TIME nation

Detroit: America’s Emerging Market

How the city can teach us to reinvest the rest of the U.S. economy

In August, a year after I wrote a TIME cover story on Detroit’s bankruptcy, I visited Motown again. This time I found myself reporting on a remarkable economic resurgence that could become a model for other beleaguered American communities. Even as Detroit continues to struggle with blight and decline–more than 70,500 properties were foreclosed on in the past four years, and basic public services like streetlights and running water are still spotty in some areas–its downtown is booming, full of bustling restaurants, luxury lofts, edgy boutiques and newly renovated office buildings.

The city struck me as a template for much of the postcrisis U.S. economy–thriftier, more entrepreneurial and nimble. Many emerging-market cities, from Istanbul to Lagos to Mumbai, share similar characteristics, good and bad. The water might be off on Detroit’s perimeter, but migrants are flooding into its center, drawn by lower-cost housing and a creative-hive effect that’s spawned a host of new businesses.

Much of the resurgence has been led by Quicken Loans founder Dan Gilbert, who a few years back decided to relocate his company’s headquarters downtown, moving from the suburbs to take advantage of the city’s postcrisis “skyscraper sales,” as well as the growing desire of young workers to live in urban hubs. “If I wanted to attract kids from Harvard or Georgetown, there was no way it was going to happen in a suburb of Detroit, where you’re going to walk on asphalt 200 yards to your car in the middle of February and have no interaction with anyone in the world except who’s in your building,” says Gilbert, 52.

Since 2010, Gilbert has created 6,500 new jobs downtown, bought up tens of thousands of square feet of cheap real estate and brought in 100 new business and retail tenants, including hot firms like Twitter, as well as a bevy of professional-services firms. Lowe Campbell Ewald, one of General Motors’ advertising agencies, recently moved back downtown after years in the suburbs, citing better client-recruitment possibilities there. Companies of all types are catering to a growing number of young entrepreneurs who are making the most of cheap real estate (Quicken subsidizes rents and mortgages) and local talent (southern Michigan still has one of the nation’s highest concentrations of industrial-product designers) to create new businesses. For instance, there’s Chalkfly, a dotcom that sells office and school supplies online, and Shinola, the cult-hit watch company that advertises $600 timepieces as “made in Detroit.” Their success is already raising rents–per-square-foot rates have doubled in the past four years–and bringing in tony retail brands like Whole Foods.

The question now is how to spread the prosperity. The answer starts with better public transportation. Motown has always been a disaster in this respect. It used to be that nobody wanted to go downtown; now nobody wants to leave. The M-1 Rail, a new public-private streetcar due to be completed in 2016, aims to link neighborhoods. GM, Penske, Quicken and other firms are contributing the majority of its $140 million cost, and the rail will be donated back to the city within a few years. Studies show that a similar project in Portland, Ore., has generated six times its cost in economic development. In the past few months, officials from New Orleans and Miami have visited Detroit to study the project.

Reinventing Detroit’s manufacturing sector is the next step. That means connecting the dots between the public and private sectors, businesses and universities, and large and small firms. Detroit’s old industrial model was top-down: the Big Three dictated terms to thousands of suppliers, who did what they were told. The new model will be more collaborative. Many of the innovations in high-tech materials, telematics and sensors are happening on campuses or at startups, with the aid of groups like the Michigan Economic Development Corp. The University of Michigan has become a test bed for driverless cars. A new federally funded $148 million high-tech manufacturing institute just opened in Detroit’s Corktown neighborhood.

One could imagine the automakers playing a key role in this resurgence by investing more broadly in local innovation, via their own venture-capital arms. Ford, which acquired a local digital-radio technology startup last fall, is beginning to do just that. It would provide a much needed injection of cash into the city’s innovation economy and offer the automakers a new line of business.

Ultimately, it will take all that and more to ensure that Detroit’s downtown rebirth grows into a boom that is more broadly shared.

MONEY Economy

Is Inflation Really Dead?

201409_TBQ_1
Joe Pugliese

We put the question to Pimco Chief Economist Paul McCulley, who explains why you don't have to worry about rising prices—and why Forrest Gump was a great economist.

Paul McCulley, 57, retired from Pimco in 2010 but returned as chief economist in May. Pimco runs almost $2 trillion, including Pimco Total Return, the world’s largest bond mutual fund. McCulley coined the term “shadow banks” in 2007 to explain how Wall Street could trigger a financial panic.

MONEY assistant managing editor Pat Regnier spoke to McCulley in late July; this edited interview appeared in the September 2014 issue of the magazine.

Q: Is inflation really dead?

A: Inflation, which is below 2% per year, may very well move above 2%. In fact, that is very much the Federal Reserve’s objective. So it will move up, but only from below 2% to just above 2%. But in terms of whether we will have an inflationary problem, I don’t think we have much to worry about. Back in my youth, in the days of Paul Volcker at the Fed in the early 1980s, inflation was considered the No. 1 problem. Now I’m not even sure it’s on the top 10 list, but it for darned sure ain’t No. 1.

Q: What’s holding inflation down?

A: First, we’ve had very low inflation for a long time, and there’s inertia to inflation. The best indicator of where inflation will be next year is to start from where it is this year. We won the war against inflation. It’s that simple.

Second, we still have slack in our economy, in both labor markets as well as in product markets. Companies have very little pricing power—as an aside, the Internet is a reinforcing factor because consumers can find the price of everything. And we have too many people unemployed or underemployed for workers to be running around demanding raises.

Finally, the Fed has credibility, so expectations of inflation are low. Unmoored expectations could foster higher inflation, as companies try to anticipate higher costs. Fed credibility is a bulwark against that. Unlike 30 years ago, the Fed has had demonstrable success in keeping prices stable by showing it is willing to raise short-term rates to slow growth and inflation.

Q: What about quantitative easing, in which the Fed buys bonds with money it creates? Doesn’t that create inflationary pressure?

A: I’ve been hearing that song for the last five years. And inflation has yet to show up on the dance floor. People say, “The Fed’s been printing money. It’s got to someday show up in higher inflation.” My answer, borrowing from the famous economist Forrest Gump, is that money is as money does. And it ain’t doin’ much.

Q: You mean money isn’t getting out of banks into the broader economy to drive up prices?

A: Yeah. I mean the Fed has created a lot of money, but it’s done so when the private sector is in deleveraging mode, meaning people are trying to get out of debt. There has been low demand for credit, so the inflationary effect of money creation has been very feeble.

Q: You’ve said that a low-inflation world also means low yields and low fixed-income returns. Why?

A: People my age—I’m 57—remember the days of double-digit interest rates and double-digit inflation. But as the Fed’s fought and won its multidecade war against inflation, interest rates have come down. And it has been a glorious ride for bond investors from a total-return perspective because when interest rates fall, bond prices go up, so you earn more than the stated interest rate.

But now inflation is actually below where the Fed says it should be. So there’s nowhere lower that we want to go on inflation to pull interest rates down further. Now what you see is what you get, which is low stated nominal yields. In fact, rates will drift up in the years ahead, which is actually negative for the prices of bonds.

Q: What does this mean for how I should be positioning myself as a bond investor?

A: First and foremost is to set realistic expectations that low single digits is all you’re going to get from your bond allocation.

New normal

Q: Is there anything I can do to get better yields?

A: For bond investors, what makes sense right now is to be in what Pimco Total Return Fund manager Bill Gross calls “safe spread” investments. These are shorter-duration bonds—meaning they are less sensitive to interest rate changes—that also pay out higher yields than Treasuries do. These could be corporate bonds or mortgage-related debt. They can also be global bonds.

Q: Pimco says investors should also hold some TIPS, or Treasury Inflation-Protected Securities. Why would I own an inflation-protected bond in a low-inflation world?

A: It’s a diversification bet in some respects. But also, the Fed’s objective is 2% inflation, higher than it is now. What’s more likely? That the Fed misses the mark by letting inflation fall to 1%, or by letting inflation hit 3%? I think 3% to 4% is more likely. TIPS protect you against the risk of 3% to 4% inflation. The Fed has made clear that if it’s going to make a mistake, it wants to tilt to the high side, not the low.

Q: Why wouldn’t the Fed just aim for the lowest possible inflation rate?

A: When the next recession hits, do you want a starting point of inflation in the 1% zone? No. A recession pulls down inflation, and then you are in the zero-inflation or deflation zone.

Q: And deflation is bad because … ?

A: Because then people with debt face a higher real burden of paying it off.

Q: How much time does Pimco spend guessing what the Fed will decide? Pimco Total Return lagged in 2013 when the Fed signaled an earlier-than-expected end to quantitative easing.

A: You’ve asked me a difficult question because I wasn’t here. But I was here for the entire first decade of the 2000s, and I know a lot about the firm. I can tell you the firm spends a huge amount of time and, more important, intellectual energy in macroeconomic analysis, including trying to reverse-engineer what the Fed’s game plan is. Fed anticipation is a key to what Pimco does. You don’t always get it right, but not for a lack of effort.

Q: You argued the 2008 crisis was the result of good times making investors complacent. With Fed chair Janet Yellen talking about high prices for things like biotech stocks, is complacency a danger again?

A: I don’t worry too much about irrational exuberance in things like biotech. It doesn’t involve the irrational creation of credit, as the property bubble did. Think of the Internet and tech bubble back in 1999. It created a nasty spell, but it didn’t lead to five years in purgatory for the economy either.

TIME energy

Dropping Oil Prices Threaten Moscow’s Budget

Oil refinery in Ufa, Russia, seen in April 2014.
Oil refinery in Ufa, Russia, seen in April 2014. Andrey Rudakov—Bloomberg/Getty Images

Russia has seen its economy boom with the price of oil. But if the cost of crude falls, Moscow could struggle to make ends meet

This article originally appeared on OilPrice.com

Oil and gas are at the heart of the Russian economy and are largely responsible for keeping Moscow’s government budget in balance. But the recent decline in the price of oil from the North Sea and Texas has now spread to Urals crude, giving President Vladimir Putin one more economic headache.

The price of Urals crude fell just below $100 per barrel on Aug. 18, an 18-month low. On Aug. 19, it dropped to less than $97 per barrel. These declines coincided with similar drops in the price of Brent crude from the North Sea and U.S. oil.

The reasons are fairly easy to recognize. First, the United States has been on a drilling tear, extracting oil at record levels to increase its supply at a time when demand is waning. Second, though more tentative, is that conflicts in North Africa and the Middle East are so far not interfering with oil production in these regions.

This oil production boom raises problems for Moscow. Two-thirds of Russia’s exports are oil and gas, accounting for fully half of the central government’s revenues. That means that so far this year, every dollar drop in the price of Russian oil means a cut of about $1.4 billion in revenues.

This comes as Russia’s oil industry joins its defense and finance sectors as targets of sanctions by the European Union and the United States over Moscow’s unilateral annexation of the Crimean peninsula in Ukraine and its suspected role in the fighting between Ukrainian forces and pro-Russian separatists.

Some analysts say the effects of the lower oil prices may not be lasting unless the drop in oil prices fall further in coming years. Vladimir Kolychev, the chief economist at VTB Capital, a global investment firm with headquarters in Moscow, says brief dips have less of an impact on Russia’s budget than the average cost of oil over an entire year.

“The first thing to remember is that the oil price projected by the finance ministry is … $104 average for the year – that still looks conservative,” Kolychev told Reuters. “Even if the oil price falls to $90, we’ll still have $105 average.”

As an example, Kolychev calculates that Russia’s budget would balance if oil’s average price fell to $103 per barrel.

Even if Moscow can tame its budget, it seems clear that Russia’s oil sector will feel the pain from the one-two punch of Western sanctions and lower prices. Vedomosti, a Russian financial journal, reported Aug. 14 that government-owned Rosneft, Russia’s largest oil company, has asked Moscow for more than $40 billion in debt relief because of the sanctions.

That’s a sharp reversal from just a month ago. Western sanctions were imposed on July 15, and three days later, Rosneft officials shrugged them off, saying the company would continue to pursue its plans and reap profits. In fact, a week after that statement, Rosneft CEO Igor Sechin boasted that the company’s revenues were soaring.

 

TIME Food

The Surprising Reason ‘Pink Slime’ Meat Is Back

Beef to Tomato Send July 4 Food Cost to Record
Ground beef is portioned onto trays at a supermarket meat department, July 2, 2014. Daniel Acker—Bloomberg/Getty Images

It has something to do with the weather

The attention was damning. In 2012, ABC News ran an 11-segment investigation on a low-cost meat product critics called “pink slime,” a moniker coined by a former USDA employee who argued the filler wasn’t really beef.

In an attempt to steer the public away from it, celebrity chef Jamie Oliver “recreated” it on his TV show by throwing beef scraps into a washing machine and dousing the results with ammonia. Soon, social media feeds were blanketed with photos supposedly of the product that made the meat look like soft-serve strawberry ice cream.

The backlash was intense. Though the USDA considers the product safe for human consumption, fast food giants like McDonald’s, Burger King and Taco Bell publicly renounced it and public schools around the country stopped serving it for lunch. By May 2012, Beef Products, Inc,, the South Dakota-based inventor of the product, was on the brink of collapse—closing three of its four plants and laying off 700 employees.

What a difference two years makes.

On Aug. 18, BPI reopened one of its shuttered plants. While production is nowhere near pre-freak-out levels, when the product BPI calls “lean finely textured beef” was estimated to be in 70% of the ground beef sold in the U.S., the company has been gradually regaining business. The reason is the same one that made finely textured beef successful in the first place: it’s cheap. And lower costs are particularly attractive to processors facing record high prices for ground beef. According to the U.S. Department of Labor, the average price of ground beef in June was $3.88, up 14% from last year.

For that, you can thank the sustained drought that has gripped much of the American West and Great Plains, including cattle producing regions of Kansas, Oklahoma, Nebraska and Texas.

“The main issue is the drought,” says Dan Hale, an animal science professor at Texas A&M University. “A lot of the U.S., especially parts that raise cattle, have experienced a severe drought. And those animals are no longer available for producing calves that we can in turn generate for beef trimmings.”

In the summer of 2012, more than 50% of the country was considered in moderate or extreme drought. Those conditions forced ranchers to rush cows to slaughter, which led to fewer calves in the following years and lower head of cattle overall. Meanwhile, demand for beef kept rising, pushing prices higher along with it. With supply down, prices up and memories of the “pink slime” moment fading, the market for finely textured beef is growing again.

BPI makes its product by spinning discarded beef scraps in a centrifuge to separate the lean, edible trimmings and then treating the result with ammonium hydroxide meant to kill food-borne pathogens like E. coli. Processors blend it with other cuts as a cost-saving measure and the product can account for as much as 10% of the meat in a package of ground beef.

“If you can utilize more of the animal, that helps mitigate some of the low supply numbers,” says Lee Schulz, an agricultural economics professor at Iowa State University.

BPI remains embroiled in a a $1.2 billion defamation lawsuit against ABC News over the network’s coverage of its product. The company is now producing close to 1 million lbs. a week. of lean finely textured beef—down from nearly 5.5 million lbs in 2012. But BPI is optimistic that the worst days are behind it. The newly opened Kansas plant will work with global meat processor Tyson Foods, collecting its raw beef trimmings and shipping them to a BPI facility in Nebraska that will process the scraps into profit.

“BPI continues to experience growth and remains confident this growth will continue,” Craig Letch, BPI’s director of food quality and food safety, said in a statement. “This is certainly a step in the right direction.”

TIME Infectious Disease

Ebola’s Untold Tragedy: Foreign Families Are Fleeing

The exodus of industry and families from West Africa could have severe implications

Health care is dire in Ebola-affected countries in West Africa. But one of the lesser recognized tragedies is the fact that international families—families of diplomats, missionaries or business people—have fled the country either by choice or at strong recommendation from their homeland. If they don’t return, some fear that their exodus could cripple the countries’ growing economies.

“The health situation in terms of direct risk of infection [for the average person] is really not that bad, but its effects are immense,” says Jeff Trudeau, the director of The American International School of Monrovia (AISM), which has lost well over half of its expected students for the start of the 2014 school year, and has delayed its start date to October. Right now, he’s only 50% confident they will open then.

In Liberia, the government closed public schools. Private schools are subject to fewer regulations and some remain open. However, even if AISM wanted to open on time, it simply no longer has students to fill its chairs. AISM and similar international schools in West Africa cater to kids who come from countries with specific educational standards, typically children of missionary families, diplomats, and international businesses. Last year, 16 embassies were represented at the international school in Liberia.

Closed schools are a serious problem for children’s education, but closures in countries like Liberia and Sierra Leone have implications even beyond lost learning opportunities. Trudeau says the country of Liberia, where he lives, has greatly improved in terms of economy and industry in the last few years. Two years ago, AISM only had 70 students, but as the school season neared this August, AISM was expecting to welcome 150. Trudeau says his school has also lost 20% of its teachers.

“Liberia entered a period of prosperity, and we grew last year,” says Trudeau. It’s reflective of how things improved security-wise and economically. Parents felt comfortable bringing their kids to Liberia.”

Trudeau says that if the school can’t open in October, and doesn’t open until, say, January, they will probably have fewer than 50 students. The other students will, by that time, likely have enrolled in other schools in their home countries or elsewhere.

Similar U.S. Embassy-funded schools in Sierra Leone and Guinea are also struggling. The American international school in Sierra Leone remains closed, and though the school in Guinea is open, it has only 50 students—a 50% reduction in their expected class.

In the wake of the outbreak, kids are left without parents and people are dying of otherwise preventable diseases due to lack of medical attention, Doctors Without Borders has written in TIME. So far, Ebola has infected 2,615, killing 1,427. But the aftermath won’t simply be a clean-up, but also a catch-up—to gain back the momentum they made in the last few years.

“There are three things a country needs to be successful: security, health care, and education,” says Trudeau. “Education is our direct responsibility. If we can attract top-quality people to return to Liberia, we can help them rebuild and restore. Unfortunately, without health care, you can see how quickly this is lost. No matter how well you’ve done in security and education, without health care, it doesn’t work.”

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