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Mark's Market Blog

10-16-11: Manufacturing, Aspergers, and the Coming Malthusian Industrial Crisis

By Mark Lawrence

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The market went up this last week on news that nothing happened. It seems the less we hear from politicians, the happier the market is. Another 3% up or so and the markets will be flat for the year. The market has been rising on very low volume and high correlation, so many question the strength of this bull market. Today, Monday 17th, the markets dropped on news that Germany is still deeply divided on how to address the banking crisis. It looks to me like our oscillations aren't over yet.


S&P 500 May 1 2011 to October 16, 2011

The talk in Europe is about building a financial "fire wall" around Greece and recapitalizing the European banks to prepare for a Greek default. This begs a question: If Greece can walk away from 50-70% of its debt, why shouldn't Portugal and Ireland, not to mention Belgium, Spain and Italy? It's assumed in Ireland that whatever deal Greece gets will also be offered to Ireland. If (when) this doesn't happen, I predict you're going to hear some wheels squeaking for more grease.

Open Europe’s Pieter Cleppe appeared on Sunday’s De Zevende Dag, Belgium’s morning politics show, discussing the eurozone crisis. He argued, "In order to keep the eurozone up and running until the end of 2014, it requires multiplying the eurozone’s bailout fund, which has just been doubled, by fivefold, giving it an effective firepower of about $3r. This is not democratically feasible, and it will not solve the underlying problem of economic imbalances within the eurozone." "Economic Imbalances" is German shorthand for their lazy, unproductive cousins to the south.

Occupy Wall Street: There are millions of young adults with college degrees and no jobs, and they're demonstrating against unregulated capitalism. I'm not clear on what they want - it seems no on is, including them - but the movement is spreading across the US and Europe. Just as the election of Obama caused a split in the right - the Tea Party, protesting bigger government and higher taxes has become a sizable movement drawing people away form the republicans - the failure of Obama to implement his platform of removing us from overseas wars, regulating banks and Wall Street, and promoting more jobs and income equality for the bottom half of our society is now causing a split in the democrats. Both splits are spreading around the world now. The American problem is an electorate split into two separate ideological groups with few people or ideas in the middle, causing our government to reflect this with an inability to solve problems. Now that movement is spreading across the world.

There's a Europe joke: Heaven is a place where the engineers are German, the cooks are French, the policemen are British, your banker is a Swiss and your lover is an Italian. Hell is a place where the engineers are French, the cooks are British, the policemen are German, your banker is an Italian and your lover is a Swiss. That said, starting next month Trichet will step down as the head of the European Central Bank and be replaced by Mario Draghi, an Italian. Who used to run the Italian offices of Goldman Sachs. Welcome to Hell.

Deutsche Bank CEO Josef Ackermann warned that many European banks would not survive having to revalue their Greek debt holdings at market value. There's a summit in Europe this Sunday to, um, well, I dunno what it's for. They've already announced they will not get to a comprehensive solution. Greek debt is trading at 58 cents on the dollar, a 170% interest rate, in advance of the assumed 50% haircuts that Greek debt will take in the Final Solution. Don't forget, everyone in Europe thinks they fix Greece and then the fire is out, but Ireland and Portugal don't consider themselves anything like fixed. I continue to believe this crisis will not end well.

Manufacturing, Aspergers, and the Coming Malthusian Industrial Crisis

Manufacturing

We have, depending on who you believe and how you count, somewhere between about 9% and 18% unemployment in the US. Furthermore, each month more and more people are dropping out of the labor force, and it seems like each month the average duration of unemployment goes up by a month - the unemployed are not finding jobs. What's happening? Historically, the US was a manufacturing powerhouse. A man would graduate from high school, perhaps learn a skill like welding or machining, join a union, and make a very decent living. Those days are gone, seemingly forever. Today it's easy to find people who believe that America doesn't manufacture anything anymore, and that this will be the downfall of our economy and culture. Is it true?

The US is roughly tied with China as the world's largest manufacturer. Our manufacturing output has gone up every year. However, our manufacturing employment has gone done every year, as our manufacturing output per worker has quadrupled over the last 60 years. We make lots of stuff, but we don't make many jobs to do it.

How is all this stuff made? Robots. Cars are welded and painted by robots. Parts are machined by automatic screw machines and Computer Numerically Controlled (CNC) routers, engravers, mills and lathes. You draw a picture on Autocad and the machine makes you one, or several thousand. The granite for your kitchen counters was most likely cut by computer. 3-d printers can make objects with moving parts from a drawing. Predator drones and cruise missiles fly themselves - in 1982 Lockheed demonstrated to the FAA an L-1011 passenger jet that could file a flight plan, taxi to a runway, take off from Los Angeles, fly to New York, get permission to land, land on a runway, and taxi to a gate, all without a human touching the controls. These computer controlled machines are now cheap and ubiquitous. In my own company, I use a home made CNC laser cutting machine; it took me about 2 months to make it. Manufacturing employment is down and quality and consistency are up because of computer controlled machines. Where did the manufacturing jobs go? Not to China. They went to computer automated machines.

CNC engraving machineAutomatic screw machines (CNC Lathes)CNC Granite and Marble Cutter
3-d Printer and printed objectsAutomotive Assembly Robots

Predator Drone

Aspergers

There's a "disease," a "learning disorder" called Aspergers, named after Hans Asperger, who both had it and first described and diagnosed it. In Aspergers, a portion of the NT's brain (NT: Neuro-Typical, our name for "normal people") that does emotional recognition is wired instead to do geometry and math. People with Aspergers with years of effort can sometimes can develop improved social skills, just as NTs with years of effort can sometimes learn Calculus. No Asperger type, however, will ever be a compellingly masterful orator like Reagen, Clinton or Obama, just as no NT will ever learn General Relativity, Astronautics, or program a high-speed communications switch.

Aspergers, a mild form of autism sometimes called "Engineers Disease," is spreading through the population. In 1985 1 in 2500 newborns were diagnosed on the Autism spectrum. By 2000 it was 1 in 500; in 2004 it was 1 in 166, and in 2009 1 in 91. Careful tests have been made, and this profound increase is not due to improved awareness or testing, it's a real phenomenon. No one has any clue to the cause; however, we're witnessing the emergence of a new species, "Homo Aspians."

Just as the NT doctors seek a "cure" for Aspergers, we Aspies imagine a world where most everyone had Aspergers and suddenly NT children started to appear. We would be very concerned for these children, and would seek a "cure" for their symptoms: lying, cheating, teasing, incessant talking especially about themselves, excessive emoting and drama, a cavalier disregard for facts and knowledge, substantially decreased ability to form life-long friendships, an inability to understand and fix computer problems, and a near complete inability to do math or science. By contrast our major symptoms are an inability to be in loud places or around flashing lights like in discos and meat market bars, a strong dislike for crowds, poor skills relating to strangers especially in groups, discomfort with emotions, a complete inability to make or understand small talk, and an obsessive desire to master some subject or skill. Hans Asperger said, for success in science or art, a dash of autism is essential. The essential ingredient may be an ability to turn away from the everyday world, from the simply practical and to rethink a subject with originality so as to create in new untrodden ways with all abilities canalized into the one specialty.

Probably 90% of the students at Caltech and MIT have Aspergers - certainly that was true when I went to Caltech. Probably a quarter of Ashkenazi Jews have some degree of Aspergers. It's positively rampant among Asians, hence their quick domination of all things engineering. Absent people with Aspergers, we would not have satellites, transistors, lasers, radio, computers or the Internet. Or industrial robots. You would also miss out on many of your favorite artists. Below is a short list of some people from history that are believed to have had Aspergers. Try to imagine your world without them, just as we sometimes try to imagine our world without soap operas, raves, the National Enquirer, Ponzi schemes including Madoff and Amway, telemarketers and car salesmen.

  • Jane Austen
  • Bob Dylan
  • Bill Gates
  • Jim Henson
  • Carl Jung
  • John Nash
  • Nikola Tesla
  • Ludwig van Beethoven
  • Thomas Edison
  • Charles de Gaulle
  • Alfred Hitchcock
  • Franz Kafka
  • Isaac Newton
  • Henry Thoreau
  • Alexander Graham Bell
  • Albert Einstein
  • Vincent Van Gogh
  • Howard Hughes
  • Michaelangelo
  • Friedrich Nietzsche
  • Mark Twain
  • Emily Dickinson
  • Henry Ford
  • Al Gore
  • Thomas Jefferson
  • Wolfgang Amadeus Mozart
  • George Bernard Shaw
  • Leonardo Da Vinci

Malthus

From about 1800 to about 1825, Thomas Malthus published several papers on a single important point: in times of relative ease, population increases geometrically. This means if you have 100,000 people in this generation, you'll have perhaps 150,000 in the next, 225,000 in the next, 337,000 in the next, 506,000 in the next, and so on. However, the ability to grow food raises only linearly: if you can feed 100,000 people in this generation, then perhaps 150,000 in the next, 200,000 in the next, then 250,000 then 300,000 then 350,000 and so on. The inevitable result: poverty then malnourishment then starvation in the lower classes. Of course the upper classes always do just fine.

In the 200 years since Malthus, many people have predicted starvation for the whole world based on his ideas. Up until about 20 years ago, science was able to improve agriculture at such a rate and wars and pogroms killed so many people that it didn't happen; perhaps many thought it never would. It's happening now, and it's going to get worse. Jim Rogers has said, "There will come a time when there are parts of the world where food is not available at any price."

The Coming Malthusian Industrial Crisis

Before the Great Depression, about 70% of the US population was employed in agriculture. Between the economic displacements of the depression, the dust bowl conditions of the 1930s, and mechanization of farms, a huge number of these people lost their jobs and found themselves broke, unemployed and homeless. Today about 3% of the US population produces all the food we need; it's unthinkable that agriculture could employ 70% of our population. The 1940s solution was WWII: we shipped a couple million of our men off to war, and built up a huge war time industry making ships, army vehicles, and aircraft. When the war was over this huge investment in industry paid off: there were civilian uses for ships, cars and aircraft, and these industries geared up to make versions for the public. This included hiring huge numbers of factory workers who promptly unionized and got good lifestyles for themselves. It's important to remember that during this industrialization period in America's history, oil was cheap, computers didn't exist, and our competition from Europe and Asia had just been bombed into rubble. Today Asia is trying to industrialize during a period of expensive and inflating food and energy; a time when computers are cheap and ubiquitous; and world competition is cut-throat.

In the current depression, huge numbers of manufacturing and construction workers have been laid off. Many of these jobs are never coming back, just as the agricultural jobs before the Great Depression never came back. Again the issue is mechanization, this time not due to mechanical reapers and five horsepower tractors but industrial computer control systems and robots designed by our growing population of Asperger engineers and scientists. Some of these jobs can still be done for very low wages: it turns out that an Asian woman making $250 per month is cheaper than a CNC sewing machine or small parts assembly robot. So temporarily some of these jobs have relocated to Asia. However, the Chinese, Japanese and Koreans are now the world leaders in producing inexpensive CNC machines, and it's just a matter of time until the $250 / month worker becomes redundant. The number of these manufacturing jobs that goes upscale into the $5,000 per month salary range will be in the hundreds for all of Asia's three billion people. In the 1950s manufacturing employed about 30% of our population. Today we manufacture far more using about 8% of our population, and that number is shrinking. It's unthinkable that manufacturing could employ 30%+ of our population.

Those who think a combination of industrial policy and government stimulus programs will somehow drag our economy kicking and screaming back into the 80s and 90s and restore the jobs lost to automation are destined to join those jobs on the scrap heap of history. Moreover, those who think China and India can produce a billion manufacturing and construction jobs for unskilled and semi-skilled workers are completely ignoring the reality of modern computerized mechanization. If you asked Bechtel to bid on the construction of a new Great Wall of China, they would never consider using tens of millions of low paid low skill workers and no heavy equipment - it simply wouldn't cross their minds. To the contrary, likely their first act would be to solicit bids for new Automated Great Wall Construction Machines from John Deere and Kubota.

The unfortunate truth is that of the world's nearly 7 billion people, there are at least three billion who will never get a chance to experience the American Dream - a good paying job for a low education low skill person that lets them support a family and eventually perhaps own a house and car. The reality is much more bleak: the jobs will never come, food prices will continue to inflate, and hopelessness and hunger will be the reality for billions in Africa and Asia. Here in the US we have lost perhaps 28 million such jobs in the last couple of years, and while many of these people will eventually find some sort of employment, few of them will make much more than minimum wage and many won't find employment even at that pay scale.

There's no going back to the pre-computer manufacturing age. The sad but inescapable truth is, the world has three or four billion people for whom we have no use, and little or no food or water. Aspergers types are building a world where there is no need for half the world's population.

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