www.deseretnews.com/article/705302331/Cap-and-trade-amounts-to-a-tax.html
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