The Coming Crisis

This is an interesting documentary on the 2008 crisis, and contains a prediction about the next one. 

Our Photon Controls Are Damaged

Lord Keynes was once asked what his policies would do in the long run. He famously said, “In the long run we are all dead.” While I have mocked this answer in the past, there is an element of truth to it. When in a tough situation one might do things that otherwise would not be done. But the idea is that when things are better one could repair the damage in better times. This was actually what Keynes advocated. He wanted to have a balanced budget over the length of a business cycle. This has never been done. Instead the debt just gets higher and higher. The potential effects of this when, not if, interest rates rise is the proverbial elephant in the room no one talks about. Keynes is dead, and has no worries. We the Living have to deal with the bad economic decisions of the past. 

As I mentioned in my earlier post 3 to 7 Years, I still have hopes we can muddle through in spite of a lack of evidence that either party actually understands the mess we are in. We must take action immediately to avoid a worse crisis later. 

A lot rides on the ability of the US economy to grow. While I think the growth assumptions of the Congressional Budget Office are overly optimistic, and Ryan’s are even worse (I have not looked closely at Romney’s growth assumptions), I do expect growth.

But what if this is untrue? The last 250 years of growth may be unique in history and may not continue. The economic law of diminishing returns says this:

The law of diminishing returns (also law of diminishing marginal returns or law of increasing relative cost) states that in all productive processes, adding more of one factor of production, while holding all others constant (“ceteris paribus”), will at some point yield lower per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.  

Have we reached that point? Martin Wolfe always makes you think and his article in The Financial Times is getting some buzz. 

Prof Gordon notes further obstacles to rising standards of living for ordinary Americans. These include: the reversal of the demographic dividend that came from the baby boomers and movement of women into the labour force; the levelling-off of educational attainment; and obstacles to the living standards of the bottom 99 per cent. These hurdles include globalisation, rising resource costs and high fiscal deficits and private debts. In brief, he expects the rise in the real disposable incomes of those outside the elite to slow to a crawl. Indeed, it appears to have already done so. Similar developments are occurring in other high-income countries.

The whole article is well worth reading. (You will have to register to read it.) 

While I expect growth to continue, it cannot do so forever. The advances in Nanotechnology might continue this growth spurt for a while, and then into a sustainable society. Maybe I can ask my son for a guest post on this issue as this is his area of expertise. 

But in the meantime we need to reorganize, tighten our collective and individual belts, and prepare for bad weather. In other words our photon controls are damaged and we must withdraw. 

If you do not like my clichés, use your own, but act. 

Turning Japanese?

Japan is in a difficult situation. They have a huge amount of debt. It has come to the point that if interest rates rise, most of the government revenues will have to be dedicated to paying it. The Japanese government has proposed doubling the sales tax. While this will help, it will not close the Japanese budget gap. 

Japan is also getting older. This means that the amount of debt per person in the workforce is going up. The same problem exists in Japan for retirees as in the US. There is no trust fund. It is actually worse in the US because Japan does own some US government debt. That changes the chart on the right, making the Japanese situation better than the chart would indicate—assuming that the US will actually pay the debt. 

Has Japan reached the point of "no return" yet? Probably. One logical place for the next crisis to begin is in Japan. 

If the current trends continue then the US will soon be in the situation Japan is in now. The debt will increase at least 1 trillion every year, assuming the US does not get into another war. If the US does, then the deficit will skyrocket. The US has not yet reached the point of "no return." Time remains to act on the deficit as it will take more than ten years to get to the place Japan is now. 

Will the US use that time wisely? 

Or is the US turning Japanese? 

I still find it ironic that pop music knows we are turning Japanese, but we are blind to it. 

Romney Boomlet

I will don my Prophecy Podcast turban and predict that if Romney wins there will be a little boomlet. 

A lot of the investor class are sitting on money, and are not borrowing money to expand because they see the risk of another Obama term as too large. So if Romney is elected we will have a self-fulfilling prophecy and the economy will improve. This may allow the US to avoid the mini-crunch that most pundits are predicting for next year. The bad 2013 prediction of many, me included, is the combination of the expiration of the Bush Tax cuts, the expiration of the temporary Social Security tax cut, the first layer of Obamacare taxes, and the forced spending cuts—all happening at once. But if Romney is elected the Bush tax cuts will be extended, Obamacare might be repealed, and the “animal spirits” as Keynes called it, consumer confidence, will increase. 

While it is anecdotal, I have had many people tell me that they are holding off making any investments until after the election. These investor “animal spirits” will be an important factor if Romney is elected. 

But will it last? 

Unless Romney is a lot better “dancer” than I think he is, then no, the respite will be temporary. Get ready for an extended period of national decline

How Did He Know The Unemployment Rate Would Drop?

On Facebook I said that the unemployment numbers were fake. This was not well recieved. Here is a Rick Santelli rant on the subject you might find interesting. 

How did he know? He knows how government works.