Yay! We reached a debt ceiling agreement! And it cuts $2.1 trillion from the federal budget!
Let's take a closer look at what really happened.
First of all, there are guaranteed budget cuts of $2.1 trillion. Sounds great until you realize that those cuts are spread out over 10 years. What's worse is that those cuts are extremely back-end loaded, meaning that much of that money isn't cut until many years down the road. In fact, only about 20 or 25 billion dollars in cuts take effect in fiscal year 2012. As far as I'm concerned, those are the only cuts that matter because any future congress doesn't have to abide by the guidelines set out in this bill. (If you're curious, 2013 cuts amount to only $47 billion, but the new 2012 congress will likely change that.) This is why politicians love 10 year budgets. They can make seemingly huge cuts that only take place in the last 3 or 4 years, never actually follow through with those cuts 6 or 7 years later and claim victory in order to help their reelection chances. Oh, and those cuts aren't really cuts in any literal sense of the word. In Washington, if you plan to increase spending by 10% but only increase it by 6% they say they made a 4% budget cut, even though spending increases by 6%. These cuts are no different. They're only budget increases that are less than the larger budget increases that were already in place. Maybe that explains why so many politicians have a weight problem. "I only ate 7,000 calories today instead of the 10,000 I planned on eating! I cut my calorie intake by 30% and only gained 5 pounds instead of 8! This diet is a huge success!"
Now to the debt ceiling. I'm not entirely certain how much it is raised by. Initially it's $400 billion with another $500 billion increase later this year. And I also saw that the total increase would somehow end up being about $2.1 trillion. That's the largest number I've seen so I'll just assume that is true. This number is very important because it's the amount of money that the Treasury says they need in order to make it through the next election cycle and into 2013. In fact, Vice President Biden said that the deal has one overwhelming redeeming feature: postponing the next debt limit battle until 2013 and leaving the current fight behind. This is crucial because Obama, and anybody in congress for that matter, don't want to have to duke it out over the debt ceiling again before they have to hit the campaign trail.
But I'm not so sure that $2.1 trillion dollars is enough to get us by that long. In August of 2009 the White House predicted the 2011 GDP to increase by 3.8%. In July of 2010 the White House projected 2011 GDP to increase by 4%. Now that we have 2 quarters of data for 2011 let's see how accurate they were. The 1st quarter GDP was originally stated to be 1.9% but was recently revised down to 0.4%. Currently the 2nd quarter GDP increase is said to be 1.3% and who knows how much that will be revised down to.* But even if we have 0.4% Q1 GDP and 1.3% Q2 GDP, that still only gives us an annualized rate of 0.8%. That is just slightly more than a long fucking way from the 4% projected just one year ago (If you're keeping score at home, the White House was off by 400% IN JUST ONE YEAR**). And with an economy that looks more and more likely to slip into the double-dip recession*** that I've been expecting for over a year now (and I'm certain it is inevitable), I wouldn't be surprised if the real revenues fall far short of the projections and the deficit ends up being much larger than expected. If that happens, and it's very likely that it will****, the Treasury could burn through their $2.1 trillion ceiling hike much sooner than anyone believes. Reaching the debt limit again, before the 2012 election, would pretty much be the nail in Obama's coffin. Then we will elect a Republican that is just as ineffective. Yay!
*Q1 GDP was revised down by 1.5%. If Q2 is revised down that much we will officially be in negative growth territory. Just a reminder, back in August 2010 I predicted GDP to enter negative growth by Q2 2011. In a few months, when the official Q2 GDP numbers are revised, that could prove to be amazingly accurate. Either way, the fact that some dumb fuck with no formal economics education who can read and objectively take in information has made predictions much more accurate than the President from Harvard speaks volumes.
**If they can be off by so much in just one year, why does anyone expect them to make budget and revenue forecasts that go out 10 years? Am I the only one who thinks this is insanity?
***In this case the term "double dip recession" is somewhat of a misnomer. It's my belief that we're currently in a depression that's been going on since 2007. The only reason the GDP numbers are positive is because the government is manipulating CPI to make inflation seem much lower than it is. Remember, official GDP is the increase in nominal GDP minus the inflation rate. If we had an accurate inflation rate, it would be high enough to push official GDP into negative territory.
****Since we'll probably have QE3 in the next couple months, and almost certainly will by the end of the year, that could help keep the economy afloat even though the effects of QE will be less and less with each round. But remember, when The Fed does QE, they print money to purchase Treasuries, so the QE money will go towards the national debt and, obviously, the debt ceiling.
Wednesday, August 3, 2011
Tuesday, June 21, 2011
No Love For Democracy
Pretty much every day you'll hear, in some for or another, the virtues of democracy being espoused. Most notably, this sentiment is expressed when we justify our overseas wars. "We are making the world safe for democracy" is a phrase that's been thrown at us for decades now. It's accepted that governments have the ability to enslave and restrict freedoms to their citizens, the only variable being the degree to which they do those things. Enough dictators and despots throughout history have certainly proven this fact. It is also accepted that simply having a democratic form of government is enough to ward off these evil tendencies of governments and ensure that people remain free. It's why we fight wars that “bring freedom and democracy to a nation.” But very little discussion is actually had on the virtues and implications of democracy.
It is generally accepted that with democracy comes freedom. This is something we all seem to understand without even giving it any thought. In a democratic society, the will of the people will prevail and surly that is emblematic of freedom itself. So long as democracy is allowed, it will ensure that freedom is upheld. Majority rule is clearly the most moral form of government one can aspire to. Perhaps these are the generally accepted beliefs, but those beliefs are wrong. In fact, I'll go one step further and posit that the only difference between a totalitarian government and a democratic government is that a dictator is simply replaced with a majority. More specifically, a voting majority.
When you get down to the basics of democracy, it's clear that it is nothing more than a system whereby the majority is legally able to impose their will on the minority. Not only does this not guarantee freedom, but it almost ensures that freedom will not exist. The only question is to what extent will freedom be forbidden.
One needs not look further than present day America to see the immoral effects of democracy. We have laws that forbid the use of recreational drugs because the majority has voted politicians into office that made that behavior illegal. Does freedom enter into this decision at all? Certainly not. If 55% of the population doesn't approve of the use of certain drugs, they can simply use the democratic process and summon the coercive power of government to impose their will on the other 45%. While there is nothing undemocratic about this, there certainly is, in my opinion, something extremely immoral with it.
There are a whole host of issues where, simply because something is not popular, it is made illegal and therefor limits the freedom of individuals to engage in certain behavior. Personally, I feel that prostitution is abhorrent behavior. But my personal opinion on the matter should not give me the ability to use government to prevent others, people who might not hold the same opinion as I do, from engaging in that activity. Why should I have the ability to use the power of government to impose my will on those who disagree with me? Why should the legality of certain behavior depend on popular opinion? Why should anyone's freedom to engage in behavior that causes no direct harm to others be restricted simply because most of his neighbors voted to do so? Why should someone be forced to give up half of their earnings to a man with a gun and a cage simply because The Majority approves of it? The answer is simple: Because we have democracy, and restricting the behavior of others can be done whenever a majority supports it.
And yet most of us hoist democracy onto a pedestal. Even worse, we put freedom right next to it. It seems to me that freedom and democracy are not inherently compatible. And why should they be? Democracy is the will of the majority. But that's only the first half of the definition. If we're being honest, democracy is the will of the majority imposed on the minority with force and the threat of violence. That has nothing to do with freedom. Freedom is something that everyone espouses, few people understand, and even fewer people desire. The proof lies in our democratic government, our willingness and ability to vote ourselves other people's money and our incessant need to use the democratic process to restrict behavior simply because We The Majority don't approve of it.
Forgive me if I retain the pedestal for something more deserving.
Monday, May 23, 2011
Deflation, Oh No!
So it's starting to happen. A few weeks ago commodities got pounded, oil and silver especially. And now stocks are falling rather sharply. It looks like the market is starting to price in the end of QE2 as $6 billion of cash flooding the system every day courtesy of the Federal Reserve will be ending in just over a month. Without this economic life support, we can expect to see deflation rear its ugly head again over the summer as the market desperately tries to cure itself of government created disease. Of course, once people start to see the value of their 401k fall through the floor, housing double dips to new lows, interest rates rise to unacceptable levels and our pathetic job creation ability comes to an end everyone will beg Ben Bernanke to start QE3. And why not? The first two rounds worked so wonderfully, right? As Jim Rogers said, "The money printer will print money." We won't be twisting Bernanke's arm a whole lot before he obliges us.
Expect to see the S&P drop about 20% before Ben is justified in unleashing his Helicopter full of cash. September. Maybe October.
Expect to see the S&P drop about 20% before Ben is justified in unleashing his Helicopter full of cash. September. Maybe October.
Helping The Unemployed While Growing The Economy (An Easy Solution To Our Predicament)
I still find it fascinating that politicians can't seem to grow the economy. Even though many of them realize how it works, political theater and partisan politics always seems to get in the way. For anyone who doesn't yet understand it, I'll take some time to explain it so you can see how easy it is.
Let's say Bob is unemployed. All we need to do is have the government give Bob some money, say $150. Now Bob can take that $150 and buy a TV from Mike. Mike, being a wealthy businessman, will then pay $100 in taxes and he can be allowed to add the other $50 to his vast fortune. Now, since Bob bought an energy efficient TV, the government can give him a $50 rebate for making a wise choice. Add that $50 to the $100 in taxes that Mike paid and the government can then give Bob another $150 for his unemployment check the next week.
Bob can then take that $150 and buy a bike from Jack. Again, Jack is a wealthy man so he will pay $100 in taxes and get to keep $50 to add to his wealth. Since Bob is making the correct decision in riding a bike instead of driving a gas powered vehicle, he will receive another $50 rebate so he can get another $150 for his unemployment check the following week.
Now Bob has a TV, a bike and $150 having started out with nothing. So what does he do? Well, he takes that $150 and he buys a radio from Sam and a week later he gets another $150 unemployment check from the government. So now he has a TV, a bike, a radio and $150 after starting out with nothing. And because of this process, Sam, Jack and Mike all saw an increase in demand for their products and the economy grew as a result. This is just a win-win-win situation all around and it's exactly how we need to grow ourselves out of this mess we're in.
And hopefully at some point Sam, Jack and Mike can all go broke on their investments so that they can be unemployed as well and start collecting unemployment checks so the economy can grow even faster with all the extra aggregate demand the government would be producing.
Hopefully everyone reading this recognized the satire and sarcasm, but it is almost exactly the way many of our politicians understand economics.
Let's say Bob is unemployed. All we need to do is have the government give Bob some money, say $150. Now Bob can take that $150 and buy a TV from Mike. Mike, being a wealthy businessman, will then pay $100 in taxes and he can be allowed to add the other $50 to his vast fortune. Now, since Bob bought an energy efficient TV, the government can give him a $50 rebate for making a wise choice. Add that $50 to the $100 in taxes that Mike paid and the government can then give Bob another $150 for his unemployment check the next week.
Bob can then take that $150 and buy a bike from Jack. Again, Jack is a wealthy man so he will pay $100 in taxes and get to keep $50 to add to his wealth. Since Bob is making the correct decision in riding a bike instead of driving a gas powered vehicle, he will receive another $50 rebate so he can get another $150 for his unemployment check the following week.
Now Bob has a TV, a bike and $150 having started out with nothing. So what does he do? Well, he takes that $150 and he buys a radio from Sam and a week later he gets another $150 unemployment check from the government. So now he has a TV, a bike, a radio and $150 after starting out with nothing. And because of this process, Sam, Jack and Mike all saw an increase in demand for their products and the economy grew as a result. This is just a win-win-win situation all around and it's exactly how we need to grow ourselves out of this mess we're in.
And hopefully at some point Sam, Jack and Mike can all go broke on their investments so that they can be unemployed as well and start collecting unemployment checks so the economy can grow even faster with all the extra aggregate demand the government would be producing.
Hopefully everyone reading this recognized the satire and sarcasm, but it is almost exactly the way many of our politicians understand economics.
Sunday, May 15, 2011
Today's Record LOW Gas Price
Over the past several weeks there has been a ton of reports about the high price of gas. Right now I would have to fork over nearly four dollars just to buy one gallon of gas. And it's true, if you're paying for gas in dollars, the price is almost at a record high. But I bet you haven't heard anything about how today's price of gas is at a record low. In reality, gas has never been cheaper in America. The problem is that in order to enjoy these record low prices you'll have to pay for that gas with real money, which the government quit issuing a few decades ago.
Before 1965 the government issued quarters and dimes that were made out of 90% pure silver. Before 1968 a dollar bill was really a silver certificate. That is, you could bring that bill to a Federal Reserve branch and get an ounce of silver in return. A quarter was made out of 1/4 ounce of silver and a dime was made out of 1/10 ounce of silver.* Today the coins are made out of whatever metal happens to be the cheapest and is then coated with another cheap metal to give it a silver color, making them have almost no intrinsic value. If someone asked for a quarter and you gave them a couple grams of copper and nickel that was worth 5.7 cents, I doubt that they would accept it, which is odd because that's all a quarter is. As for dollar bills, we don't even have those any more. What we have are Federal Reserve Notes, which are basically green pieces of paper that are backed by government debt. If you don't believe me then just take any bill out of your wallet and read the top of it. If you bring a FRN to a Federal Reserve branch and ask for anything in return they'll laugh in your face. Modern money in all its glory!
But back to the record low gas price. In 1931 the price of gas hit the all-time low price of about 17 cents per gallon. But remember, our money at that time was, quite literally, gold and silver. Now suppose you have a dime that was minted before 1965. You could take that coin to your local precious metal store and exchange it for about $3.50, since silver is currently at about $35/ounce. You could then drive to a gas station and get nearly a gallon of gas with those FRN's that a single dime bought you. In fact, if you paid for gas with those silver coins, gas would only cost you about 11 cents a gallon.**
What has happened here is obvious to anyone who cares to think about it. It's not the price of gas that is soaring. It's the value of the Federal Reserve Notes that are plummeting, causing you to fork over more of them just to buy the same amount of gas.*** We don't need presidential investigations or a special task force to understand why prices are rising, we just need to understand what money really is. Sadly, those of us that do understand this and, consequently, would like to return to a gold standard, are viewed in the same light as people who claim to have seen Elvis in a Tennessee truck stop, have a story about being abducted by aliens or harbor a rabid desire to blow up government buildings after spending a couple decades of isolation in a two-room shanty in Montana.
I think it's time to stop complaining about high gas prices and start complaining about the Federal Reserve purposely devaluing the money we use to buy gas. And Justin Bieber. Seriously.
*Actually, since they're only 90% silver they don't actually contain 1/10 an ounce of silver. I'm oversimplifying a little bit to avoid explaining a whole bunch of pointless math, but doing so doesn't alter my point. Feel free to do the math yourself.
**Interesting fact here. Today's price of gas is $3.90, and measured in depression-era currency it's $0.11. Do the math and you'll see that is a 97% difference. That's exactly how much the value of a dollar has declined since the Federal Reserve was instituted in 1913. This is no coincidence.
***One reason those on the political left who are more passionate about combating the widening wealth gap and, at least on a surface level, want to directly aide the poor, should support the gold standard is that the inflation of the monetary supply disproportionately benefits the most wealthy in society. When new money is created, the wealthiest people get it first. That means they get the benefits of spending or investing this new money before the monetary inflation causes prices to rise. Once the inflation eventually benefits poorer people in the form of higher wages, the prices have already risen, meaning that their income doesn't necessarily go up in real terms.
Monday, May 9, 2011
Interest Rates: How Interesting
Back in the olden days, in the long long ago, before about 1913, we didn't have a monopolistic cartel of private banks headed by a few unelected officials who were in charge of the nation's (and, more recently, the world's) money supply. But, other than money supply, another great power of the Federal Reserve is to dictate interest rates, either directly or indirectly. It's this power that gives us nearly every economic boom (Read: Bubble) because the central bank loves to keep interest rates too low for too long, thereby creating excess credit that eventually funnels into a single area and creates a bubble. But what would the world be like if Bernanke couldn't control interest rates? Well, this thing called the "free market" could take care of that. And it's actually pretty simple.
In a truly free market the interest rate would be determined by the amount of savings. When someone deposits money into a savings account, what they're essentially saying is that they are going to under-consume today so that they can consume more in the future. If enough people do this, and the amount of deposits on the bank's book increases, banks will lower interest rates. This lowering of interest rates does two things. First, it makes it cheaper for businesses to borrow money, thereby encouraging it. After all, interest is simply the cost of money. Lower interest rates can make a huge difference to a business that plans on investing a lot of money that won't start to turn profits for many years. Think of R&D departments that attempt to invent new technologies that won't be sold in a store for 10 or 20 years. The difference between 5% and 4% could be millions and millions of dollars. So as savings are build up, interest rates go down and long term investments become feasible. This works out wonderfully because the money that is being used to finance these long term investments that don't pay off until some future date is the very savings that people put away in order to be able to consume something in the future. This consistency in the time factor cannot be stressed enough. Not until people decide to consume in the future (save) can business start to invest in their future (borrow).
The second thing lower interest rates do is discourage savings. If you're only gaining 2% on a savings account you're going to save a lot less than when you were getting, say, 5%. This allows the banks to lend out their deposits, which is how they make most of their money. Once most of the deposits are lent out, the banks will need to start raising interest rates. This will encourage more savings and allow banks to rebuild their deposits at the same time that it discourages borrowing. Again, the time factor works out perfectly here. As people are consuming more today, it becomes harder for a business to invest in the future. This cycle continues with the competition between banks, saving habits of the individual and borrowing needs of business all working together to determine the interest rate.
But like I said, that system died a long time ago. How wonderful that we progressed enough to cast away those quaint relics of yesteryear. That awful era where unintelligent rubes didn't have the know-how to properly manage a nation's economy, money and credit. At least now we realize that we simply need the right people in charge. And as long as we just allow those brilliant economic planners to turn the dials the perfect amount and press the right buttons in the proper sequence we'll be alright. They'll give us the perfect amount of credit and just the right level of money supply. The waste and inefficiency of saving can be eliminated without effecting the ability of business to borrow and invest. I don't see how this could possibly go wrong...
In a truly free market the interest rate would be determined by the amount of savings. When someone deposits money into a savings account, what they're essentially saying is that they are going to under-consume today so that they can consume more in the future. If enough people do this, and the amount of deposits on the bank's book increases, banks will lower interest rates. This lowering of interest rates does two things. First, it makes it cheaper for businesses to borrow money, thereby encouraging it. After all, interest is simply the cost of money. Lower interest rates can make a huge difference to a business that plans on investing a lot of money that won't start to turn profits for many years. Think of R&D departments that attempt to invent new technologies that won't be sold in a store for 10 or 20 years. The difference between 5% and 4% could be millions and millions of dollars. So as savings are build up, interest rates go down and long term investments become feasible. This works out wonderfully because the money that is being used to finance these long term investments that don't pay off until some future date is the very savings that people put away in order to be able to consume something in the future. This consistency in the time factor cannot be stressed enough. Not until people decide to consume in the future (save) can business start to invest in their future (borrow).
The second thing lower interest rates do is discourage savings. If you're only gaining 2% on a savings account you're going to save a lot less than when you were getting, say, 5%. This allows the banks to lend out their deposits, which is how they make most of their money. Once most of the deposits are lent out, the banks will need to start raising interest rates. This will encourage more savings and allow banks to rebuild their deposits at the same time that it discourages borrowing. Again, the time factor works out perfectly here. As people are consuming more today, it becomes harder for a business to invest in the future. This cycle continues with the competition between banks, saving habits of the individual and borrowing needs of business all working together to determine the interest rate.
But like I said, that system died a long time ago. How wonderful that we progressed enough to cast away those quaint relics of yesteryear. That awful era where unintelligent rubes didn't have the know-how to properly manage a nation's economy, money and credit. At least now we realize that we simply need the right people in charge. And as long as we just allow those brilliant economic planners to turn the dials the perfect amount and press the right buttons in the proper sequence we'll be alright. They'll give us the perfect amount of credit and just the right level of money supply. The waste and inefficiency of saving can be eliminated without effecting the ability of business to borrow and invest. I don't see how this could possibly go wrong...
Sunday, April 10, 2011
Debt Ceiling, Default And Teleporters
With all the budget talks lately, the fact that we are quickly approaching the debt ceiling is slipping under the radar. But we'll hit our debt target in about a month, maybe 6 weeks, and then congress will be forced to raise that limit. That the debt limit will get raised is a guarantee, the only question is how much it will get raised.
The pundits on TV will tell you that we need to raise the debt ceiling because failing to do so will destroy our bond market, raise interest rates and ultimately cause us to default on our debt. The problem is that all of those things are going to happen anyway. Guaranteed. Sure, there are things that government can do (and they have been doing these things for years) to put off this inevitability into the future. But the longer we delay these problems, the worse they will become.
Anybody who thinks we won't default on our debt is either a lunatic, drunk or both. So if we will not pay back our debt, we must default on it. There are two ways that governments can do this. First, they can be honest about the situation and restructure the debt. They can get their budget in order and then make deals with their lenders where they don't get paid 100% of their loans but at least they get paid in money that has some value. The problem is that the budget need to be balanced for this to work. We almost saw a government shutdown because politicians couldn't agree on whether to cut $30 billion or $60 billion. OUT OF A $1.6 TRILLION YEARLY DEFICIT! On my most optimistic day I can imagine a scenario where we try really hard and our politicians are willing to fight for a balanced budget and we'll maybe see one in 15 or 20 years. Even if that would happen, it's not nearly soon enough. I don't think we have 5 years before the system breaks down. So option 1 is out the window.
The second way to default on the debt is to inflate it away. That is, we simply print new money to pay our debts. Our lenders will get their money, but they will be paid in money that is worth much less than the money they lent us. This is the worst option, but it's becoming clear that it is the option we'll take. As long as the debt ceiling continues to be raised, as long as interest rates stay extremely low, as long as the Fed is willing to print money to monetize our debt, and as long as someone is willing to lend us money at the low interest rates this is what we will do.
But that option can only work so long as all of those things stay true. Once one of those factors goes away, the bubble will pop, interest rates will skyrocket, the dollar will plummet, we will default on our debt and hyperinflation becomes a real threat. Notice that the end result of that scenario is nearly identical to the end result of not raising the debt ceiling right now. Like I said, all of those things are going to happen sooner or later. The only option we have is whether we want to face the problems today, take the medicine and deal with the pain (and trust me, it will be very painful), or keep delaying the problem until it's impossible to do so any longer and in the meantime pray for some new technology or invention (like a teleporter for example) that completely changes the nature of our economy. Barring a new, revolutionary technology, the end result of this option is only a deeper and more painful recession/depression than what we would have to face right now.
The pundits on TV will tell you that we need to raise the debt ceiling because failing to do so will destroy our bond market, raise interest rates and ultimately cause us to default on our debt. The problem is that all of those things are going to happen anyway. Guaranteed. Sure, there are things that government can do (and they have been doing these things for years) to put off this inevitability into the future. But the longer we delay these problems, the worse they will become.
Anybody who thinks we won't default on our debt is either a lunatic, drunk or both. So if we will not pay back our debt, we must default on it. There are two ways that governments can do this. First, they can be honest about the situation and restructure the debt. They can get their budget in order and then make deals with their lenders where they don't get paid 100% of their loans but at least they get paid in money that has some value. The problem is that the budget need to be balanced for this to work. We almost saw a government shutdown because politicians couldn't agree on whether to cut $30 billion or $60 billion. OUT OF A $1.6 TRILLION YEARLY DEFICIT! On my most optimistic day I can imagine a scenario where we try really hard and our politicians are willing to fight for a balanced budget and we'll maybe see one in 15 or 20 years. Even if that would happen, it's not nearly soon enough. I don't think we have 5 years before the system breaks down. So option 1 is out the window.
The second way to default on the debt is to inflate it away. That is, we simply print new money to pay our debts. Our lenders will get their money, but they will be paid in money that is worth much less than the money they lent us. This is the worst option, but it's becoming clear that it is the option we'll take. As long as the debt ceiling continues to be raised, as long as interest rates stay extremely low, as long as the Fed is willing to print money to monetize our debt, and as long as someone is willing to lend us money at the low interest rates this is what we will do.
But that option can only work so long as all of those things stay true. Once one of those factors goes away, the bubble will pop, interest rates will skyrocket, the dollar will plummet, we will default on our debt and hyperinflation becomes a real threat. Notice that the end result of that scenario is nearly identical to the end result of not raising the debt ceiling right now. Like I said, all of those things are going to happen sooner or later. The only option we have is whether we want to face the problems today, take the medicine and deal with the pain (and trust me, it will be very painful), or keep delaying the problem until it's impossible to do so any longer and in the meantime pray for some new technology or invention (like a teleporter for example) that completely changes the nature of our economy. Barring a new, revolutionary technology, the end result of this option is only a deeper and more painful recession/depression than what we would have to face right now.
Saturday, March 12, 2011
American Foreign Policy: The Flow Chart
I know it's difficult at times to wrap your head around the foreign policy decisions that American leadership makes, so I've devised this handy flow chart to help makes some sense of it. Hopefully this helps to clear up some of the misunderstandings. (Click the image to make it larger)
Monday, March 7, 2011
Quantitative Easing: To Infinity And Beyond
Since the Great Recession started a couple years ago*, the federal reserve has been involved in a process called "Quantitative Easing". I've discussed this before so I won't go into the process any further. The second round of Quantitative Easing, QE2, is set to expire at the end of June. Watch the talking heads on TV and they'll tell you, almost unanimously, that there will be no further rounds of QE. Their reasoning is that the economy is turning around. I think the economy only appears to be turning around because of the QE, and the recovery isn't sustainable without it. Either my laymen understanding of our economic condition is terribly wrong, or these guys are grossly stupid. I have a very healthy ego so I'm going to go with the latter. Here's why I think that QE3, QE4, QE5, etc will happen.
As I mentioned in the article I linked above, the federal government is running huge deficits, and will be doing so for at least the next decade. This means that the treasury has to sell bonds to cover the budget deficits. Since QE2, the federal reserve has been buying 70% of new treasury bonds. When QE2 ends, and the fed stops buying treasuries, someone has to pick up the slack. And that's a lot of slack.
You might be thinking that China will come to the rescue again, but I don't think they can continue to do that. When they buy our treasuries, they have to print money to do so, which causes inflation. They're already experiencing a high level of inflation, possibly as much as 10% or more. They're currently importing much of our inflation in order to keep their currency pegged to our dollar. But the inflation problem in China (and all over the world really) is leading to some civil unrest that The State needs to avoid. As we've recently seen in the Middle East, citizens will put up with brutal regimes as long as they have a job and can afford food. By printing money, we're pushing up the price of food all over the world, China included.** In order to get their inflation under control and calm the citizenry, China is going to have to stop buying our debt with money they print.
So if not China, then who? That's a very good question. A better question might be How much interest are these unknown buyers going to charge? Since the fed represents 70% of bond demand, once they quit buying bonds the demand will drop and interest rates will surge. If interest rates go up significantly, the federal government is going to have to find more buyers of our debt to cover the higher amount in interest payments plus the new debt we take on. Finding more buyers of this debt in a market where demand is low will push interest rates up higher, which will cause us to have to find even more buyers who will demand higher interest which will cause us to find even more buyers which will... well, you get the idea. It's called a Ponzi Scheme, and even Bernie Madoff recognizes that our entire government operates as one. If there are no buyers of our debt other than the federal reserve, the federal reserve will be forced into filling that gap in order to keep interest rates low.
Another problem is that the economy cannot sustain the "growth" we've experience over the past 6 months or so without the money that the fed is providing through QE2. On average, the federal reserve has been purchasing 5-8 billion dollars of treasuries a day and injecting that new money into the system. This has been great news for stocks since the vast majority of that money makes its way to the big guys on Wall Street. Ever since "Jackson Hole" late last August, when the fed announced their plan for QE2, stocks have almost gone straight up***. Before that, the economy was in shambles in the vacuum left behind after QE1. Things aren't much different now than they were last summer. Many of our problems have not been fixed and most of the ones that matter are even worse today. Once the fed stops pumping money into the economy, the "recovery" will sputter and there will be a lot of pressure on them to fire up the printing press.
There is a problem though. The public is becoming more and more nervous about all of the money printing. Luckily for Washington, the public is also easily manipulated.If QE3 happ When QE3 happens, they can do it without calling it that officially. QE2 is written in such a way that it can be expanded upon if the fed chooses to do so. That means that we do another round of Quantitative Easing but call it a continuation of QE2, or some other goofy name altogether. It will also be interesting to see what tragedy or crisis they say we are on the brink of in order to convince the public that it is necessary. I'm of the mindset that we're already on the brink of an economic depression if we stop the QE(insert number). But as I've said before, that is an inevitability that is only being delayed and intensified by the actions of the federal reserve. If we continue on this QE/huge deficit spending path, we're almost guaranteeing that we experience hyperinflation and a total economic collapse. The sooner we try to deal with the mess in a real and honest way, the better. 2008 would have been a nice time to start...
*Fun fact: The Great Recession officially ended in September 2010. That's according to Government Data though. Mark Twain popularized the phrase "There are lies, damned lies, and statistics." Today that phrase would be "There are lies, damned lies, statistics, and government statistics."
**Because we have the world's reserve currency, food is traded in US dollars in the world markets. When we print 2 trillion dollars to prop up our economy, we also bring the price of food up across the world. These Mid-East protests can be directly linked to our inflationary monetary policy. If it spreads to Saudi Arabia, I hope you can afford $5(probably even more) gas
*** This chart shows the DOW from a couple weeks before the announcement of QE2 (end of August) until now. Stocks were falling until the minute QE2 was announced. Wall Street loves free money from the fed.
As I mentioned in the article I linked above, the federal government is running huge deficits, and will be doing so for at least the next decade. This means that the treasury has to sell bonds to cover the budget deficits. Since QE2, the federal reserve has been buying 70% of new treasury bonds. When QE2 ends, and the fed stops buying treasuries, someone has to pick up the slack. And that's a lot of slack.
You might be thinking that China will come to the rescue again, but I don't think they can continue to do that. When they buy our treasuries, they have to print money to do so, which causes inflation. They're already experiencing a high level of inflation, possibly as much as 10% or more. They're currently importing much of our inflation in order to keep their currency pegged to our dollar. But the inflation problem in China (and all over the world really) is leading to some civil unrest that The State needs to avoid. As we've recently seen in the Middle East, citizens will put up with brutal regimes as long as they have a job and can afford food. By printing money, we're pushing up the price of food all over the world, China included.** In order to get their inflation under control and calm the citizenry, China is going to have to stop buying our debt with money they print.
So if not China, then who? That's a very good question. A better question might be How much interest are these unknown buyers going to charge? Since the fed represents 70% of bond demand, once they quit buying bonds the demand will drop and interest rates will surge. If interest rates go up significantly, the federal government is going to have to find more buyers of our debt to cover the higher amount in interest payments plus the new debt we take on. Finding more buyers of this debt in a market where demand is low will push interest rates up higher, which will cause us to have to find even more buyers who will demand higher interest which will cause us to find even more buyers which will... well, you get the idea. It's called a Ponzi Scheme, and even Bernie Madoff recognizes that our entire government operates as one. If there are no buyers of our debt other than the federal reserve, the federal reserve will be forced into filling that gap in order to keep interest rates low.
Another problem is that the economy cannot sustain the "growth" we've experience over the past 6 months or so without the money that the fed is providing through QE2. On average, the federal reserve has been purchasing 5-8 billion dollars of treasuries a day and injecting that new money into the system. This has been great news for stocks since the vast majority of that money makes its way to the big guys on Wall Street. Ever since "Jackson Hole" late last August, when the fed announced their plan for QE2, stocks have almost gone straight up***. Before that, the economy was in shambles in the vacuum left behind after QE1. Things aren't much different now than they were last summer. Many of our problems have not been fixed and most of the ones that matter are even worse today. Once the fed stops pumping money into the economy, the "recovery" will sputter and there will be a lot of pressure on them to fire up the printing press.
There is a problem though. The public is becoming more and more nervous about all of the money printing. Luckily for Washington, the public is also easily manipulated.
*Fun fact: The Great Recession officially ended in September 2010. That's according to Government Data though. Mark Twain popularized the phrase "There are lies, damned lies, and statistics." Today that phrase would be "There are lies, damned lies, statistics, and government statistics."
**Because we have the world's reserve currency, food is traded in US dollars in the world markets. When we print 2 trillion dollars to prop up our economy, we also bring the price of food up across the world. These Mid-East protests can be directly linked to our inflationary monetary policy. If it spreads to Saudi Arabia, I hope you can afford $5(probably even more) gas
*** This chart shows the DOW from a couple weeks before the announcement of QE2 (end of August) until now. Stocks were falling until the minute QE2 was announced. Wall Street loves free money from the fed.
Wednesday, March 2, 2011
Defending Evil
"You see, that's the whole point of being the government. If you don't like something you simply make up a new law that makes it illegal"
-Minister Dormandy in Pirate Radio
Just today the Supreme Court ruled in favor of a bunch of despicable people at the Westboro Baptist Church. For anyone living under a rock for the past few years, the people at Westboro do awesome things like protest at soldiers' funerals. Their logic is this:
1) God hates gays.
2) America is far too tolerant to gays.
3) God wants to punish America for being too tolerant of gays.
4) God kills soldiers as punishment for America's tolerance of gay people.
Yeah, they're juuuuuust a little goofy.
Back to the Supreme Court ruling. A family member of one of these soldiers sued Westboro and it eventually ended up at the Supreme Court who ruled 8-1 in favor of the protesters. It's my opinion that the only bad thing about this ruling is that it wasn't unanimous.
In America we like to talk about our "rights" "liberties" and "freedom". Those are all noble ideas and concepts that we all embrace... when it's easy. This is one of those cases where it's not easy. A family in mourning had to bury a man while a group of hateful assholes celebrated it. But their celebration occurred 1,000 feet away (far enough away that those at the funeral couldn't see them, and in compliance with city ordinance) and on public land. In my opinion those are all reasonable conditions to limit speech so that it doesn't interfere with the right of other people to be left alone.
But in a case like this it's far too easy to get caught up in the emotion and lunacy of the whole thing and look for ways to keep people from saying things that we disagree with. Any reasonable person would recognize Westboro's actions as something that is not desirable. But that should not give us the right to make it illegal or further limit it in some way. I fear that the opposite ruling of the Supreme Court, had it occurred, would not have elicited much outrage among American's who claim to embrace free speech. The reason is simple: because it's difficult to defend such horrible speech. Shouldn't the right to speak freely be defended the most when the speech is outside of our comfort zone since that's when it's most likely to be attacked?
If we only defend free speech (or any other "right" for that matter) when it's easy and when we agree with the speech, then we don't really defend speech at all. We simply defend speech that we agree with, or isn't offensive, or isn't controversial. Free speech should not have an asterisk next to it.
I think you can tell a lot about a man's character based on whether or not he is willing to, based on principle, defend something with which he fervently disagrees. I don't think American's would have rushed to the defense of Westboro Baptist if the Court ruled the other way, and hopefully I'm wrong about that. Thankfully they got this one right.
-Minister Dormandy in Pirate Radio
Just today the Supreme Court ruled in favor of a bunch of despicable people at the Westboro Baptist Church. For anyone living under a rock for the past few years, the people at Westboro do awesome things like protest at soldiers' funerals. Their logic is this:
1) God hates gays.
2) America is far too tolerant to gays.
3) God wants to punish America for being too tolerant of gays.
4) God kills soldiers as punishment for America's tolerance of gay people.
Yeah, they're juuuuuust a little goofy.
Back to the Supreme Court ruling. A family member of one of these soldiers sued Westboro and it eventually ended up at the Supreme Court who ruled 8-1 in favor of the protesters. It's my opinion that the only bad thing about this ruling is that it wasn't unanimous.
In America we like to talk about our "rights" "liberties" and "freedom". Those are all noble ideas and concepts that we all embrace... when it's easy. This is one of those cases where it's not easy. A family in mourning had to bury a man while a group of hateful assholes celebrated it. But their celebration occurred 1,000 feet away (far enough away that those at the funeral couldn't see them, and in compliance with city ordinance) and on public land. In my opinion those are all reasonable conditions to limit speech so that it doesn't interfere with the right of other people to be left alone.
But in a case like this it's far too easy to get caught up in the emotion and lunacy of the whole thing and look for ways to keep people from saying things that we disagree with. Any reasonable person would recognize Westboro's actions as something that is not desirable. But that should not give us the right to make it illegal or further limit it in some way. I fear that the opposite ruling of the Supreme Court, had it occurred, would not have elicited much outrage among American's who claim to embrace free speech. The reason is simple: because it's difficult to defend such horrible speech. Shouldn't the right to speak freely be defended the most when the speech is outside of our comfort zone since that's when it's most likely to be attacked?
If we only defend free speech (or any other "right" for that matter) when it's easy and when we agree with the speech, then we don't really defend speech at all. We simply defend speech that we agree with, or isn't offensive, or isn't controversial. Free speech should not have an asterisk next to it.
I think you can tell a lot about a man's character based on whether or not he is willing to, based on principle, defend something with which he fervently disagrees. I don't think American's would have rushed to the defense of Westboro Baptist if the Court ruled the other way, and hopefully I'm wrong about that. Thankfully they got this one right.
Thursday, February 17, 2011
Optimistic, Unrealistic Budget
President Obama recently released his budget proposal for next year and it is quite fantastic. It includes revenue increases of 65% and will reduce the deficit from 11% of GDP to 3.2% of GDP. It's wonderful! Fast track this through congress and start looking for retirement islands in the Caribbean! OK, maybe I'm being a little too sarcastic. Instead of caustic hyperbole and snarky rhetoric, I'll use some data and facts to let you know why this budget is a farce.
Here are the specifics of the recently released budget proposal (Source):
FY 2011 Projected Revenue: $2.174 Trillion
FY 2011 Projected Spending: $3.819 Trillion
FY 2011 Projected Deficit: $1.645 Trillion
Spending as % of GDP: 25.3%
Deficit as % of GDP: 10.9%
FY 2012 Projected Revenue: $2.627 Trillion
FY 2012 Projected Spending $3.729 Trillion
FY 2012 Projected Deficit: $1.101 Trillion
Spending as % of GDP: 23.6%
Deficit as % of GDP: 7.0%
FY 2013 Projected Revenue: $3.003 Trillion
FY 2013 Projected Spending: $3.771 Trillion
FY 2013 Projected Deficit: $768 Billion
Spending as % of GDP: 22.5%
Deficit as % of GDP: 4.6%
FY 2014 Projected Revenue: $3.333 Trillion
FY 2014 Projected Spending: $3.977 Trillion
FY 2014 Projected Deficit: $645 Billion
Spending as % of GDP: 22.4%
Deficit as % of GDP: 3.6%
FY 2015 Projected Revenue: $3.583 Trillion
FY 2015 Projected Spending: $4.190 Trillion
FY 2015 Projected Deficit: $607 Billion
Spending as % of GDP: 22.3%
Deficit as % of GDP: 3.2%
First, let's look at the 65% projected increase in revenue. Has this large of an increase in revenue ever occurred in such a short period of time? The answer is yes, but it comes with an asterisk or two.
Over the past 60 years there have only been three other years with a similar rate of revenue growth for a 4 year period (where each year is compared to the revenue period four years prior). They happened in 1979, 1980 and 1981. Those years also happen to have some of the highest rates of inflation in the 50 or so years of data. To be specific, 1979 had the 2nd highest inflation (11.3%), 1980 had the 1st highest (13.5%) and 1981 had the 4th highest (10.4%). Obama's budget doesn't assume those enormous inflation levels. In fact, it assumes 2% or less inflation, so it's not inflation that will be driving the enormous revenue growth.*
Another reason we could have a 65% increase in revenue would be because of a huge expansion of GDP. Again, in 1979, 1980 and 1981 we saw extremely high GDP growth of 11.7%, 8.8% and 12.1% respectively. Out of 65 years of data those are the 4th, 5th and 17th fastest years of economic expansion. Does the Obama budget expect similar GDP expansion that will be ranked in the top 10 years in recent memory? Not if you look at their published data. From the years 2011 - 2015 they expect the following GDP growth: 2.7%, 3.6%, 4.4%, 4.3% and 3.8%.
So we can't defend the rosy revenue projections based on huge GDP growth or high inflation.
What if we compare the projected increases historically on an inflation-adjusted basis. If we simply chart each year's federal revenue after correcting for CPI, and use the Obama budget CPI assumptions for the years 2011 - 2015 so everything is in 2010 dollars, we'll see that the budget proposal contains the 3 largest years of inflation adjusted revenue on record (2013, 2014, 2015).
So what do all these boring numbers mean? Simply put, the revenue assumptions that are in the budget proposal are extremely unlikely. The chances of them actually happening are close to 0% unless massive tax increases are part of the package, which the president insists will not happen. Of course, there's the chance that we see rapid growth, low unemployment, substantial increases in wages and low inflation all at once. Again, the chance of that happening is nearly 0%. The one things these numbers are good for is talking points and hopeful, optimistic speeches that garner votes by making us feel warm and fuzzy.** The one thing they are not is honest, and honesty is probably the most important thing we need from our leaders right now.
The truth is that if we don't act boldly right now, and neither party seems to be willing to do so, we will add at least another $5-7 Trillion to our $14 Trillion national debt by 2015. Unless politicians somehow address the "big four" - Defense, Medicare, Medicaid and Social Security - this budget proposal is little more than a fantasy. If you hear someone talk about our budget and they don't mention those four areas, it's simply partisan talking points used for positioning in the next election cycle. By lying to ourselves, we're only ensuring that our debt will grow, our GDP will remain largely flat, and we'll bring on a massive inflationary event that forces the federal reserve to choose between defending the dollar (raising interest rates) or defending the economy. It can't do both at the same time.
*As I've said before, the government lies about inflation. Anyone who has gone shopping in the last year knows that we have much higher inflation than what the official numbers show. We'll also have much higher inflation than what Obama and his administration is predicting. But that will also bring down his GDP expectations because GDP is inflation-adjusted.
**While our head is firmly planted in the sand.
Here are the specifics of the recently released budget proposal (Source):
FY 2011 Projected Revenue: $2.174 Trillion
FY 2011 Projected Spending: $3.819 Trillion
FY 2011 Projected Deficit: $1.645 Trillion
Spending as % of GDP: 25.3%
Deficit as % of GDP: 10.9%
FY 2012 Projected Revenue: $2.627 Trillion
FY 2012 Projected Spending $3.729 Trillion
FY 2012 Projected Deficit: $1.101 Trillion
Spending as % of GDP: 23.6%
Deficit as % of GDP: 7.0%
FY 2013 Projected Revenue: $3.003 Trillion
FY 2013 Projected Spending: $3.771 Trillion
FY 2013 Projected Deficit: $768 Billion
Spending as % of GDP: 22.5%
Deficit as % of GDP: 4.6%
FY 2014 Projected Revenue: $3.333 Trillion
FY 2014 Projected Spending: $3.977 Trillion
FY 2014 Projected Deficit: $645 Billion
Spending as % of GDP: 22.4%
Deficit as % of GDP: 3.6%
FY 2015 Projected Revenue: $3.583 Trillion
FY 2015 Projected Spending: $4.190 Trillion
FY 2015 Projected Deficit: $607 Billion
Spending as % of GDP: 22.3%
Deficit as % of GDP: 3.2%
First, let's look at the 65% projected increase in revenue. Has this large of an increase in revenue ever occurred in such a short period of time? The answer is yes, but it comes with an asterisk or two.
Over the past 60 years there have only been three other years with a similar rate of revenue growth for a 4 year period (where each year is compared to the revenue period four years prior). They happened in 1979, 1980 and 1981. Those years also happen to have some of the highest rates of inflation in the 50 or so years of data. To be specific, 1979 had the 2nd highest inflation (11.3%), 1980 had the 1st highest (13.5%) and 1981 had the 4th highest (10.4%). Obama's budget doesn't assume those enormous inflation levels. In fact, it assumes 2% or less inflation, so it's not inflation that will be driving the enormous revenue growth.*
Another reason we could have a 65% increase in revenue would be because of a huge expansion of GDP. Again, in 1979, 1980 and 1981 we saw extremely high GDP growth of 11.7%, 8.8% and 12.1% respectively. Out of 65 years of data those are the 4th, 5th and 17th fastest years of economic expansion. Does the Obama budget expect similar GDP expansion that will be ranked in the top 10 years in recent memory? Not if you look at their published data. From the years 2011 - 2015 they expect the following GDP growth: 2.7%, 3.6%, 4.4%, 4.3% and 3.8%.
So we can't defend the rosy revenue projections based on huge GDP growth or high inflation.
What if we compare the projected increases historically on an inflation-adjusted basis. If we simply chart each year's federal revenue after correcting for CPI, and use the Obama budget CPI assumptions for the years 2011 - 2015 so everything is in 2010 dollars, we'll see that the budget proposal contains the 3 largest years of inflation adjusted revenue on record (2013, 2014, 2015).
So what do all these boring numbers mean? Simply put, the revenue assumptions that are in the budget proposal are extremely unlikely. The chances of them actually happening are close to 0% unless massive tax increases are part of the package, which the president insists will not happen. Of course, there's the chance that we see rapid growth, low unemployment, substantial increases in wages and low inflation all at once. Again, the chance of that happening is nearly 0%. The one things these numbers are good for is talking points and hopeful, optimistic speeches that garner votes by making us feel warm and fuzzy.** The one thing they are not is honest, and honesty is probably the most important thing we need from our leaders right now.
The truth is that if we don't act boldly right now, and neither party seems to be willing to do so, we will add at least another $5-7 Trillion to our $14 Trillion national debt by 2015. Unless politicians somehow address the "big four" - Defense, Medicare, Medicaid and Social Security - this budget proposal is little more than a fantasy. If you hear someone talk about our budget and they don't mention those four areas, it's simply partisan talking points used for positioning in the next election cycle. By lying to ourselves, we're only ensuring that our debt will grow, our GDP will remain largely flat, and we'll bring on a massive inflationary event that forces the federal reserve to choose between defending the dollar (raising interest rates) or defending the economy. It can't do both at the same time.
*As I've said before, the government lies about inflation. Anyone who has gone shopping in the last year knows that we have much higher inflation than what the official numbers show. We'll also have much higher inflation than what Obama and his administration is predicting. But that will also bring down his GDP expectations because GDP is inflation-adjusted.
**While our head is firmly planted in the sand.
Wednesday, February 9, 2011
Regression To The Mean
"All truth passes through 3 stages. First, it is ridiculed. Second, it is violently opposed. And finally it is accepted as self-evident." -Arthur Schopenhauer
Warning: What you are about to read is very likely the insane ramblings of a mad man. God, I hope that's the case.
Imagine you receive a very large pop bottle that is full of rice at 12:00. At 12:01 you remove one of those grains of rice. At 12:02 you remove 2 grains. At 12:03 you remove 4 grains. You continue this, taking twice as many grains of rice out of the pop bottle every minute, for one hour. At 1:00 the bottle is empty. What's somewhat interesting is that at the 1:00 mark you end up taking over 500 quadrillion (576,460,752,303,423,500) grains of rice. But we've all learned about exponential growth like that. Here's what I find the most interesting about the thought experiment: at what point would you start to worry about your limited supply of rice?
If you're taking twice as many grains of rice every minute, and the bottle is empty in one hour, then at 12:59, one minute before you run out of rice, you still have 50% of your total supply of rice left. At 12:58, you still have 75% left. Clearly, it would be difficult to plan ahead and prepare for a depleted supply of rice when you still have a vast majority of your total supply 2 or 3 minutes before you run out. This becomes even more disturbing if you imagine a bottle of unknown size full of an unknown, but finite, amount of rice. And if you imagine that your entire existence is dependent on the unknown, finite amount of rice in the bottle, the problem becomes dreadfully catastrophic.
Now instead of a huge pop bottle and rice, think about Earth and oil.
Oh shit...
You can figure out the doubling rate of something with some very simple math. If you have a continual rate of growth, all you have to do is divide the rate of growth into 72 and you'll get the doubling rate. So if you had $100 and every year you earned 10% interest on that money, you would have $200 in a little over 7 years (72/10 = 7.2). Another 7.2 years later you would have $400. And so on.
We can look at this another way using some more simple math. Say you start to double the number of apples you eat every year. The first year you eat 1 apple. The next year you eat 2 apples. The year after that you eat 4 and so on. 1, 2, 4, 8, 16, 32, 64, 128. That's the number of apples you eat for 8 years. If you start to add these numbers up you'll notice that the number of apples you eat in any given year is one more than the number of apples you've eaten in all the previous years combined. 1+2+4+8+16+32+64 = 127, one less than the total eaten in the next year alone. This holds true no matter how large the numbers get. That's why at 12:59, before 576 quadrillion grains of rice are pulled from the bottle, the bottle is still half full.
A quick google search (that's as much effort as I was willing to expend) showed that from 1900-1973 the average growth rate of oil consumption was 7%. It doesn't seem like much until you figure out that it means you double consumption about every 10 years (72/7=10.3). That means that in the 1920's we used more oil than the two previous decades combined. In the 1960's we used more oil than the previous six decades combined. However, since then, the growth rate has actually declined for a variety of reasons, but if we assume a conservative average growth rate of 3% for world wide oil consumption, that means that we use twice as much oil per year every 24 years. Instead of taking 10 years to consume more energy than all the previous years combined, it would take 24 years. That also means that only 24 years before we run out of oil, we'll still have 50% of the world's total oil supply (a lot of oil, relatively speaking) in the ground.
Oh shit...
If you think of a bell curve and imagine that it represents global oil production, the top of the bell curve would represent what is called "Peak Oil". At that point, the world reaches its peak of oil extraction. That means that no matter how much money or effort you put into the oil industry, it will be impossible to equal the oil supply that was reached at that point. That also means that at Peak Oil, you only have 24 years worth of oil left (assuming a continual 3% growth rate, which would be virtually impossible*). And since we don't know how much oil is present in the planet, we won't know when we've reached Peak Oil until after the fact, when the supply fails to reach the level it was at when it peaked. In the rice and pop bottle example I mentioned earlier, Peak Oil is 12:59. And we won't know that we reached Peak Oil until a few seconds after 12:59.
Oh shit...
As of right now, the most oil that was extracted from the earth was 73.72 million barrels per day. That was in 2005. Since then, we have failed to reach that level of oil production. To put it in other terms, our oil production peaked somewhere around 2005.
Shit shit shit! Ohhhh shit!
Now that doesn't necessarily mean that we reached Peak Oil in 2005.
Phew!!
The declining supply was most likely a result of falling demand due to the worldwide recession we've been going through, among other things. That same data also shows that oil production peaked in 1979 and we didn't see that same level of production until 1996**, so there are obviously peaks, valleys and plateaus in the curve. That also demonstrates that we will be on the downward side of the slope for a long time before people are aware of it.
But some optimistic current estimates are that we will reach Peak Oil in 10 to 40 years. Of course, it's extremely difficult to estimate that with any accuracy because the governments in the Middle East that produce the world's oil supply, and the governments around the world who research these things, would never tell the world that their reservoirs are running dry. But there will certainly be signs to look for. Drilling for oil on land is by far the most efficient way to get oil. The total energy used to drill test wells and everything that goes into finding and extracting oil is very small for land drilling. Drilling in the ocean is much more inefficient. You have to expend a lot of energy just to find oil, and you need to find a lot more oil before you start to get more energy than you put in. So it's very disconcerting to hear that Saudi Arabia, a country that currently has at least 20% of the world's known oil reserves, is investing heavily into offshore oil exploration. There is only one reason why they would do that, and it's the same reason America started doing it after we reached Peak Oil in 1970: they're running out of places to drill on land. And then there's this recent story where Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, claims Saudi Arabia overstated its oil supply by 40%.
Maybe the drop in oil production since 2005 wasn't simply due to the global recession. After all, the recession didn't really start until late '07, early '08. Oh, and there's the little story that nobody really talked about where the International Energy Agency claimed that we saw Peak Oil in 2006.
Oh shit...
With the laws of supply and demand, it's safe to assume that a global oil shortage will cause prices to go up to a level where the average person cannot afford it. When that happens, things like electric cars as well as solar and wind power sources will finally become more cost effective, and more prevalent as a result. But make no mistake, the oil we use to drive our cars and light our homes is only slightly more significant than a drop in the bucket. It takes 7 gallons of oil to make one tire on your car, electric or not. It takes several gallons of oil to produce and transport the steel used to make the car. Nearly everything you buy only exists because of oil. Plastics, which are found in almost all consumer goods, packaging for food, etc only exist because of oil. Your toothpaste and toothbrush has oil in it. Of all the things you use throughout your day, nearly 100% of it only exists because humans have figured out how to use oil to make it and/or get it to you. Expecting electric cars and solar panels to solve the problem is extremely foolish and extraordinarily naive. Oh, and there's this little problem.
Probably the single most important reason we have our high standard of living is because a few farmers can effectively feed everyone in the country. The technological advancements in farming freed up the masses to pursue other interests, like building transistor radios, TVs, satellites, space shuttles and producing steel, cars, computers, cell phones, etc. If the majority of people had to spend the majority of their time growing food, none of that would have existed. Modern farming only exists because of oil. It powers the tractors that plow the field, fertilize the ground and plant the seeds. It powers the airplane that sprays petroleum based chemicals that increase yields. It powers the combines that harvest the crop. It powers the trucks that transport the crops to factories that use energy to make bread, sugar, flour, and so on. It powers even more trucks that bring the final product to your local grocery store. It powers the ships that import all the things we want to eat, but are grown on another continent. In one study, David Pimentel and Mario Giampietro concluded that the industrialized world uses 10 calories of petroleum based energy to produce 1 calorie of food energy.
All of this has lead to a population explosion that is difficult to comprehend. It took all of human history up until 1804 to reach 1 billion people. It took another 123 years to add another billion people. It then took 33 years to add another billion people. We're currently adding a billion people to the planet every 10-15 years***. It's no coincidence that this population explosion occurred at the same point that humans started to use oil to power their societies. Humans aren't as unique as we like to think we are. Whether it be bacteria in a petri dish, caribou on a predator-free island, or humans with a few trillion barrels of oil, any organism that is put into favorable conditions will experience a population explosion. Remove the favorable conditions and the explosion will be followed by a drastic decline. None of the human population growth of the last century or two would have existed were it not for one thing. In economics, they call that a bubble. And every bubble must pop at some point.
Oh shit...
Warning: What you are about to read is very likely the insane ramblings of a mad man. God, I hope that's the case.
Imagine you receive a very large pop bottle that is full of rice at 12:00. At 12:01 you remove one of those grains of rice. At 12:02 you remove 2 grains. At 12:03 you remove 4 grains. You continue this, taking twice as many grains of rice out of the pop bottle every minute, for one hour. At 1:00 the bottle is empty. What's somewhat interesting is that at the 1:00 mark you end up taking over 500 quadrillion (576,460,752,303,423,500) grains of rice. But we've all learned about exponential growth like that. Here's what I find the most interesting about the thought experiment: at what point would you start to worry about your limited supply of rice?
If you're taking twice as many grains of rice every minute, and the bottle is empty in one hour, then at 12:59, one minute before you run out of rice, you still have 50% of your total supply of rice left. At 12:58, you still have 75% left. Clearly, it would be difficult to plan ahead and prepare for a depleted supply of rice when you still have a vast majority of your total supply 2 or 3 minutes before you run out. This becomes even more disturbing if you imagine a bottle of unknown size full of an unknown, but finite, amount of rice. And if you imagine that your entire existence is dependent on the unknown, finite amount of rice in the bottle, the problem becomes dreadfully catastrophic.
Now instead of a huge pop bottle and rice, think about Earth and oil.
Oh shit...
PART 1: OIL AND GLOBAL POPULATION
You can figure out the doubling rate of something with some very simple math. If you have a continual rate of growth, all you have to do is divide the rate of growth into 72 and you'll get the doubling rate. So if you had $100 and every year you earned 10% interest on that money, you would have $200 in a little over 7 years (72/10 = 7.2). Another 7.2 years later you would have $400. And so on.
We can look at this another way using some more simple math. Say you start to double the number of apples you eat every year. The first year you eat 1 apple. The next year you eat 2 apples. The year after that you eat 4 and so on. 1, 2, 4, 8, 16, 32, 64, 128. That's the number of apples you eat for 8 years. If you start to add these numbers up you'll notice that the number of apples you eat in any given year is one more than the number of apples you've eaten in all the previous years combined. 1+2+4+8+16+32+64 = 127, one less than the total eaten in the next year alone. This holds true no matter how large the numbers get. That's why at 12:59, before 576 quadrillion grains of rice are pulled from the bottle, the bottle is still half full.
A quick google search (that's as much effort as I was willing to expend) showed that from 1900-1973 the average growth rate of oil consumption was 7%. It doesn't seem like much until you figure out that it means you double consumption about every 10 years (72/7=10.3). That means that in the 1920's we used more oil than the two previous decades combined. In the 1960's we used more oil than the previous six decades combined. However, since then, the growth rate has actually declined for a variety of reasons, but if we assume a conservative average growth rate of 3% for world wide oil consumption, that means that we use twice as much oil per year every 24 years. Instead of taking 10 years to consume more energy than all the previous years combined, it would take 24 years. That also means that only 24 years before we run out of oil, we'll still have 50% of the world's total oil supply (a lot of oil, relatively speaking) in the ground.
Oh shit...
If you think of a bell curve and imagine that it represents global oil production, the top of the bell curve would represent what is called "Peak Oil". At that point, the world reaches its peak of oil extraction. That means that no matter how much money or effort you put into the oil industry, it will be impossible to equal the oil supply that was reached at that point. That also means that at Peak Oil, you only have 24 years worth of oil left (assuming a continual 3% growth rate, which would be virtually impossible*). And since we don't know how much oil is present in the planet, we won't know when we've reached Peak Oil until after the fact, when the supply fails to reach the level it was at when it peaked. In the rice and pop bottle example I mentioned earlier, Peak Oil is 12:59. And we won't know that we reached Peak Oil until a few seconds after 12:59.
Oh shit...
As of right now, the most oil that was extracted from the earth was 73.72 million barrels per day. That was in 2005. Since then, we have failed to reach that level of oil production. To put it in other terms, our oil production peaked somewhere around 2005.
Shit shit shit! Ohhhh shit!
Now that doesn't necessarily mean that we reached Peak Oil in 2005.
Phew!!
The declining supply was most likely a result of falling demand due to the worldwide recession we've been going through, among other things. That same data also shows that oil production peaked in 1979 and we didn't see that same level of production until 1996**, so there are obviously peaks, valleys and plateaus in the curve. That also demonstrates that we will be on the downward side of the slope for a long time before people are aware of it.
But some optimistic current estimates are that we will reach Peak Oil in 10 to 40 years. Of course, it's extremely difficult to estimate that with any accuracy because the governments in the Middle East that produce the world's oil supply, and the governments around the world who research these things, would never tell the world that their reservoirs are running dry. But there will certainly be signs to look for. Drilling for oil on land is by far the most efficient way to get oil. The total energy used to drill test wells and everything that goes into finding and extracting oil is very small for land drilling. Drilling in the ocean is much more inefficient. You have to expend a lot of energy just to find oil, and you need to find a lot more oil before you start to get more energy than you put in. So it's very disconcerting to hear that Saudi Arabia, a country that currently has at least 20% of the world's known oil reserves, is investing heavily into offshore oil exploration. There is only one reason why they would do that, and it's the same reason America started doing it after we reached Peak Oil in 1970: they're running out of places to drill on land. And then there's this recent story where Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, claims Saudi Arabia overstated its oil supply by 40%.
Maybe the drop in oil production since 2005 wasn't simply due to the global recession. After all, the recession didn't really start until late '07, early '08. Oh, and there's the little story that nobody really talked about where the International Energy Agency claimed that we saw Peak Oil in 2006.
Oh shit...
With the laws of supply and demand, it's safe to assume that a global oil shortage will cause prices to go up to a level where the average person cannot afford it. When that happens, things like electric cars as well as solar and wind power sources will finally become more cost effective, and more prevalent as a result. But make no mistake, the oil we use to drive our cars and light our homes is only slightly more significant than a drop in the bucket. It takes 7 gallons of oil to make one tire on your car, electric or not. It takes several gallons of oil to produce and transport the steel used to make the car. Nearly everything you buy only exists because of oil. Plastics, which are found in almost all consumer goods, packaging for food, etc only exist because of oil. Your toothpaste and toothbrush has oil in it. Of all the things you use throughout your day, nearly 100% of it only exists because humans have figured out how to use oil to make it and/or get it to you. Expecting electric cars and solar panels to solve the problem is extremely foolish and extraordinarily naive. Oh, and there's this little problem.
Probably the single most important reason we have our high standard of living is because a few farmers can effectively feed everyone in the country. The technological advancements in farming freed up the masses to pursue other interests, like building transistor radios, TVs, satellites, space shuttles and producing steel, cars, computers, cell phones, etc. If the majority of people had to spend the majority of their time growing food, none of that would have existed. Modern farming only exists because of oil. It powers the tractors that plow the field, fertilize the ground and plant the seeds. It powers the airplane that sprays petroleum based chemicals that increase yields. It powers the combines that harvest the crop. It powers the trucks that transport the crops to factories that use energy to make bread, sugar, flour, and so on. It powers even more trucks that bring the final product to your local grocery store. It powers the ships that import all the things we want to eat, but are grown on another continent. In one study, David Pimentel and Mario Giampietro concluded that the industrialized world uses 10 calories of petroleum based energy to produce 1 calorie of food energy.
All of this has lead to a population explosion that is difficult to comprehend. It took all of human history up until 1804 to reach 1 billion people. It took another 123 years to add another billion people. It then took 33 years to add another billion people. We're currently adding a billion people to the planet every 10-15 years***. It's no coincidence that this population explosion occurred at the same point that humans started to use oil to power their societies. Humans aren't as unique as we like to think we are. Whether it be bacteria in a petri dish, caribou on a predator-free island, or humans with a few trillion barrels of oil, any organism that is put into favorable conditions will experience a population explosion. Remove the favorable conditions and the explosion will be followed by a drastic decline. None of the human population growth of the last century or two would have existed were it not for one thing. In economics, they call that a bubble. And every bubble must pop at some point.
Oh shit...
PART 2: UNLIMITED GROWTH AND REGRESSION TO THE MEAN
Every major economy on the planet is only sustainable and effective if continual growth exists. We all know this without even thinking about it. We put money in the bank, the banks use that money to invest in new business, growth occurs, wealth is created and banks get their money back with interest. The growth of the new business creates more people with more money who put it in the bank who can then make more loans to more businesses. That cycle works wonderfully as long as growth takes place. Without growth, that system could never exist. Depositors would lose out on their savings because it would not have grown with the bank's investment. With their savings depleted, individuals have less money to spend on things they normally buy and banks have less money to invest in business. Business fails to get credit, they fail to expand, consumers don't spend money and the whole system collapses in on itself. Continual and infinite growth is absolutely essential for every major economy in the world today.
When house values stopped growing, it exposed major problems. When GDP remains flat or contracts or does anything other than grow (at a high enough rate, as we're currently learning), it brings a lot of pain to a lot of people because of the inherent effects of zero growth on a system dependent upon growth. Our entire system, and the system of every industrialized nation on earth only exists because economic growth has always occurred, save for a few temporary but painful dips here and there.
But as I pointed out before, nearly all of the growth that has taken place since the late 19th century, give or take a few decades, has only occurred because of oil. This leaves us in a very peculiar situation. Our world demands infinite growth, but that growth is dependent on a finite energy source. At some point in human history, those two things will collide. The question that keeps me awake at night is simple: How many more minutes do we have until 1:00?
In a scenario where the world's oil supply shrinks, then it follows that economies will shrink as well. Formulating the doubling rate works for growing systems just as well as it does for shrinking systems. You just get negative numbers instead of positive ones. When home prices started to rise at abnormally high rates because of artificial stimuli, it followed that when the stimuli was removed or conditions changed, the prices would fall to pre-bubble levels. However, these economic systems have the advantage of politicians who can print money and lower interest rates and bail out financial entities, at least for a period of time. But a bubble is a bubble, no matter if it's tech stocks, housing prices, population growth or oil dependent civilizations.
In statistics there is a term called "regression to the mean". Basically, it says that if you see statistical anomalies in a system, something that deviates from "average", the system, when given enough time, will "regress to the mean" or return to normal. If you hit the jackpot the first three times you play a slot machine, and you play that machine long enough, you'll eventually wind up with as much winnings (read: losings) as the average person ends up with. If you flip a coin five times there is a chance that it'll turn up heads every time. Continue to flip that coin for long enough and your results will approach a 50-50 head-tails average.
Now look at the human population chart and the global oil production chart. Better yet, look at both of them together. What if that chart was housing prices? Stock prices? What if you saw that chart and had no clue what it showed? How confident would you be that there wasn't an imminent regression to the mean? A bubble about to burst? Humans have been on this planet for hundreds of thousands of years. What are the odds that the last 100 is anything other than a blip? A statistical anomaly? Three slot machine jackpots and the heads side of a coin five times in a row?
When house values stopped growing, it exposed major problems. When GDP remains flat or contracts or does anything other than grow (at a high enough rate, as we're currently learning), it brings a lot of pain to a lot of people because of the inherent effects of zero growth on a system dependent upon growth. Our entire system, and the system of every industrialized nation on earth only exists because economic growth has always occurred, save for a few temporary but painful dips here and there.
But as I pointed out before, nearly all of the growth that has taken place since the late 19th century, give or take a few decades, has only occurred because of oil. This leaves us in a very peculiar situation. Our world demands infinite growth, but that growth is dependent on a finite energy source. At some point in human history, those two things will collide. The question that keeps me awake at night is simple: How many more minutes do we have until 1:00?
In a scenario where the world's oil supply shrinks, then it follows that economies will shrink as well. Formulating the doubling rate works for growing systems just as well as it does for shrinking systems. You just get negative numbers instead of positive ones. When home prices started to rise at abnormally high rates because of artificial stimuli, it followed that when the stimuli was removed or conditions changed, the prices would fall to pre-bubble levels. However, these economic systems have the advantage of politicians who can print money and lower interest rates and bail out financial entities, at least for a period of time. But a bubble is a bubble, no matter if it's tech stocks, housing prices, population growth or oil dependent civilizations.
In statistics there is a term called "regression to the mean". Basically, it says that if you see statistical anomalies in a system, something that deviates from "average", the system, when given enough time, will "regress to the mean" or return to normal. If you hit the jackpot the first three times you play a slot machine, and you play that machine long enough, you'll eventually wind up with as much winnings (read: losings) as the average person ends up with. If you flip a coin five times there is a chance that it'll turn up heads every time. Continue to flip that coin for long enough and your results will approach a 50-50 head-tails average.
Now look at the human population chart and the global oil production chart. Better yet, look at both of them together. What if that chart was housing prices? Stock prices? What if you saw that chart and had no clue what it showed? How confident would you be that there wasn't an imminent regression to the mean? A bubble about to burst? Humans have been on this planet for hundreds of thousands of years. What are the odds that the last 100 is anything other than a blip? A statistical anomaly? Three slot machine jackpots and the heads side of a coin five times in a row?
*In reality, the right half of the bell curve will probably be stretched out over more time than the left half due to supply, demand, rising prices and the end of economic growth.
**Although for much of those years, the relative low supply can be directly attributed to some politically motivated actions taken by the OPEC nations, where they purposely limited the global oil supply to manipulate prices.
***Imagine the pop bottle and rice example in reverse. Start adding twice as much rice to the bottle every minute for an hour. At 12:59 the bottle will be half empty. At 1:00 it will be full. At 1:01 you could fill two bottles, if you had another one. Currently, we only have one planet.
**Although for much of those years, the relative low supply can be directly attributed to some politically motivated actions taken by the OPEC nations, where they purposely limited the global oil supply to manipulate prices.
***Imagine the pop bottle and rice example in reverse. Start adding twice as much rice to the bottle every minute for an hour. At 12:59 the bottle will be half empty. At 1:00 it will be full. At 1:01 you could fill two bottles, if you had another one. Currently, we only have one planet.
Thursday, January 6, 2011
Getting What We Deserve
I had a whole thing written up where I made some predictions for the coming year but I figured I could do that in one (rather long) paragraph. Murphy's Law says that if something can go wrong it will go wrong. There are so many things that can go wrong in the next year that I think it's almost inevitable. The housing market is still a mess, and there is a huge inventory of homes that is only going to grow, putting more downward pressure on prices. States and cities have huge budget problems, mostly because of unrealistic and unfunded pension liabilities to public employee unions. They lack the ability to print money in order to avoid tough decisions, but the federal government will most likely take care of that for them somehow. The European debt crisis is only going to get worse in 2011, which will lead to more instability worldwide. The federal budget deficit of $1.3 trillion will not have significant changes, and unless the fed continues to buy bonds, interest rates will go up dramatically. Higher interest rates will expose a lot of problems everywhere. The fed has no plan to unload its balance sheet that has grown by many trillions of dollars in the past couple of years. There is an oncoming explosion of student loan defaults on the horizon, which could start to blow up in 2011. FDIC insolvency, big bank failures, skyrocketing energy and food prices, ad nauseum. And even in the absolute best possible scenario, unemployment will still be above 8.5% in one year. If any one of these problems occur in the way that I think is possible (catastrophe, not a minor problem), it'll domino throughout the whole economy and 2011 could be the year that it all hits the fan. But enough of that. In the end, we deserve to get it splattered all over us.
In the past few decades, Americans have come to have some unrealistic and conflicting expectations. Once the federal government started to provide for people, as opposed to creating a situation where people are capable of providing for themselves, the demand to be provided for has exploded.
We want everyone who gets a terminal disease to live another 30 years. We also want the government to keep our health care costs low. Somehow. Any way.
We cheer when government financial institutions guarantee loans so we can buy homes with no money down and low interest rates and then call on the government to help us out when we can no longer afford our homes. Somehow. Any way.
Nobody bats an eye when the federal government guarantees student loans that allow an 18-year-old to go $200,000 in debt so he or she can get a degree in Music Appreciation, Physical Education, or The Many Shades Of Concrete. And then we want the government to help us with our debt problems when we can't find a job that pays a sufficient salary to repay our loans. Somehow. Any way.
When credit card companies charge 20% interest, and suddenly that $500 PS3 is costing you $5,000, we cry to congress to pass a law to keep them from doing it instead of --gasp-- saving until we can afford that stuff. Then, when we have to get a payday loan at a pawn shop with even higher interest just to buy food or keep the lights on, we get pissed because credit isn't available and call on the government to help us out. Somehow. Any way.
We don't get upset when we spend trillions of dollars in order to fight never ending pseudo-wars, but get upset because we're trillions of dollars in debt and expect our government to fix the problem. Somehow. Any way.
We want the government to cure economic imbalances, but we want the medicine to taste good.
We twiddle our thumbs and grind our teeth while muttering "gosh, I don't like this but if they say we have to do it then I guess it's true" under our breath when the government props up a phony economy by giving trillions of dollars to corporations that made bad decisions and have no reason to exist anymore. Then after we give all that money to people who we recognize as corrupt and greedy scumbags, we act shocked and appalled when they use that bailout money to buy themselves an island or 2 in the pacific.
We want unemployment benefits, welfare for the poor, food stamps for half of us, wars in the middle east, low house prices when we buy, higher house prices sometime after that, medicare, medicaid, social security, cheap food, high wages, retirement at 60, low taxes, billions of gallons of oil, no oil spills, rules and regulations on oil companies when a spill happens, low oil prices, safe airplane travel, convenient airplane travel, some cake, our government to feed it to us too.
At some point we started to act like children, expecting the government to provide for us, no matter what the costs. Is it any wonder that we now have a government that treats us like children? Entitled brats with no motivation to expend any more energy than what is absolutely necessary to get by. We put as little effort into the system as possible, refusing to pick up a book and become educated on the issues, opting instead to trust those in charge (or worse yet, silently distrust them while sitting idly by) and let them do what they do. Less than half of us vote, which, by the way, is the lowest possible form of civic participation, and the vast majority of voters refuse to participate at any higher level. And then we complain when things go wrong, or more problems are created, or we find ourselves $14 trillion in debt with hundreds of trillions of dollars in unfunded liabilities.
The harsh reality is that we have a mountain of debt because we asked for a mountain of debt. We wanted to live like millionaires on a $40,000 salary and we have done just that for a few decades. Even those who are the most concerned about the debt problem don't want to have their programs cut. Get our spending in order, but don't take away my medicare or social security. Increase revenues to the government, but raise the other guy's taxes, not mine. Fix the problems, but don't make it painful.
Because we had this mindset for so long, we have reached a point where any meaningful solutions MUST be painful. Extremely painful. But I don't think Americans are ready to face the pain. We don't want to give up enough. We would much rather hear lip service from those in charge and believe the illusion that that is enough.
In the coming months we'll see some very telling and symbolic actions in congress. The 14.3 trillion dollar debt ceiling, set by congress, will be reached between March and May. Some congressmen are threatening to vote against raising the debt ceiling, essentially forcing congress to cut any spending beyond what we have in tax revenue. Cutting 1.3 trillion dollars a year in spending would force some very difficult decisions on congress. Austan Goolsbee, Obama's top economic adviser, said that failing to raise the debt ceiling would be the same as defaulting on our debt and would be catastrophic for the economy. In other words, if we don't go into more debt we can't pay off our current debt. In even other words, he admitted that we're running a gigantic ponzi scheme. Relying on new money to pay off the old money is the definition of a ponzi scheme.
He is right about everything, especially the catastrophic part. Getting on sound financial ground would mean a lot of pain to a lot of people. And because the people aren't willing to face that pain, congress will vote to raise the debt ceiling to protect its children from pain today and ensure that we'll face greater pain in the future. Of course, we'll still want lip service and empty promises to make it feel like something is being done. Many will vote to raise the debt ceiling under the condition that there are cuts in the budget. And we'll probably see spending cuts, but those cuts won't be able to cause too much pain to the people so they'll be extremely insignificant. We might see 50 or 70 billion dollars in cuts out of a 1.3 trillion dollar deficit. To put it simply, they'll put a band aid on a gunshot wound because surgery would be too painful. And it'll all be done because it's all we really want to bear.
People who study human behavior have found something interesting called the “discount rate”. The discount rate basically measures the sense of urgency with which people view problems and compare it to how far into the future those problems will occur. If you look at the chart you'll see that people are extremely short sighted. We tend to only react to problems that are happening or are on the brink of happening. Our sense of urgency decreases dramatically, to near zero, whenever something is not imminent. We see this behavior all the time. Even when we hear a week in advance about a snow storm that is coming, most everybody rushes to the grocery store the day of the storm or the day before if they're ambitious. We simply aren't good at looking beyond the here and now. Carpe diem. I guess it's foolish of me to believe that, as a group, we would behave any different with our national debt crisis. It would also be foolish to believe that we'll realize we need to make drastic changes before it's too late. It might be too late already.
In the past few decades, Americans have come to have some unrealistic and conflicting expectations. Once the federal government started to provide for people, as opposed to creating a situation where people are capable of providing for themselves, the demand to be provided for has exploded.
We want everyone who gets a terminal disease to live another 30 years. We also want the government to keep our health care costs low. Somehow. Any way.
We cheer when government financial institutions guarantee loans so we can buy homes with no money down and low interest rates and then call on the government to help us out when we can no longer afford our homes. Somehow. Any way.
Nobody bats an eye when the federal government guarantees student loans that allow an 18-year-old to go $200,000 in debt so he or she can get a degree in Music Appreciation, Physical Education, or The Many Shades Of Concrete. And then we want the government to help us with our debt problems when we can't find a job that pays a sufficient salary to repay our loans. Somehow. Any way.
When credit card companies charge 20% interest, and suddenly that $500 PS3 is costing you $5,000, we cry to congress to pass a law to keep them from doing it instead of --gasp-- saving until we can afford that stuff. Then, when we have to get a payday loan at a pawn shop with even higher interest just to buy food or keep the lights on, we get pissed because credit isn't available and call on the government to help us out. Somehow. Any way.
We don't get upset when we spend trillions of dollars in order to fight never ending pseudo-wars, but get upset because we're trillions of dollars in debt and expect our government to fix the problem. Somehow. Any way.
We want the government to cure economic imbalances, but we want the medicine to taste good.
We twiddle our thumbs and grind our teeth while muttering "gosh, I don't like this but if they say we have to do it then I guess it's true" under our breath when the government props up a phony economy by giving trillions of dollars to corporations that made bad decisions and have no reason to exist anymore. Then after we give all that money to people who we recognize as corrupt and greedy scumbags, we act shocked and appalled when they use that bailout money to buy themselves an island or 2 in the pacific.
We want unemployment benefits, welfare for the poor, food stamps for half of us, wars in the middle east, low house prices when we buy, higher house prices sometime after that, medicare, medicaid, social security, cheap food, high wages, retirement at 60, low taxes, billions of gallons of oil, no oil spills, rules and regulations on oil companies when a spill happens, low oil prices, safe airplane travel, convenient airplane travel, some cake, our government to feed it to us too.
At some point we started to act like children, expecting the government to provide for us, no matter what the costs. Is it any wonder that we now have a government that treats us like children? Entitled brats with no motivation to expend any more energy than what is absolutely necessary to get by. We put as little effort into the system as possible, refusing to pick up a book and become educated on the issues, opting instead to trust those in charge (or worse yet, silently distrust them while sitting idly by) and let them do what they do. Less than half of us vote, which, by the way, is the lowest possible form of civic participation, and the vast majority of voters refuse to participate at any higher level. And then we complain when things go wrong, or more problems are created, or we find ourselves $14 trillion in debt with hundreds of trillions of dollars in unfunded liabilities.
The harsh reality is that we have a mountain of debt because we asked for a mountain of debt. We wanted to live like millionaires on a $40,000 salary and we have done just that for a few decades. Even those who are the most concerned about the debt problem don't want to have their programs cut. Get our spending in order, but don't take away my medicare or social security. Increase revenues to the government, but raise the other guy's taxes, not mine. Fix the problems, but don't make it painful.
Because we had this mindset for so long, we have reached a point where any meaningful solutions MUST be painful. Extremely painful. But I don't think Americans are ready to face the pain. We don't want to give up enough. We would much rather hear lip service from those in charge and believe the illusion that that is enough.
In the coming months we'll see some very telling and symbolic actions in congress. The 14.3 trillion dollar debt ceiling, set by congress, will be reached between March and May. Some congressmen are threatening to vote against raising the debt ceiling, essentially forcing congress to cut any spending beyond what we have in tax revenue. Cutting 1.3 trillion dollars a year in spending would force some very difficult decisions on congress. Austan Goolsbee, Obama's top economic adviser, said that failing to raise the debt ceiling would be the same as defaulting on our debt and would be catastrophic for the economy. In other words, if we don't go into more debt we can't pay off our current debt. In even other words, he admitted that we're running a gigantic ponzi scheme. Relying on new money to pay off the old money is the definition of a ponzi scheme.
He is right about everything, especially the catastrophic part. Getting on sound financial ground would mean a lot of pain to a lot of people. And because the people aren't willing to face that pain, congress will vote to raise the debt ceiling to protect its children from pain today and ensure that we'll face greater pain in the future. Of course, we'll still want lip service and empty promises to make it feel like something is being done. Many will vote to raise the debt ceiling under the condition that there are cuts in the budget. And we'll probably see spending cuts, but those cuts won't be able to cause too much pain to the people so they'll be extremely insignificant. We might see 50 or 70 billion dollars in cuts out of a 1.3 trillion dollar deficit. To put it simply, they'll put a band aid on a gunshot wound because surgery would be too painful. And it'll all be done because it's all we really want to bear.
People who study human behavior have found something interesting called the “discount rate”. The discount rate basically measures the sense of urgency with which people view problems and compare it to how far into the future those problems will occur. If you look at the chart you'll see that people are extremely short sighted. We tend to only react to problems that are happening or are on the brink of happening. Our sense of urgency decreases dramatically, to near zero, whenever something is not imminent. We see this behavior all the time. Even when we hear a week in advance about a snow storm that is coming, most everybody rushes to the grocery store the day of the storm or the day before if they're ambitious. We simply aren't good at looking beyond the here and now. Carpe diem. I guess it's foolish of me to believe that, as a group, we would behave any different with our national debt crisis. It would also be foolish to believe that we'll realize we need to make drastic changes before it's too late. It might be too late already.
At some point our budget problems will fuel a currency crisis and congress will run out of ways to kick the can down the road. Thomas Jefferson said that we needed a revolution every generation to keep the population from becoming complacent, apathetic and removed from the political system. We're many generations overdue for a revolution. When the currency crisis starts, so will our revolution. Maybe it'll happen in 2011. Maybe we can hold off until 2012. I doubt we can delay the inevitable any longer than that, no matter how much we want to. And it'll all be because we pay for what we feel we are entitled to today with money we hope we have in 10 years. Worse than that, we stand in the face of this harsh reality and try to convince ourselves that we can keep the scheme working. Somehow. Any way. If that doesn't sound like the mindset of a people that deserves to get splattered with shit from a fan, I don't know what does.
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