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Drone Transport Ships, Automation, and the Bubble Economy

Editor’s Note:  This article by Mike Shedlock leads off with a report on “drone transport ships,” but moves on to explore a provocative and very pertinent question:  Are policies that create the “bubble economy,” i.e., artificially inflated asset values, partly motivated by a desire to counter the deflationary pressures caused by automation? We have explored this issue most recently in “Pension Funds and the Asset Economy,” and also in a post from 2013 entitled “Exponential Technology and the Role of Unions.” Shedlock may not have all the answers here – who does – but he is asking a question that must challenge anyone serious about promoting effective policies to stimulate sustainable economic growth. And Shedlock’s basic point – intervention to counter “good deflation” is futile, if not counterproductive – is consistent with the lessons of history. Every innovation ever conceived of was deflationary; only by deflating the value of existing services can you free up capital to invest in the next wave of innovation.

Here is the question of the day: Are drone, workerless ocean freight transport ships coming?

If shippers can pull it off, the cost saving would be immense. But what about the job losses? Insurance? Inflation?

Let’s explore the questions with a look at the Bloomberg article Rolls-Royce Drone Ships Challenge $375 Billion Industry.

“In an age of aerial drones and driver-less cars, Rolls-Royce (RR/) Holdings Plc is designing unmanned cargo ships.

Rolls-Royce’s Blue Ocean development team has set up a virtual-reality prototype at its office in Alesund, Norway, that simulates 360-degree views from a vessel’s bridge. Eventually, the London-based manufacturer of engines and turbines says, captains on dry land will use similar control centers to command hundreds of crewless ships.

Drone ships would be safer, cheaper and less polluting for the $375 billion shipping industry that carries 90 percent of world trade, Rolls-Royce says.

The European Union is funding a 3.5 million-euro ($4.8 million) study called the Maritime Unmanned Navigation through Intelligence in Networks project. The researchers are preparing the prototype for simulated sea trials to assess the costs and benefits, which will finish next year, said Hans-Christoph Burmeister at the Fraunhofer Center for Maritime Logistics and Services CML in Hamburg.

Even so, maritime companies, insurers, engineers, labor unions and regulators doubt unmanned ships could be safe and cost-effective any time soon.

Crew costs of $3,299 a day account for about 44 percent of total operating expenses for a large container ship, according to Moore Stephens LLP, an industry accountant and consultant.

The potential savings don’t justify the investments that would be needed to make unmanned ships safe, said Tor Svensen, chief executive officer of maritime for DNV GL, the largest company certifying vessels for safety standards.

While each company can develop its own standards, the 12-member International Association of Classification Societies in London hasn’t developed unified guidelines for unmanned ships, Secretary Derek Hodgson said.

“Can you imagine what it would be like with an unmanned vessel with cargo on board trading on the open seas? You get in enough trouble with crew on board,” Hodgson said by phone Jan. 7. ‘There are an enormous number of hoops for it to go through before it even got onto the drawing board.'”

100% Guaranteed to Happen

Anyone who does not think drone, workerless ships will happen, cannot think clearly.

Skeptics did not think the auto would replace horses or trains. Skeptics thought flight was impossible. Even simple constructs we now take for granted such as coffee on airplanes was once considered ridiculous.

So yes, driverless cars and workerless ocean ships are 100% guaranteed. The only question is “what timeframe?”

I do not have an answer to that question, but let’s not bury our heads in the sand over what is inevitable.

Furthermore, it’s likely workerless ships arrive before driverless trucks hit mainstream.

After all, the ocean is a vast place and there are no road or other constraints except in docking. If landing is a major concern, how difficult would it be to helicopter in crews specifically for the final landing?

What About Jobs?

Let’s get a grip on the problem of jobs. Yes, many will vanish. But others will appear. I cannot name one technological advancement in history that did not ultimately create more jobs than it destroyed.

Examples 

  • Lightbulbs replaced candles
  • Cars replaced horses
  • Trains replaced the Pony Express
  • Personal computers
  • Internet replacing libraries

Can someone tell me why it’s supposed to be different this time?

What About Inflation?

Therein lay the problem. Driverless cars, the internet, and other price-deflationary advances have outstripped central banks ability to inflate prices and wages.

Try as they might, central banks have only managed to foster asset bubbles (they don’t even see) not the 2% price inflation they want.

Yet they keep trying. Prices went up but not as much as central banks want. Wages rose less than prices, especially for those on the bottom end. Home prices soared so Congress initiated countless affordable home programs. Then home prices crashed and Congress and the Fed acted to prop up home prices.

No one really wanted affordable homes, they just wanted ill-advised affordable home programs. Now people scream about income inequality and for higher minimum wages.

This all stems from one bad idea – central banks fostering inflation.

One Bad Idea Leads to Another, and Another

In the effort to produce 2% inflation, One Bad Idea Leads to Another, and Another

That construct is corollary number six of the greater “Law of Bad Ideas“.

Can the Fed Prevent Boom-Bust Cycles? 

Heck no, the Fed causes them! For details, see Bubblicious Questions: What Causes Economic Bubbles? When Do Bubbles Burst? Can the Fed Prevent Bubbles?

Also consider Deflation Theory Reality Check.

Losing Battle

Such are the challenges the Fed faces, and they are losing the battle because the advancement of technology is inherently price-deflationary. Technollogy has overtaken the Fed’s (central bankers in general) ability to inflate consumer prices.

Here’s the irony: Ridiculous efforts to prevent price-deflation cause asset bubbles that inevitably collapse, which in turn bring the very conditions central banks wish to prevent.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

Bipartisan Solutions for California

When examining policy options that might help restore a financially sustainable public sector, reformers tend to focus on what may be politely referred to as austerity programs. And no effective package of reforms can ignore austerity measures; cutting government programs, cutting government staff, and cutting government employee compensation. At the same time, an essential element in such an austerity program would be new rules to change the political landscape – in particular, legislation to curb the power of public sector unions whose agenda intrinsically favors bigger government.

Focusing on austerity alone, however, not only condemns many useful government programs and virtually all government workers to an unpalatable fate, but it is insufficient to revitalize overall economic growth. Accompanying any package of austerity measures must be a package of prosperity oriented measures. These include, predictably, creating a more business-friendly regulatory environment. But they also should include public/private infrastructure projects, strict new laws designed to break up monopolies and promote competition among very large corporations, and a relaxed permitting process for land, energy and resource development. All of these prosperity measures must share a common priority – to lower the cost of living. This not only makes austerity measures affordable, but it frees up public capital to reduce debt and make smart infrastructure investments, and it frees up private capital to innovate and invest in entirely new industries.

Here, in more detail, are solutions for California that combine both austerity and prosperity:

(1) Balance State and Local Government Budgets:

(a) Lower the wages of all state and local government workers by 20% of whatever amount they make in excess of $50,000 per year. Lower the wages of all state and local government workers by 50% of whatever amount they make in excess of $100,000 per year. Include in “wages” ALL forms of compensation.

(b) Solve the financial crisis facing pensions by imposing special tax assessments on state and local government pensions in the amount of 50% of all pension payments in excess of $60,000 per year and 75% of all pension payments in excess of $100,000 per year. Adopt the same reformed  financial rules governing pension liability estimates that already apply to private sector pension plans.

(c) Require 75% of all K-12 and Community College employees to be teachers in a classroom.

(d) Faithfully implement the federal welfare reforms already adopted by most other states in 1996 during the Clinton administration.

(2) Change the Rules in Sacramento:

(a) Implement fundamental curbs on the rights of public sector unions, including:  Grant all public sector workers the right to opt-out of union membership and payment of any union dues including agency fees. Prohibit government payroll departments from collecting union dues. Allow all public sector employees to negotiate their own wages and benefits and not be bound by collective bargaining terms if they wish. Prohibit public sector unions from negotiating over long term benefits, and require all current wage and benefit agreements to expire at the end of the term for the elected officials who approved the agreements. Prohibit public sector unions from engaging in political activity of any kind.

(b) Discontinue California’s “CO2 auctions,” which are nothing more than a way to redistribute money from middle class ratepayers to bankers, crony green entrepreneurs, and public sector payroll departments. Repeal AB32. Crucially, lift the crippling burden of land use regulations that keep the prices of homes and commercial property artificially high in California.

(c) Revisit all business-friendly recommendations made by business associations such as the bipartisan California Chamber of Commerce. This would not include compromise positions in support of public sector unions and crony capitalist environmental regulations. This would include banning mandatory project labor agreements or requiring union only contractors on government funded projects.

(3) Use government surpluses to engage in public works, and streamline permitting for private infrastructure investments, that LOWER the cost of living for everyone:

(a) Rebuild California’s aqueducts and develop additional aquifer and surface storage for runoff harvesting. Build desalination plants on the southern California coast. Upgrade existing dams and pumping stations. Permit farmers to contract with California’s urban water districts to sell their water allocations. Create water abundance and make water cheap.

(b) Build new power stations. Whether this is a joint project with Nevada to establish nuclear power stations in the vicinity of Yucca Mountain, or building new natural gas fired power plants, the immediate establishment of an additional 20%+ of generating capacity in California would result in significant lowering of utility rates and make California a net exporter of electricity.

(c) Permit development of offshore oil and gas using slant drilling from land. It is no longer necessary to develop offshore drilling rigs to extract energy reserves. There are cost-effective ways to bring this energy onshore without the risk of an oil spill from an offshore platform.

(d) Permit development of natural gas and shale oil reserves in California.

(e) Permit development of new mines and quarries in California.

(f) Build additional pipeline capacity into California to import and export natural gas to and from elsewhere in North America.

(g) Permit development of a liquid natural gas terminal off the California coast. Get California onto the global LNG grid to import and export natural gas and further diversify sources of energy and income. Create energy abundance and make energy cheap.

(h) Upgrade existing roads, bridges, and freeways. Begin working on “smart lanes” that will facilitate cars and mass transit vehicles driving on autopilot.

(i) Instead of developing a bullet train – something that might be worth experimenting with once everything else on this list is done and Californians have surplus money – upgrade California’s existing freight and passenger rail infrastructure. When practical, integrate passenger and freight service on common rail corridors in large cities where high population densities make passenger rail economically viable. Increase the speed of intercity passenger rail to 100+ MPH, which can be done on upgraded but already existing track. Improve the interstate rail links emanating from the ports of Los Angeles and Long Beach, to help them remain competitive.

Implementing policies designed to lower the cost of living is a perilous undertaking. Because it involves increasing the supply of all basic commodities and services including housing, energy, water and transportation, it can lower asset values and profits in those sectors and can contribute to a deflationary economy. But by lowering the cost of living, despite how pay and benefit cuts may affect public sector workers, and despite existing downward pressure on compensation that affects private sector workers employed by corporations competing in the global economy, the overall standard of living may actually improve.

During the 21st century there are two competing models of economic growth. The path California is on involves artificially inflating the prices of all basic commodities. Staying on this path will reduce global competition, empower entrenched global elites, and consolidate the power of public sector unions, monopolistic corporations, and global bankers. Economic growth will be slower, and in terms of genuine productivity, it will be an anti-competitive age of control by the few over the many, and a sad utilization of the great technological advances we have seen in recent decades.

The alternative economic model for California is to adopt policies that dismantle monopolies, nurture competition, and encourage new development of land and resources. If costs for basic commodities are lowered instead of raised, capital is released to finance completely new industries, from robotics and space commercialization to life-extension and other fundamental advances in medicine. This will cause rapid and sustainable economic growth, unprecedented per-capita prosperity, and even faster technological advancement. Because California enjoys so many gifts – natural resources of almost unparalleled abundance and diversity, and an economy that is the technological leader in the world – the solutions described here, though painful, may ensure California survives and thrives during what are sure to be challenging years ahead.