Something old....

This post referring to the savings glut has made me sentimental for Grad school.  It was a problem back in 2006 too.  In fact, it inspire the following SA (which was probably the most fun I've ever had  doing homework):

Preface

Federal Reserve Chairman Ben Bernanke has suggested that a global saving glut is the primary cause of the unusual flattening of the treasury yield curve and is thus fueling the consumption boom that is driving the explosion of the US trade deficit[i].  Bernanke views the situation as relatively benign and expects it to unwind gradually over time.  Other commentators are less sanguine and have suggested a variety of remedies.  Most discussion seems to revolve around how to induce higher consumption and lower savings rates in Asia.  Reducing savings rates is certainly one way to address the excess savings problem.  However it is not the only possibility.  We can invert the issue and suggest that the problem isn't so much an excess of savings as a shortage of investment opportunities.  So the question becomes what could we do to put all those surplus savings to use?  One suggestion: Colonize the moon.

Why the moon?

At first glance the moon does not look like a particularly attractive destination.  However it is important to remember that in 1607 (founding date of Jamestown, VA) what is now the US was a tractless wasteland inhabited by hostile natives and separated from civilization by a long and dangerous sea voyage.  In order to understand why the moon might be attractive it is helpful to consider what the moon lacks:

• Pollutable atmosphere, waterways or oceans
• Conservable wildlife of any kind
• Disenfranchised natives
• Regulations
• Activists

Now consider what the moon does have; 58.6 million square miles of unclaimed and never mined real estate conveniently located just 385,000km away.  The moon also has the twin benefits of low gravity and negligible atmosphere. It may not be immediately obvious why the second point is important.  Low gravity and no discernable atmosphere mean that it requires relatively little energy to launch objects from the lunar surface.  Thus the products of lunar industry would thus be relatively easy to export.  Simply sling them into space and let earth's much stronger gravity pull them back into earth orbit where they can be collected for return to the surface. In addition, there are the obvious tourism opportunities.  The moon offers spectacular scenery, numerous historic sites, and plus entertainingly low gravity.  As the ultimate vacation destination the moon would have little in the way of competition.

What might it cost?

It is somewhat difficult to estimate what kind of investment lunar colonization might require.  As a starting point we can consider how much cost to visit the moon in the 1960's and 70's.  The total cost of Apollo and associated programs was approximately $135 billion in 2006 dollars[ii]. While establishing a human presence on the moon is a much bigger objective than simply visiting the moon it is important to remember two important facts.  Firstly, the Apollo program was administered by NASA which is hardly famous for cost minimization.  Secondly, NASA started at the very bottom of the space learning curve.  Any lunar colonization effort will have the benefit of a lot of expensively acquired experience.  For these reasons it seems reasonable, in the absence of other data, to suggest that $135 billion is probably a reasonable ballpark cost estimate for a commercial effort to establish a human presence on the moon.

Structuring the venture

It might be somewhat difficult to raise $135 billion for a moon colonization venture.  For arguments sake let us stipulate that it might be possible to raise $3 billion from risk hungry investors.  Private equity and hedge funds routinely exceed this size, so $3 billion isn't inconceivable provided there is a good investment story to tell.  In order to actually build a lunar colony it would be necessary to invest the $3 billion such that it provokes considerably more investment.  The key is to identify all the components required to make colonization possible and then seed ventures to develop each of those components.  These could be start-ups or joint ventures with established companies.  For example, our lunar colonization investment fund might approach Boeing to develop a next generation launch system.  Boeing provides the engineering capability while our company provides the first billion in funds.  Once this is spent Boeing can either find risk sharing partners and develop the project to completion, in the same way it does for new aircraft, or take a pass.  From Boeing's perspective this would look like a paid R&D project with a free option to create a new product line if it looks commercially attractive. Essentially we would be creating a portfolio of ventures each of which is valuable because of the existence of the others.  The fact that a complete lunar colonization solution is being developed will make each of the components viable investment prospects and allow each of the component ventures to raise funds individually.  The return to the original investors comes from the eventual liquefaction of the fund's equity stakes in the component ventures.  Notice that this investment strategy is the exact opposite of diversification.  For this reason the investors really would need a significant appetite for risk.  However the upside of owning a piece of every major project supplying the commercialization of the moon is potentially huge. Creating the necessary equipment is just the first half of the equation.  The next step is to create a customer to buy it.  Essentially we need to create an airline with a truly unique route network.  This would undoubtedly be very expensive.  However, raising the required funds need not be especially difficult if demand for transport to and from the moon could be demonstrated.  By the time it is necessary to launch our lunar airline it is entirely possible that demand will have already materialized.  After all Virgin Galactic is currently busy collecting $20,000 deposits for sub-orbital tourist space flights it does not plan to undertake until 2008.  While lunar tourism is certainly one potential source of revenue, the potential of a lunar airline is much greater.  The opening of a dependable link to the moon will inevitably lead to colonization and commercial exploitation.  That means ferrying not just people, but cargo – equipment and supplies – to and from the moon.

Creating Property Rights

A necessary precondition for inducing people to invest in moon based commercial ventures will be the creation of property rights.  Upon landing on the moon in 1969 Neil Armstrong claimed it for, "all mankind", which essentially means the moon isn't currently owned by anybody in particular.  There is a UN sponsored treaty governing ownership of celestial bodies however it has been signed by very few countries and ratified by even fewer.  The US is not a signatory. This would seem to leave the establishment of lunar property rights wide open.  Initially it might seem tempting to claim ownership based on the establishment of a lunar presence and then and sell lunar property.  This is not a great idea for several reasons.  Firstly, it is difficult to sell something for which the legal basis for ownership is ambiguous.  Secondly, any attempt to claim ownership is likely to provoke a government response either in the form of legislation or competing lunar programs.  Finally, putting a price on lunar property acts as a disincentive for the lunar investment required to make the whole venture worthwhile.  From a historical perspective, it should be noted that what really got the colonization of the US underway was the promise of free land. A better approach would be to create a registry for claiming lunar property.  The idea would be to divide the moon up into parcels which anybody who was interested would be free to make a claim.  The trick is that claims office would be located on the moon.  So lunar property would be available to anyone, or any corporation, committed enough to lunar ownership that they are prepared to travel there, or at least send a representative. Two key details would be required to make the system workable.  Firstly there would need to be a limit of one land parcel per claimant to prevent the first arrival claiming the whole moon.  The restriction would apply purely to claims, lunar property holders would be able to add to there holdings by purchasing property from each other.  Secondly, a condition of making a claim would be acceptance that disputes would be resolved in the courts of some suitable jurisdiction, for example Delaware. Notice that this not only creates a system of land rights that is sufficiently fair and open that influential governments are unlikely to feel the need to intervene, it also creates an incentive for people to visit the moon as soon as the system is in place.

Conclusion

By developing the necessary equipment, creating a transport link and building an acceptable system of property rights it may possible for us to open the final frontier.  In doing, so we will open an entirely new frontier for investment and have created a really interesting, and potentially rewarding, use for world's surplus savings.

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[i] Speech April 14 2005 – "The Global Saving Glut and the U.S. Current Account Deficit"

[ii] Marcus Lindroos - http://www.asi.org/adb/m/02/07/apollo-cost.html - estimate adjusted from 1994 to 2006 dollars