3 to 7 years

What Can't Continue, Won't ContinueWhile there is a recurrent theme on the Prophecy Podcast blog of a crisis in 3 to 7 years, I do have an assumption underlying that “prediction” that I hope is false. As I have also pointed out, what can’t continue, won’t continue. Our current policies can’t continue. If that is the approach that is tried, it will fail in 3 to 7 years. I expect instead that there will be various short term fixes with varying degrees of success. Describing the future of the US as a long period of decline sounds horrible, but in fact this is an optimistic scenario.

The blog post yesterday about Grand Mal seizures as an analogy to our economic situation led Pam Dewey to write to me about her view of the future. Pam’s mother was subject to serious danger of such seizures as the result of a massive stroke in 1986. She took Dilantin from then on until her death in 2009. It was supposed to be a dose four times a day, but over time the confusion of old age led to her missing many, many doses. Under normal circumstances, being under-medicated could easily have led her to repeated seizures. Yet in all those years, she only had a single serious incident involving one. Pam noted:  

I say all that to say ... the US may end up like my mother. Needing to take the Dilantin, and always in danger of those seizures—but somehow getting by for years and years without any Grand Mal. That’s one of my theories of prophetic speculation and prognostication ... we just have no way to predict anomalies that make no sense but do exist. So ALL the pundits can be surprised, because there are just TOO many variables that can head off in unexpected directions.

Yes, the situation may never come to a crisis moment, but instead the bad economy can continue for a long time. Or there can be something unexpected, out of left field, that leads to a crisis. Just like Yoga Berra said, “It is difficult to make predictions, especially about the future.”

What is the economic Dilantin that we need to take? While I feel no need to walk on hot coals for Tony Robbins, he gives us a reasonable course for the future I wish we would take.

Grand Mal Seizure

I have been using a number of analogies about our political and economic situation. I have compared the US economy to a junkie and the election to the arrival of the Cirkus Klown Kar. But there is another analogy that applies to both the election and the economy. 

In 3 to 7 years I expect that the economy will have a Grand Mal Seizure. The Mayo clinic defines a grand mal seizure this way:

A grand mal seizure — also known as a tonic-clonic seizure — features a loss of consciousness and violent muscle contractions. It’s the type of seizure most people picture when they think about seizures in general.

Grand mal seizure is caused by abnormal electrical activity throughout the brain. In some cases, this type of seizure is triggered by other health problems, such as extremely low blood sugar or a stroke. However, most of the time grand mal seizure is caused by epilepsy.

Many people who have a grand mal seizure will never have another one. However, some people need daily anti-seizure medications to control grand mal seizure.

It is a shocking thing to see, and it will be even more shocking when our body politic has its seizure. You do not want to be too close when the flailing begins. As Yogi Berra said, “It is difficult to make predictions, especially about the future.” So who can say when or what the trigger will be?

It may be the flashing pretty light of deficit spending reaching a point where no one will lend the US any money. In this area there is plenty of wiggle room as it will take the US about ten years to reach the point Japan is right now in terms of government debt to GDP.  Japan does have the advantage that they owe the debt domestically. The US owes a large portion of its debt to China and Japan. Since a recession is coming to China by all indications, at the very least new debt will not be purchased by the Chinese. 

Or maybe interest rates will rise. Interest rates are at historic lows. Interest rates could go up by a factor of 5 and still be lower than what I paid in the 80’s. This will lead to huge negative feedback in the deficit. If we think 1.2 trillion is a bad, just wait. 

Or maybe we will have a 30 year long malaise like Japan? 

In any event, neither Obama nor Romney will take their Dilantin—tax increase, budget cuts, and unfortunately, money printing. 

I hope I am wrong and that there is not a seizure in the future. It is a horrible cliché, even worse than feeding frenzy, but time will tell. 

Stockman Right Again!

I like David Stockman more and more. He is saying what I have been saying for the last year—the US needs to let the Bush era tax cuts expire, cut spending, “means test” Medicare (one solution I might support), and cut defense spending. He might not agree with my observation that we need to print money! 

Here is Stockman being interviewed at a Casey Research Event. 

If you do not wish to watch something this long, click here and watch a shorter appearance on CNBC.  

Simpson-Bowles

Alan Simpson appeared on Capital Account recently. Senator Simpson was co-chair with Erskine Bowles to the deficit reduction commission (often called Simpson-Bowles) which was basically ignored by everyone. He made several interesting points.

But first let me comment on the point Simpson didn’t make. As fellow blogger Eric Anderson pointed out in his commentary on the video, every time that tax increases were offered in exchange for spending cuts, we got the tax increases, but did not get the spending cuts. The main reason for this is that one Congress cannot bind a later Congress. Deficit hawks like me have every reason to be suspicious of promised spending cuts. 

Simpson also explained why Ryan voted against the final Simpson-Bowles commission recommendation. There was one specific reason. Under current law if a business provides health care it can deduct the cost of the health care from its gross receipts. Simpson-Bowles eliminated this deduction. What this would mean is that most businesses would have no choice but to cancel health care for its employees. I would. This would place many employees into the Medicaid system and overload it. The proverbial elephant in the room that no one is addressing, including Simpson Bowles, is health care.

I voted for Perot in 1992. I suggest Poirot for 2012. Simpson’s most important point is that ultimately the market will force the government’s hand. This is another ignored point that I have been harping on since the inception of the prophecy podcast blog. Governments have three basic sources of income: taxes, borrowing, and printing money. The reason we see austerity in Greece, and now Spain, is that they have no choice. They cannot raise taxes any more, nor can they borrow or print money, they have to cut spending.  Tax receipts are going down and no one with any brains will lend them money. Of course the European central bank can print money. The ECB is lending Greece money, and also it is lending to Spanish banks, who then lend to the Spanish government. Europe’s leadership is brain dead. Soon we will find out how many “little gray cells,” as Hercule Poirot would say, the America elites have. I am not hopeful.

Sooner or later the big one will come. Simpson was very pessimistic on how long we have until we “hit the wall.” He said that we could not predict the trigger that will start the next crisis—he said it could be 6 weeks, or 6 months or 3 years. I think that those of us who could be categorized as deficit hawks underestimate the time we have left. The economy is resilient. I have been saying 3 to 7 years. Japan is just now starting this process. If we repeat the Japanese scenario we have about ten years of recession before the big one hits.

My friends and readers that vote have an interesting “Sophie’s Choice.” They can vote for Romney who will decrease the economic risk of catastrophe by a few years, but increase the short term risk by war. Or they can vote for a slightly less warmongering Obama, and let the economic malaise continue unabated.

Here is Capital Account.

To Infinity and Beyond

Toy Story was recently declared to be the second best animated film ever made. (Who decides these things? It is clearly number one.) The catch-phrase of Buzz Lightyear has entered our collective conscience—“to Infinity and Beyond.” This catch-phrase is starting to make the rounds in the usual places with regard to Ben “Buzz” Bernanke, who has just announced QEIII.

What is QE? It is an abbreviation for Quantitative Easing. Wikipedia describes QE this way. 

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value. Quantitative easing increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield. 

Financial Times of London describes the current round of Quanitative Easing this way:

It was not so much QE3 as QE∞.  [The symbol ∞ is the “infinity sign” in math.]

Why is this a big deal? Compared to the two previous QEs (it stands for “quantitative easing” and refers to a central bank buying bonds to push down their yields), this one is unlimited. While the previous two were for fixed amounts, this time the Fed will keep buying $40bn of mortgage-backed securities until the labour market has improved “substantially”. That word is to be interpreted by the Fed, allowing it to carry on for as long as it likes.  

Romney and Ryan need to be in this picture too. Buying 40 billion dollars of mortgages every year, er ... no, that should be month… will please Paul Krugman, but no one else. Gold took an immediate spike upward in price. I wish I owned more. While I have been in favor of QE, I wanted it to be a part of a package that included tax increases and budget cuts. Such a package is not even being talked about as a possibility. 

Buying mortgages is also the very worst place that the Fed could buy securities. Interest rates are low enough already in that area. Driving them lower will only distort the market even more and encourage more debt. This we do not need. 

We Americans, as a people, already put way too much of our assets into houses. Why not enjoy it now, and then sell it later for retirement? Unfortunately, the homeowner has run out of bigger fools to sell to. This constant pressure will be with us permanently. Note that since my profession over the last few decades involves buying and selling houses and residential land, and supplying contractors with hardware and lumber, I may need to adjust my personal business plan a mite.  (I will talk more about housing tomorrow.) 

Having sold my 4,000 sq. ft. house and moving into a 2,000 sq. ft. has shown me that my family does not need all that space. My daughter is a little shy on space, but we can move her into the office when she is older if we need to. Or maybe, just maybe, she can learn to cope with one closet. As long as I have room for my toys we will be fine. Actually, I got rid of most of my toys—my books—in the move. I brought ten boxes of books to California. I have ten boxes of books still in storage for a later trip. Those who have seen my former library will instantly realize what a huge reduction in books this is. I counted my books many years ago. I had 1400+ at the time. It has been actually somewhat traumatic for me to pare the collection down. This is not a joke. Well, maybe a little one. 

This chart will show you what I mean. It shows the size of the average house by country by sq. meters. To get the more expected “English” measurements multiple by 10.76. So the average house in Britain is roughly 880 sq. feet as compared to 2300 in the United States. 

Typical Russian Apartment BlockWhile I was not able to find the figures for house size in Russia, it has to be smaller than Britain. In Russia each room has to serve multiple functions. When we go to Russia to visit family, the dining room becomes my computer room and a bedroom. The living room becomes a bedroom at night. The convertible beds are actually much more comfortable than the hide-a-beds we use in America—they have to be as they are used every night. Yes, there is a little work to prepare the bed at night, and a little work to make it a living room again in the morning, but this is minor. While my mother-in-law's kitchen is as small as the average American walk-in closet, it is adequate and we even eat there. The main issue is the lack of closet space, but if you are like me, you have enough clothes to last for years. I might need to buy socks, but that is about it. 

If you want some comparisons between life in Russia and America, click here.

Why am I going on and on about Russian housing? To make a point that you can downsize and not affect your lifestyle very much. Would you rather have a 2500 sq. ft. house that you lose to the bank, or a 1500 sq. ft. house you can keep? Those kinds of times are coming as a permanent reality to all of us. Be prepared. 

Ben “Buzz” Bernanke thinks that he is some sort of superhero. When Buzz Lightyear thought this he got into trouble. Ben is no different. He is just a toy of the banksters. The “powers that be" think they can kick the can down the road with QE, but the fact that this QE episode has no terminus should tell us that they do not expect a recovery any time soon. I fear it is permanent, so be prepared.