Skeptical Environmentalist

Most libertarians would disagree with me, but I generally agree with Bjørn Lomborg. The way government goes about things is all wrong. I think that spending a lot more money for energy research is an appropriate thing to do, once we get our financial house of cards in order.

I approve of research done by the private sector as the most efficient way to achieve progress. When the government interferes through subsidies, the inevitable result is to misallocate funds.

Onr reason we are in the mess we are in environmentally is the subsidies we give to the ownership of cars. Do away with all subsidies is a first step to environmental sanity.

This presentation of Lomborg's was done at Google Talks.

Until Your Liver Fails

David Stockman was a former congressman and head of the budget office under Reagan. He got "taken to the woodshed" when he said that the Reagan budget deficits were not sustainable. Here is what the US economy has been doing since Stockman got in trouble for suggesting that debt is bad. 

This chart is from Felix Salmon. Here is what he had to say about the implications of the chart. 

From 1970 through the beginning of the crisis in 2008, GDP grew at a pretty steady pace. But the amount of debt required to generate that output just got bigger and bigger — the rate of growth of the credit market was much faster than the rate of growth of GDP. In 1970, GDP was $1 trillion while the credit market was $1.6 trillion: a ratio of 1.6 to 1. By 2000, when GDP reached $10 trillion, the credit market had grown to $28.1 trillion: a ratio of 2.8 to 1. And by mid-2008, when GDP was $14.4 trillion, the credit market was $53.6 trillion. That’s a ratio of 3.7 to 1.

In other words, in order to keep up a steady rate of GDP growth, we had to saddle ourselves with ever more cheap and dangerous debt. 

Stockman saw the problem clearly in the 80's. I came on board a little later. That is why I supported Perot in 1992 even though I disagreed with him on many issues. I felt that the debt crisis was the only thing that mattered.

Clinton had the dotcom bubble (caused by excess money chasing investments). So that meant he was able to reduce the deficit. (He did not have a surplus. This was an accounting gimmick. The amount of debt that the government owed went up every year Clinton was president.) 

As is always the case the bubble popped, and this led to Bush trying to "push on a string" and by tax cuts and money-printing increase the economy. It worked, but it was temporary—the debt level just kept getting higher and higher. This excess money went into real estate and caused the current crisis. 

Stockman's view has not changed. While it would have been relatively easy and painless if we had worked on these issues earlier, we have waited too long and now it will be difficult. If we wait until the latest bubble—government debt—pops,  it will be devastating. 

David Stockman was recently interviewed for the Gold Report. 

The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of "Operation Twist" is an abomination.

Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.

I have been predicting that we have 3 to 7 years before investors no longer want government bonds. Stockman agrees: 

DS: The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?

TGR: What do the politicians have to do next?

DS: They are going to have to eat 30 years’ worth of lies and by the time they are done eating, there will be a lot of mayhem.

As I mentioned last week we are headed for an interesting 2013. Interesting enough than my prediction of 3 to 7 years may be optimistic. Former Senator Simpson, co-chair of the deficit reduction committee, thinks it will happen next year. 

Stockman does not know but suggests 2013 will be a difficult year:

TGR: Let's talk about timing. On Dec. 31, the tax cuts expire, defense cuts go into place and we hit the debt ceiling.

DS: That will be a clarifying moment; never before have three such powerful vectors come together at the same time— fiscal triple witching.

First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed. Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400–500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended. Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.

A majority vote in congress—good luck with that! 

But yet the call from the establishment is still more debt. It is like the drunk who feels bad every morning with a hangover. As soon as he is up he starts drinking again. Can he continue this for some time? Absolutely. But sooner or later his liver will fail. Then he is dead. We can see the signs of liver failure in the economy. Will the next president stop drinking? Not even if it is a President Romney. 

Are you ready for the coming crisis? Most people are not. David Stockman concludes the interview with this happy thought: 

How painful will the re-pricing be? I think the public already knows that it will be really terrible. A poll I saw the other day indicated that 25% of people on the verge of retirement think they are in such bad financial shape that they will have to work until age 80. Now, the average life expectancy is 78. People's financial circumstances are so bad that they think they will be working two years after they are dead!

Austerity? Austerity? We Don’t Need No Stinking Austerity!

There is a lot of talk about how the people in recent elections in Europe have rejected "austerity." In fact there has been no austerity at all. At best there was a very small cut in spending, as the following chart shows. 

 

Click here for an article about this. 

Why then is there all the hubbub? It is simple—most people do not understand how out of control spending is. There are very few countries where spending is in line with income. This cannot continue forever. 

In the US we have the same kind of hubbub. The Ryan budget is supposed to cut spending, and this is so unChristian, so unCatholic, of Ryan. But when you look at the Budget Ryan proposed, he cut nothing but ObamaCare. In fact that is the main difference between this proposed budget and Obama's proposed budget. Both proposals grow federal spending by an unsustainable amount. I have blogged about this before. 

‎2013 will be an interesting year economically. While I am not a Keynesian, the ending of the Bush tax cuts, the ending of the temporary payroll tax reduction, and the new ObamaCare taxes are going to really suck things out of the economy. I am afraid that when this happens and the effect is temporarily bad, the incoming president will instead postpone these taxes again.

As Herb Stein said, what can't continue won't. There will come a time when investors will refuse to reinvest and buy new government debt. I have been predicting this will happen in 3 to 7 years. I would rather be wrong than right on this prediction. 

I will not be surprised, but most people will. 

Paul vs Paul

The Ron Paul vs Paul Krugman "debate" was interesting. I had just finished the eBook about the two and their predictions over the last ten years. The book points out that both Pauls predicted the various booms we seem to be cascading from one to another. The difference is that Ron Paul thought the bubbles were bad, and Krugman was calling for them. I cannot recommend the book unless you are very deep in the weeds with these kind of issues.

Will People Believe Ron Paul?

Krugman has an interesting advantage in such predictions. When he calls for qualitative easing of a certain size, and the easing is only 80% of that number, Krugman can claim that the easing, the printing of computer money, was a failure because it was not big enough.

If you missed it, here is the video of the exchange:

One final interesting point: despite the breaking of the rules by various Republican party mucky mucks, Paul is continuing to pick up delegates at a surprising clip. You remember Romney winning Iowa, and then later it was decided that Santorum actually won? Well, do you care to guess who actually got the most delegates? That is right, Ron Paul did. Is it being reported that Paul now controls the Massachusetts delegation? He controls the Louisiana delegation. He just won the Nevada delegation. There are a lot of Paul supporters who are required to vote for someone else, but only on the first ballot.

If you the type to notice this kind of thing, and the Nevada delegation is not seated, then you will know that the powers that be are worried. I am not predicting a Paul nomination, but it may not be the coronation of Romney that one might expect.

Romney might get a wedgie—and his special underwear may not save him.

Bomb Bomb Bomb Bomb Bomb Iran

Recently I suggested that Obama had cut a deal with Israel to postpone the attack on Iran until after the election. Click here if interested.  If this is so, why is the following build up taking place? From Wired:

The U.S. Air Force is quietly assembling the world’s most powerful air-to-air fighting team at bases near Iran. Stealthy F-22 Raptors on their first front-line deployment have joined a potent mix of active-duty and Air National Guard F-15 Eagles, including some fitted with the latest advanced radars. The Raptor-Eagle team has been honing special tactics for clearing the air of Iranian fighters in the event of war.

Read the whole article if you have an interest in military tactics. I found it boring. However, it seems obvious that the US Air force is ready to attack with very little extra preparation needed. Everything is in place for an "October Surprise" before the November elections. Will there be one? My guess is that Obama himself does not even know. It will depend on the polls in October, and what effect such an attack might have on the election. He may not attack at all. If he does attack, those who approve might not vote for him anyway. Most people are too smart to be fooled by this tactic again.  Err, umm, Nevermind. 

I have heard it said that Obama will not attack Iran. Could be. It is also suggested that he will not because he is a wimp. Maybe. Personally I think he will attack because he is a wimp, but does not want to be perceived as one. I wish that decisions would be made on some other basis than testosterone. The potential side effects of such an attack in our crumbling economy are dire.