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Diplomacy in Action

Outlook and Overview of the U.S. Economy

Steven Ricchiuto, Managing Director and Chief Economist, Mizuho Financial
New York, NY
February 16, 2011

Date: 02/16/2011 Location: New York, NY Description: Steven Ricchiuto, Managing Director and Chief Economist, Mizuho Financial, briefs at the New York Foreign Press Center on the ''Outlook and Overview of the U.S. Economy.'' - State Dept Image

11:00 A.M., EST

MODERATOR: Good morning. Welcome, everybody. I’m really pleased today to have Steve Ricchiuto, who is an economist from the U.S. who will talk to you a little bit about the forecast for the economy. And Steve is representing Mizuho Securities, which is a Japanese-American company based both here and in Japan.

So, Steve, thank you for coming. We’re happy to have you here.

MR. RICCHIUTO: My pleasure. All righty, gang, let’s try to do this in a very informal way, okay? I gave you a presentation, and the reason why I gave you the presentation is because there are a couple of figures in there that I may want to point to. We’re not going to go through every one, so don’t flip to the last page and say 26 pages, how are we going to get through this in 20 minutes? We’re not going to do that.

There’s really only three figures that are going to be important in the entire presentation, and I think what you’re going to discover about the presentation is, one, that I tend to do analysis on the U.S. very differently than most people do analysis on the U.S. And the reason for it is my background is very different, okay? Not to say I don’t have advanced degrees in economics – I do – but I’ve done lots of things in my career over 30 years, okay? I started out in the business right out of graduate school and I was a fixed-income economist, at the time when fixed-income economists were few and far between, and most of them were basically rejects from the equity economics department, then moved over, over time, into being a U.S. equity economist, been a global chief economist for a global institution. I have been an equity strategist, I have been a corporate bond strategist, and I’ve been a director of fixed-income research twice.

And this is where I differ from most people, in that the analysis I do really takes a look at the economy from a credit perspective. Okay? Why a credit perspective? Basically, because we are the largest, most leveraged nation in the world. Now, you can say Japan has a higher public debt to GDP than the United States, but when you look at the plethora of our debt markets, we are the largest and most leveraged nation in the world. And unless you understand what’s happening with credit, you really don’t understand what’s going on in the economy.

As a point of reference, a year ago most of my colleagues on the street were forecasting 4-plus growth for 2010. Growth in 2010 will probably come in around 2.5, maybe 3 percent best, once we’re done with all the revisions. Big difference between 4 percent growth and 2.5 percent growth. Most of them were forecasting that we would end 2010 with an equity market near 1450. Most of them were expecting we would end 2010 with long-term interest rates well over 4 percent.

None of those forecasts came to fruition. The question is why. And why today, when we stand here and they’re making almost exactly the same pronouncements? They’re talking about 4-plus growth. They’re talking about steady climbs in long-term interest rates. They’re talking about when will the Federal Reserve begin the process of tightening monetary policy. And they’re talking about equity markets at 1450 by the middle of this year.

I disagree. I disagreed a year ago and I disagree today. The reason I disagreed a year ago and the reason I disagree today are exactly the same reason. This is one of the other reasons why economists don’t like to talk about credit. When you follow credit, to a great extent it’s like watching paint dry. It’s like watching grass grow. Okay? Nothing happens day to day. It takes time. And we have just gone through the third credit-oriented cycle in the last three cycles. And no one wants to talk about it or understand why it’s developing this way.

To understand credit, you first have to say to yourself, “What is important about credit?” Well, it wasn’t until I had to build an investment grade fixed income research department from scratch that I had to learn what credit analysts did for a living. And after I went through all their analysis of what they do, their mumbo jumbo, what do the rating agencies do when they look at corporate credits, I began to realize there are really three fatal sins of leverage. And yes, my Roman Catholic upbringing starts to come through in here a little bit as well. Three fatal sins of leverage. If you have none of them, you’re in credit heaven. If you have one or two of them, you’re in credit purgatory. If you have three of them, you’re in credit hell. The U.S economy a few years ago was in credit hell.

And what are those fatal sins? A high leverage ratio, a short duration structure, and a high debt burden. You have a lot of debt. You have to roll it over often and you’re paying a lot to finance that debt. Your cash flow is being squeezed and you’re in danger of not being able to survive. This is how companies go under. This is how economies go under. This is how sectors in industries go under.

The Steve Ricchiuto forecast today says, guess what? Growth in 2011 will be no stronger than growth in 2010. Monetary policy is on hold for at least the next 12 months. Long-term interest rates may temporarily move towards 4 percent, but they’ll end the year closer to 3-and-a-half percent than they will be to 4. So 2011 is another year of false start, and it comes down to credit.

What about credit? What about credit that matters? The consumer, first of all. A year ago, most economists on Wall Street said, hey, the savings rate had gone from zero to 3 percent and it was time for that savings rate to drift back to 2 percent and the economy would grow at over 4 percent. It didn’t happen. We ended 2010 with a savings rate of over 5.5 percent. Big miss.

When we look at the economy right now, most economists are saying 5.5 percent, that’s it, we’re going to 4; the economy’s going to grow at 4, 4.5 percent. My answer is you’re not paying attention to the credit story. Consumer balance sheets are not yield. I’m not saying if consumers were given the opportunity to spend they wouldn’t go out and spend; yes, they will. But the banks who control the flow of credit to the consumer sector are not in a position to let them leverage.

The net result is you have an economy that can’t get that momentum. You have an economy that can’t go to lower savings rates. You have a banking industry that’s going to force the consumer to a savings rate of closer to 8 percent. That doesn’t mean the economy goes into double dip; it just means the economy can’t get the strong upward momentum that’s necessary to clear the labor market, drive up jobs, reduce tax burdens, and reduce the government’s demand for borrowing. And that’s why real yields will be higher in 2011 than they were in 2010, but not enough to strangle the economy.

Now, I’ve given you a very different way of looking at the world. Let me try, through a couple of figures, to make a point. This presentation is a shortened presentation of one that I do when I go visit clients. And the first figure we’re going to look at, which is the quintessential figure in here – unless I eliminated it; oh, no; no, I didn’t – is the figure on page 11. This is what determines how banks behave. You would think a model of the U.S. banking industry would have to be much more difficult than this. You know what? It’s not.

I spent 15 years on the asset liability committee for one of the largest foreign banks in America, and I spent 15 years on the accident liability committee for that global institution. And at the end of the day, there are really two things that draw out the way banks work: What are their estimates of non-performing loans, and how many reserves do they have against those non-performing loans? When the non-performing loans are declining and they’ve got a lot of reserves, they want to make a lot of loans. When they want to make a lot of loans, they make a lot of loans to consumers, and the consumer drives the economy. When they’re in a position where they have very high non-performing loans and they’ve got very low reserves, guess what? They don’t make loans. And if they don’t make loans, what happens, the consumer can’t spend. Because the average consumer in this economy is living on debt because they haven’t a lot of savings. Even in a 5 percent savings rate, they still only have a 5 percent rate at a current income. They’re still heavily leveraged.

But the interesting thing about this figure is it kind of explains why the economy has evolved the way it has in each of the last three recessions. Take a look at the first recession back in 1990 through 1991. That was the first jobless recovery. Notice, at the point in time that the recovery became – went from jobless to job growth was when? In 1993. What happened in 1993? Non-performing loan balances dropped below reserves. In that entire period when non-performing loan balances were higher than the coverage ratio, companies weren’t in the position to drive the economy in higher markets because they weren’t sure demand was real.

Suddenly when a chip* switched over, the economy became self-sustaining and dragged on right into 9/11. And everyone sat there after 9/11 and said, oh, my God, the recession’s going to be horrible. However, George Bush signed a tax cut. The economy took off like a rocket. The economy didn’t just take off like a rocket because George Bush signed the tax cut. The economy took off like a rocket, why? Because the coverage ratio and non-performing loan balances were far apart. Banks were in great position to support consumer spending. In the current downturn, what’s happened, non-performing loan balances are through the roof. Bank coverage ratios or their reserves are at the absolute bottom, and we’ve been going through a year-and-a-half, going on two years, of a jobless recovery. Any surprise?

And look how far apart these two lines are. Now, banks are recording good profits. They’ve got nice capital. Don’t get me wrong; we forced them to raise capital, but they also need a lot of reserves, and they’re holding a trillion dollars in excess reserves. Why? Because the Fed’s paying them less than 25 basis points for it? They’re holding those reserves because they know their non-performing loan balances are huge and the coverage ratios are still low. That’s why the title of this presentation is Post-crisis Workout Period, because that’s what we’re in. We’re in the period where banks are still working out their problems. And while banks are distracted working out their problems, this doesn’t mean J.P. Morgan. This doesn’t mean Goldman Sachs. This doesn’t mean Morgan Stanley. It means the smaller regional banks, spread out throughout this country, which are the heart of small business lending and the heart of employment, these are the institutions that are still struggling and will be struggling for the next few years.

The only way these non-performing loan balances can drop is if consumers de-leverage. And here again is where I differ a lot from people on the street. You’re going to look over now to page 15 – page 1-5. Everyone looks at the fact that the consumer’s leverage ratio is coming back to this trend that has been going on since 1990 and saying, hey, the housing’s sector’s completely de-leveraged; saving rates don’t need to rise anymore. Here again, I don’t think they’re paying attention. Wall Street Journal today, news column, right? Banks are demanding more in down payments for homes. Federal Reserve loan officer survey the other day, consumers are still de-leveraging and they’re still deleveraging in the housing market. The average U.S. consumer’s balance sheet is heavily leveraged, and where is it leveraged to? It’s leveraged to real estate. And estimates say at least 25 percent of all homeowners are upside down in their mortgage.

QUESTION: I’m sorry, how many?

MR. RICCHIUTO: Twenty-five percent. Returning to this trend line, is that realistic? Or do we need to go a much flatter trend line. Look at the trend line for growth that existed from the 1950s to the early 1990s. And then look at the big discontinuous upward jump in leverage and then that new trend line that continued and the insanity we went through a few years ago, and ask yourself a question: In that upward sloping trend line, what was going on? What was going on was we took homes, which was the largest liability on a consumer’s balance sheet, and we said we were going from a 20 percent required deposit – over time we did this – to a zero deposit. We went from heavily documented loans to no-document loans. We went to fully documented liabilities and assets to the consumer to robo-signers.

Now, I ask you, is that trend valid anymore? Are we going to have robo-signers? Or are banks going to give you 100 percent loan-to-value loan and hand you a credit card for another 10,000 home equity line of credit just because you took out the mortgage with them? Because that’s what that line builds in? That’s a different world than we’re in today.

Getting back to that line suggests that consumers – flip forward two pages – that consumer debt burdens have come down a lot. They’ve come down to that dashed line. You see the dotted line, that’s my estimate of where the consumer debt burden has to come down to. You know what you need to get to that point, you need a savings rate of 8 percent out of current income. At that point, you have a flatter trend – that leverage line – a trend that assumes all new homes will have a 20 percent equity piece. That’s the only difference. One says you’re done with the restructuring; the other one says you’ve got more work to do and it could take another year to get there. The net result is this is why I am different than everybody else on the street in my forecast.

I was just at a bank economist luncheon the other day, 30 of us sitting around the room. I am the most negative out of all of them. In fact, the thing that surprised me most about the conversation is the conversation wasn’t even about, gee, is the economy going to be strong? is inflation a problem.? Those were all assumed. The debate was all about when does the fed begin raising interest rates and what do they do first. Will they do what Dick Fisher says and start selling securities, or will they stick to the exit strategy that Bernanke laid out and start raising interest paid on reserves and slowly begin the process of de-leveraging the fed’s balance sheet? This is how far they’ve gone in their mind again.

So when you see things like a housing start number today, which is up a ridiculous amount because of a 77.7 percent jump in multifamily structures, these aren’t condos in Florida. What’s happening in the multifamily space is a recognition by Reitz* that the homeowner is not going to be the homeowner in the future, that the homeowner’s going to rent, that those of us who have a lot of gray hair and would like to retire in the next 10 years are going to look at the opportunity to sell our house and rent, and that new entrants into the housing market are going to sit there and say, I can’t raise $50,000 quickly to put a donw payment on a home, so I’m going to have to get married for a couple of years and live in rental apartments for a few more years longer because I don't have the deposit for a home.

But if you look at single-family starts, which is all the value added, single family housing starts dropped again and permits were down over 10 percent. And then you look at the vaunted manufacturing sector. We all look at the ISM numbers, and Europeans in particular love ISM numbers. Why? Because you have crappy statistics on each individual country and you don’t know how to add them up properly across countries. So you look at these ISM numbers, and the world depends on ISM. But in the U.S., we have relatively good statistics. The problem is economists are no longer paying attention to them.

The ISM number says manufacturing is up here. The Fed’s own measure of industrial production says manufacturing is here. Which one is right? I’m sitting at the Federal Reserve Board of Governors. I know which one I think is right: the number I produced. I know how it’s calculated. I’ve got a huge history of understanding how this thing works to the economy. This ISM thing is expectations of purchasing managers. They read the papers, they see the stock market, they’re being told things are better, they say things are better. But the industrial production number, which measures actual output, says guess what? Things ain’t that much better.

The net result is when I look at the U.S. economy, it’s not ready to grow strong. It’s not ready – it’s not capable of cashing the checks economists are writing. And unfortunately because we have a budget deficit both at a state and local level and at a federal level, which are heavily dependent on tax revenues, which are heavily dependent on employment generation, we have a structural budget deficit that’s higher than OMB assumes. And the problem for us is going to be competing in a global economy for that limited pool of savings. And that’s why I think real interest rates will end this year higher than they ended last year, but not as high as the Street anticipates.

So to sum it up, the Street: 4, 4.5 percent growth, S&P 500 1450 by the middle of this year, 10-year notesbreaking through 4 percent, heading towards 450 by the end of the year, monetary policy probably beginning the process of raising the rights and adjusting out monetary accommodation by the end of the year. Steve Ricchiuto: growth in 2011 no stronger than in 2010, S&P 500 will be lucky to break 1350 by the end of the year, we’ll get to a near term and then we’ll settle back and consolidate and then have to struggle the rest of the year to get up to it, long-term interest rates ended last year at around 3 percent and will end this year at around 3.5 percent after making a temporary detour to 4 percent because everyone’s bearish, and the Federal Reserve is on hold for the next 12 months. Vastly different stories, vastly different analysis.

Questions, or have I scared you with that?

MODERATOR: I was going to say, thanks for that very upbeat forecast. (Inaudible) so do people have questions? Say where you’re from and your name as well.

Yeah, I have the mike. It’s for the transcript. It’s obviously not for the (inaudible).

MR. RICCHIUTO: Any questions? Any global questions, fees* on the dollar? Yes?

QUESTION: Global question on the role of the dollar.

MODERATOR: You have to use the microphone.

QUESTION: Renzo Cianfanelli of the Italian group Corriere della Sera. Okay. Is the role of the dollar as a world currency compatible with the scenario you have just outlined? Or is it likely to be coexisting, the dollar with the euro, with the ramen* and perhaps with some other relatively minor currency such as the Swiss franc?

MR. RICCHIUTO: The answer to your question in a very, very simple answer is for now, yes, it stays the reserve currency. Over time, we all hope it loses some of that status, because the world has to evolve. The problem that I see is more one that says, look, who’s the competitor? Okay. Can you really trust – don’t take this wrong – can you really trust the Chinese Government at this point? You have zero disclosure, right?

The other thing you have to worry about with regard to China is every emerging economy in the world goes through a depression at some point. You can’t emerge rapidly, efficiently, without creating excesses. And when those excesses come home to roost, you have major problems. The U.S. economy, as it was emerging, went through many depressions, okay? And what happens? Those depressions stress the internal structure of the political organizations. And what you have to worry about in certain government and government structures are that when that stress occurs, you could fracture the political environment, kind of like what you see happening a little bit in the Middle East right now, but that’s a different story, but again, a little bit like what you saw happen in the USSR after that fell apart. Stresses and strains create cracks.

And the Chinese economy, for one, is not a homogenous economy in terms of its population. There are very diverse groups within it. And there are questions as to whether or not how it’s being held together. So the thing you have to worry about with China right now is simply what is it that we’re dealing with? We still don’t really know. So how can you trust it as a reserve currency? You can’t.

Europe. Europe has an incredible potential right now to assume the mantle as a second reserve currency. Will Europe blow it? I don’t know. The odds are pretty much stacked against it because of the disparate political situation, the disparate behavior between unions and governments, the linkages between them in Europe. The biggest fear I have about Europe is the costs get to be at the point prohibitive enough that Germany just says, ah, the hell with it; we’ll go to a core Europe. And would France be part of that core Europe? From the statistics, it probably wouldn’t deserve to be. So what is a core Europe, then? Switzerland and Germany and maybe the Dutch? So there’s still a lot of movement in those parts as well.

So the dollar maintains its reserve currency status not because it deserves it but simply by default. And where you see diversification taking place right now, it’s a very, very early stage and it should be happening because it takes time to move things like reserves. But I do get a little bit upset when I see things like China has $2 trillion worth of reserves. U.S. corporations added $2 trillion to their balance sheet in the last year-and-a-half. Not insurmountable numbers. The federal government’s raising $1.6 trillion in the financial markets this year. There are huge differences.

The other big difference, really, between Asia, Europe, and the United States is the belief towards disclosure. I’m not going to say our disclosure laws are the best. However, disclosure tends to be more of an endemic piece of our marketplace than it is in Europe or in Asia. And if you are going to have a reserve currency, you have to have the highest degree of disclosure. It’s not to say somebody else couldn’t take that mantle. They could, and I’m sure they will at some point. But that opens you up to a lot. And a lot of people don’t like to be that exposed. And again, reserve currency by default.

Another question?

QUESTION: Stephan Alsman, Economics Weekly. So, Britain has made this arrangement a week or two ago where they tried to sort of ensure that some of the banks will have some lending to small companies. And in terms of your analysis, I’m wondering, what does that point to? Is that futile or would you say America just has to bite the lemon right now and eat the –

MR. RICCHIUTO: Well, the answer to your question: Yes, you do have to bite the lemon for a while. Trying to stimulate small lending when the small lender isn’t creditworthy is just wrong, okay? Do you give a sick person more of the disease in an injection? The person’s bleeding to death. Do you cut their other arm? No, you stop the bleeding. You allow the economy to rebuild its blood, to rebuild its strength. That’s the point we’re at. That’s been a part of the problem with the political approach to this recession. They want quick fixes, and there are no quick fixes, which is the one good thing, I think, about having a split government at this point. Because you don’t keep on going down the path to quick fixes.

The reality is we need real tax reform, real entitlement reform, real solution to budget deficits. You get that done and you could see a proper fiscal stimulus program coming down the pipeline which would get this economy moving to a stronger growth trajectory rather quickly. Credible reform. Is that politically acceptable? At this stage, I don’t think so. I would love it to be the case. Two years from now, I think it will be the case. This isn’t a bet on the next election, because two years from now, if we have another year of a garbage year, another year where the unemployment rate is over 8 percent, another year where the equity market doesn’t make it to new highs, another year where employment growth isn’t too strong, we’re going to be ready to go through that domestically. Right now, we’re not at that point.

QUESTION: That’s a mental barrier, basically.

MR. RICCHIUTO: It’s a requirement, yeah. Now, with regard to the UK, the other thing that worries me a little bit is the UK is not known for a lot of small business opportunities. It’s not the new bastion of new development, small businesses. And I understand the reason why the government’s doing it. It sounds good, but I, again, don’t believe it’s something that’s going to be really capable of driving the UK economy because they don’t have that culture of starting small businesses.

MODERATOR: Questions?

MR. RICCHIUTO: There’s questions over here.

QUESTION: Hey, it’s just something I read after the next budget, that everybody says, look, there is one thing which should be cut but is so holy here and that’s defense. Do you have any opinions on that?

MR. RICCHIUTO: There are a lot bigger fish to fry than defense. Defense is important. Defense is part of being a reserve currency. Defense is important to our allies. I don’t see defense as the primary thing that needs to be adjusted. The primary things that need to be adjusted are healthcare, entitlement reform, and the interest on the public debt. Those are the three issues. And you need a major tax reform structure. I mean, let’s be honest. When you look at the U.S. economy, I mean, I’m a conservative, okay? But I’ll tell you, I look at this whole concept of a flat tax rate at 32 percent, 38 percent for everybody, depending on which person’s numbers you want to use, and I’m kind of like this makes no sense. Why should a John Paulson make $5 billion last year, max out at exactly the same marginal tax rate as a guy who sells hot dogs on the street in Manhattan? That’s just ridiculous.

Now, I’m not saying if you had broader tax bands, but at some point you have to look at multimillion dollar sports contracts and musicians making $150 million for concerts, and say enough is enough, or a TV star who makes $2 million an episode, and say enough is enough. Let’s tax them at an appropriate rate.

QUESTION: (Inaudible) socialism.

MR. RICCHIUTO: Well, it’s not socialism; it’s just pragmatism. And again, as I said, I’m a conservative, but I recognize at some point you do have to begin to take these – you have to broaden the tax stream. I’ll also sit here and tell you is I think they should eliminate completely the mortgage interest deduction. Forget only the houses over $500,000; it should be across the board. We shouldn’t be in the business of subsidizing housing. I do believe that Social Security should be taxed, or it should be means tested so wealthy income individuals don’t get it.

So there’s a lot that has to be dealt with, and they have to be dealt with in fair and equitable ways, before we even worry about defense. And given the insanity of the world these days, I’m not so sure cutting defense is a smart thing to do. However, giving all the concerns about the inability of the TSA to catch things at Newark Airport – and I fly in and out of there quite frequently – maybe something should be done to straighten them up a little bit.

Any other questions? There’s one more question over here?

QUESTION: I wanted to ask a question but you partially answered it. Tom Dipula (ph) from the Polish Newsweek. I wanted to ask about the public debt issue. You were talking mostly about consumer debt. How do you see this problem in your equation here? And should we start to reform our Social Security, Medicare, Medicaid system right away or can we wait before everything collapses?

MR. RICCHIUTO: Well, a, we should be doing it right away. Politically, we can’t, so we’re not going to. Again, which is one of the reasons why my more dour scenario, I think, brings about a political solution in two years to doing it. So, yeah, I think it needs to be done. To be a hundred percent honest with you, I’m disappointed the rating agencies haven’t taken action already. But I’m disappointed they have taken action in the United States.

QUESTION: Reduce debt, yes?

MR. RICCHIUTO: Correct. That they haven’t taken greater action in Europe, that they haven’t taken greater action in Asia. To be honest, when I look around at the (inaudible), there are only a handful of countries that I think should deserve a triple-A rating, and they ain’t any of the big guys. And I throw China into that mix.


QUESTION: Yeah, Jihong Qiao from Xinhua News Agency. Yes, China has great – a large number of the bonds of Fannie Mae and Freddie Mae*. And there are great concerns now about the safety of the bonds. How do you think of the safety – how do you see the future of the two, maybe, mortgage giants?

MR. RICCHIUTO: Yeah. No, it’s a good question. It’s a question I get all the time from my clients in Tokyo as well. The best thing I could say is this: The government is going to have Fannie and Freddie in their conservatorship for probably as long as I’ll be left in this business because, if you think about everything they have to do, between entitlement reform, healthcare reform, tax reform, all of that comes ahead of Fannie and Freddie. So what I think happens is Fannie and Freddie, by the time we get to it, will be a much smaller problem. In the interim, they are the wards of the U.S. Government and they will stay that way. So I wouldn’t be terribly worried about the bonds for Fannie and Freddie that are outstandanding.

The U.S. Government is not going to allow – after they stood behind them, they’re not going to walk away from them, which is one of the reasons why you need proper entitlement reform, you need proper Social Security reform, you need proper tax reform. As I said, you need to broaden the tax base and you need to do it in a way that doesn’t put the government in a position of subsidizing housing anymore. We’ve already made that mistake, you’ve got to live with it.

QUESTION: Talking about tax – broadening the tax base, how – talking about broadening the tax base, do you see – is it politically possible to introduce a tax on fossil fuels, which would make a lot of sense, but it’s really an atom – if gasoline price went up to, I think, a realistic price, there would be riots, maybe, in the U.S. And what about introducing VAT, which seems another anathema in this country?

MR. RICCHIUTO: Well, let me take them in reverse order. VAT is already essentially in this country through state and local sales tax laws. So it’s not like we don’t have it; we do. We just have it under a different name because it’s a very different structure than Europe has in particular. So compounding it with the federal structure on top of it all is just going to take revenue away from the states because you’re going to have to give some quid pro quo for the two of them. The states can’t afford that either. So that’s not going to happen because we already have it in the states manage it.

With regard to a gasoline consumption tax, okay, we are an automobile nation, like it or not, okay? We’re not going to build high-speed rail networks. They lose money, okay? We’re just not going to do that. When you look at the Amtrak system, okay, it only makes money between Boston and Washington. Everything else, it loses money. When you look at the Metropolitan Transportation Authority, right, you can’t make money – public transportation. We’re not going to change that because everything we have doesn’t make money. And we’re not going to subsidize it because we’re already fighting against those cost increases.

So we are, at the end of the day, an auto nation. We’ve have built an auto infrastructure, we’ve built an auto industry, and we are going to stay an auto nation. Doesn’t mean we don’t go to clean diesel. Doesn’t mean we don’t go to electric. But right now, that’s just not in the cards. It’s just not efficient. It’s just not practical. We own a Prius, okay? We paid more for it than we should have. It gives great gas mileage, don’t get me wrong. But the reality is, is it a cleaner vehicle? Five-year estimates on the cost of – the environmental cost of producing the batteries, the environmental cost of shipping those batteries across the Pacific in incredibly polluting cargo ships – okay – and then how are we going to dispose of these batteries properly? At the end of the day, is the carbon footprint any smaller?

Electric infrastructure doesn’t exist. The cars aren’t there yet. You can’t recharge them quickly. Now, I’m not going to drive to work and leave my car plugged in for 12 hours somewhere. (Inaudible) if that infrastructure isn’t there, what happens if I need it in six hours to go home? I can’t go home? It’s just not going to happen.

So we’re going to put a fuels tax on? It’s not going to change consumption a heck of a lot. It’ll change consumption temporarily, but then people get used to it and they change their cars a little bit and we go on with it, and that’s all that I think is going to happen. So all these grand and glorious dreams of doing this stuff just don’t make a lot of sense. Look at wind turbines. Everyone wants wind turbines. You drive out the Midwest, all you see is truckloads of wind turbines going north and south and everywhere. At the end of the day, they don’t make any money.

So what’s the sense of doing things that don’t make money? I mean, it’s just – it’s a very, very – it’s a very difficult problem. The technology certainly is racing more quickly towards a solution than it’s ever done before, and there’s a greater acceptance of these vehicles, these newer vehicles, than there ever has been before. But again, we are an auto nation, and we’re not going to change. We made that determination after World War II – after World War I, actually – and that’s where we are. That’s not going to change.


MODERATOR: (Inaudible) right behind you (inaudible).

QUESTION: Yes, I’m Fucik Zdenek, Czech News Agency. A simple question: What is your forecast for Europe for this year?

MR. RICCHIUTO: Again, I think Europe winds up pretty much with a 2011 that’s no better than 2010. And I think China has – I think the global economy has already hit the highs that it ever normally hits before it settles back. So when you look at the global economy, the global economy is going to be weak. What was it, 5.5 percent last year? The global economy is probably going to be in a range of about 4.5 to 5. And you say, oh, gee, what’s five tenths of a percent? It’s a lot in a global economy.

And where does it (inaudible) primarily come from? I think it’s going to come a little bit from Europe and a little bit from Asia, because I believe the ECB is going to make the mistake of tightening interest rates because the inflation problem in Europe is a bit more endemic than the inflation problem here. And they’ve got only one mandate – inflation. You can hide behind that one mandate all you want, and they’re going to. They’re going to get that inflation rate down, no matter what it costs Europe.

Any other questions?

MODERATOR: All right. (Inaudible) so much for coming.

MR. RICCHIUTO: I would like to let you know my – all my contact information is right on the front of the presentation. If you want to – I put out a daily. I don’t put out a weekly, I don’t put out a monthly, I don’t put a – and the daily on Monday just happens to be – serve for the week. If you want to see anything, just email me. I’ll be glad to add you to the lists and we can take it from there. If you want to talk about any of this part of the presentation in more detail or pending the future, I’m available. *Come to me directly.*

QUESTION: Thank you very much.

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