Friday, January 21, 2011

OPEC, State Bankruptcies, and Math

California is on the verge. How long they can stave off the inevitable is unknown, but the outcome is not up for debate.  Now comes the Federal Government with, not a rescue, but a solution - Bankruptcy.

Well... that's not exactly what some would call a "solution"... but there it is.  The Muni bond market has gotten killed over the past several weeks as this story has been leaking out, and then waterfalled when Whitney made her prognostication on CNBC a couple weeks ago.

There are SOOOO many ways that this can play out - municipal borrowing rates soar, defaults spur a deflationary wave, the Feds come to the rescue by printing and spur an inflationary wave... no matter what, pink slips are on the way to millions of state and local workers (thankfully).

How'd we get here? A tremendously complex economic model has evolved in the U.S. and the ROW... and it is being tended to by folks with no mathematical, analytical, nor economic talent.  Our system, at least in the West, is still Lawyer based.  We would be better of with physicians, and FAR better off with accountants, running the show... but that just ain't the way it is...

And in the background, Oil is slowly chocking the living snot out of the American economy.


OPEC, responsible for 40 percent of global supply, issued a statement on its website saying “there is more than enough oil on the market,” and promised action in the event of a supply shortage. The group is next due to review production quotas in June, skipping its usual first-quarter conference.
"Any assumption that there is tightness in the market is incorrect,” OPEC Secretary-General Abdalla El-Badri said in the statement. “In reality, commercial stocks remain well above the five-year average and forward cover stands at around 60 days. There is more than enough oil on the market.”

I love that. I love the smell of propaganda in the morning.... it smells like... Fresh Horse SH#!

Over the past 72 months, yearly world Oil production has increased ZERO. World population, on the other hand has increased by over 6.5% (just over 1.1% per year)... Per capita availability of Oil has decreased commensurately, and that can be seen in the price of crude today.

Does the world have 60 days of supply ("DOS") or what the OPEC spokesman refers to as forward cover?  Perhaps, but I sincerely doubt that.  There is simply no way to measure world inventories that accurately - and there no better a mechanism for the discovery of truth in a market place than price (and even that is not always so hot, especially when it comes to commodities or markets that are being interfered with by government).

For the sake of California's budget, let us sincerely hope that the OPEC spokesman is correct.  No state economy is more dependent than the geographic colossus of California. New York relies on Banking... California depends on gasoline...

Because the use of propaganda is only going to escalate. What children should have learned at home is no longer being learned at home for reasons we have discussed ad nauseum... and the statists appear willing to continue the fight in spite of the water clutching their ankles as they sink their own ship... though a few of the rats are abandoning the sinking vessel... and all for want of a nail.

The laws of mathematics are immutable and common sense will once again rule the day.

54 comments:

Anonymous said...

Seems to me that if OPEC holds a meeting, they'll be pushed to increase production. They are probably at 100% of capacity right now. By canceling their Spring meeting they can put off letting the cat out of the bag until June.

I'm thinking that 2011 is going to be a year full of surprises.

Regards,

Coal Guy

Greg T. Jeffers said...

A reasonable hypothesis...

Anonymous said...

Why do states need bankruptcy? If they are "Sovereign" can't they default on their own? Seems to me they just want someone else to take responsibility for what they have to do.

Illinois has no problem stiffing its vendors. Why not stiff the bondholders and pension funds too? Can't squeeze blood from a turnip.

Bunch of chickens.

Regards,

Coal Guy

Anonymous said...

If OPEC has no excess capacity to withhold, it has lost its reason to exist. What a shame.

Regards,

Coal Guy

bureaucrat said...

I don't think you Libertarians realize the full effect of what you think/hope will happen. For one thing, not every "bureaucrat" is a waste of money performing some unneeded task (perhaps I am that way, but that is another story. :))

The loss of state and local employees (the ones who plow your streets and keep murderers safely locked in jails, not to mention caring for the children and the disabled), could be considered by some to be "essential" workers. Whose gonna do that work? The public didn't step up to do that work properly and reliably in the last 235 years -- why would they start now? Volunteering is tha nice thing, but .. c'mon!

Also, defaulting on debts has a curious effect of making yourself/itself not able to get any more loans ... any more of any type of loans. Perhaps even emergency-type loans. Katrina-type loans. Default is a very bad thing. Has repercussions.

Anonymous said...

Bur,

Simply, you can't squeeze blood from a turnip. Seeing millions more laid off is not something that I'm anxious to see. Simply, something has got to give. There will be layoffs, pension defaults, bond defaults, stiffed creditors, etc., because there is simply not enough wealth left to support the massive bureaucracies and welfare structures. It isn't a matter of opinion, it is a fact. Wishful thinking does not put more BTUs in a gallon of gasoline or more economic output into our economy. It will be hard on everyone, eventually.

Regards,

Coal Guy

westexas said...

I was going to post a link to the item about state bankruptcies, but I see that Greg already did. Following are a couple of paragraphs from a prior post, followed by some additional comments.

Another Titanic analogy I have used is the first 15 minutes of the sinking versus the last 15 minutes. In the first 15 minutes, only a handful of the people on the ship knew that it would sink; in the last 15 minutes, the reality of the situation was apparent to everyone.

In regard to Peak Oil/Peak Exports, we are in the first 15 minutes, but that does not mean that our old way of life is not in the process of sinking below the waves. For anyone in government, dependent on the status quo, you can continue to hold on to the railing, or start looking for a lifeboat.

Regarding budget deficits, on the state level, we have two models--the Texas model (ruthless budget cuts) and the Illinois model (some budget cuts combined with huge tax increases). On the federal level, of course the Federal Reserve can of course continue to gradually take over as the buyer of last resort (of Treasury debt).

I personally think that Illinois' tax increases will yield them far less income than they are hoping, but we shall see.

Regarding unfunded and underfunded government obligations, e.g. pensions, I suspect that the only real question is how governments default on the obligations.

There is an inescapable "Atlas Shrugged" aspect to this. One could argue that cheap energy historically allowed producers to support a lot of non-producers, but cheap energy is a thing of the past. So increasingly I suspect that the question will be to what extent do governments destroy the remaining producers in a desperate attempt to maintain the status quo (and government jobs).

Anonymous said...

Westexas,

Is NG used in refineries to provide additional hydrogen to make lighter distillates. I've noticed that we are producing much smaller quantities of residual fuel oil. It it being turned into lighter fuels?

Regards,

Coal Guy

westexas said...
This comment has been removed by the author.
westexas said...

I'm not a refinery expert, but refineries do need hydrogen to complete the lighter hydrocarbon chains, after long chain hydrocarbons are cracked, and I think that most hydrogen is produced from NG.

I don't know about the residual question.

Anonymous said...

WT,

Thanks.

Coal Guy

bureaucrat said...

Seeking Alpha -- According to Merrill Lynch’s Sabine Schels, a commodity analyst, the breaking point for the global economy is when the size of the energy sector hits 9%. With the sector currently at 7.8% Schels says the breaking point is $120 oil:

“Whenever the size of the energy sector in the global economy reached 9 percent, we went into a major crisis,” said Sabine Schels, a commodity analyst at Merrill Lynch.”It was in the 1980s and it was the same in 2008. Right now we are at about 7.8 percent and if you go above $100 per barrel to $120 per barrel, you get to that 9 percent level.”

bureaucrat said...

I'll be more than happy to begin disbelieving that the 50% of national income the top 10% now earn (versus 25% in the 1950s) is not actually there when we've reversed the Bush tax cuts for awhile and start taxing those with wealth to pay for the myriad useful and demanded government programs provided. Until then, those that think cutting spending is the ONLY solution are just a bunch of Libertarian shills for the rich and powerful, who prefer to suck up to their masters instead of thinking they are worthy of their share of the pie themselves. :)

Greg T. Jeffers said...

Bur:

Please stop repeating yourself. We have all heard your view on taxes and we have repeatedly asked you for the numbers and supporting analysis... you have to provided this. If you have it, please email me, and I will post it and we can discuss it.

bureaucrat said...

Since I cant post graphs on here, I can't give you my "pictoral" evidence. I collect a lot of graphs.

Can you post graphs?

Anonymous said...

Bur,

The business / investment climate in this country has been worsening for the last 40 years due to increasing regulation and taxes. There has been MASSIVE capital flight over that period. Part of the reason for blowing the finance bubbles was to hide that fact. Doubling federal tax rates ( and it would take more than that to balance the federal budget ) will only make it worse, and us poorer in the long run. Doubling taxes NEVER doubles revenue. Assets will scatter across the globe like roaches when you switch on the kitchen light.

Regards,

Coal Guy

Anonymous said...

Greg-

Great post. Love it when you get the incisive analyis in gear.

Thanks,
Marshall

PioneerPreppy said...

I came across an interesting article yesterday about how the public service unions are fighting back against the governors.

Interestingly enough they had the same talking points as someone who comments here.

Yadda Yadda...tax the rich...

One thing I took away from the article was this quote (which I posted on my blog).


Advertising campaigns like Afscme’s “Stop the Lies: Public Service Workers Under Attack,” are trying to shift blame for state budget deficits to corporations and Wall Street. Afscme points out that its average member earns less than $45,000 a year and that average pensions are about $19,000 annually.

Now I cannot speak for other areas but here-abouts 95% of State employees are female with at best a high school diploma. After less than 10 years they are averaging the pay mentioned in the article. Not to mention after 4 years being given the government job equivalent of a Bachelors degree. Until this Month they also paid nothing into their retirement pension.

In the private sector a worker with a simple high school diploma would never rise past 30K and would have to put something like 75% of their pre-tax income into their 401K's to get 19K out of it and then that would be assuming a zero tax rate at 65.

Simply put this is where our tax money is going. it's consumed by overblown salaries and over staffed government.

I ran the numbers so I hope my math was accurate but I see a huge disparity between government employees and private sector. That simply will not fly in this neck of the woods.

bureaucrat said...

Let's start increasing taxes on the well-to-do (like any Socialist nation that has bills to pay does, which we are) and we'll see just how little money comes in.

By the way, the "overseas flight of capital" thing sounded great until Lehman Brothers collapsed in 2008. Then, suddenly, the U.S. dollar started rising in value as all the rich snobs and their money fled to U.S. Treasuries, dropping their yields to almost nothing.

Let the big, bag monied class flee all they want -- the whimps will always come back when they need the U.S. government (and military) to protect their inherited wealth. Overseas? Yeah, right.

Must drive you nuts, Carbon. :)

bureaucrat said...

Preppy, remove the retail and restaurant workers who aren't comparable to Federal work and perhaps your analysis (and Jeffers will require evidence :)) disparity between private and public wont be so large.

But, I am the first one to say .. Federal government work isn't particularly exciting, and we have good health care and retirement, but we also don't share in the "stock options" of our company. We also cannot strike.

PioneerPreppy said...

Bur

I see no reason to remove any worker, especially since a basic high school diploma is all it takes for most clerk typist to get into the government feeding network. Well a diploma and a minority status helps anyway.

In fact though, my numbers did eliminate basic retail and restaurant employees since I was figuring a small (half of 5%) in 401k matching for the typical employee. Most retail and food service positions offer no retirement benefits requiring the employee to do it alone.

The addition of the retail/food service employee would further expand the gap requiring the employee to pay in some where in the neighborhood of 150% of their salary for retirement.

I won't even get into the scam of government hiring 3 to 5 times the actual number of "clerks" needed for each given job.

I would like to compliment you on your actual acknowledgment of a counter opinion though Bur. Well done and much more friendly than the standard ignore tactic you usually use. I mean it sincerely too I am not trying to be an A$$ or something :)

bureaucrat said...

When it is 5 against 1, Preppy, I can't address all of you individually. ;)

Someone has to be the voice of reason. The Internet is filled with ranting old men with their guns and gold who nobody listens to anymore. All I ask is a factual, sometimes even anecdotal, approach to the mess we find ourselves in. Finding someone to blame for it all is just a side issue.

2011 could be a very interesting time in terms of oil prices, stock market intrigue, government budget stress, and the like. I prefer to talk about oil.

For the next 18 years, as the baby boomers (78 million of them) retire at 10,000 a DAY, I think it will be the 1970s all over again. Nothing will work properly, and 18 years is a long time. And those lucky enough to be in government will get cut our fair share or more. :(

Donal Lang said...

There are parts of the UK where every job created in the last decade has been public funded. I suspect the same applies to the US, especially rustbelt, inner cities and poorer areas. It's easy to say 'great, let's just stop doing all that', either by states declaring bankruptcy or by cutbacks, but bear in mind that it is the government machine which has created this system and those families caught up in this are genuine victims of a system that failed them. Few of those that will suffer possibly a whole lifetime of poverty and misery carry blame for that.

I don't support that system (before all you Republicans declare a fatwah with my name on it!) but I'd make 3 points;
1. These are the workforce. If they are not making something of value, then the economy will NEVER recover.
2. If their not working, their not paying taxes.
3. Idle hands do the devils work. Crime will soar, possibly to the point of civil strife.

I could go on, especially about kids growing up with failure, collapse of education, falling life expectancy, etc.

If the gov't isn't there to protect and support the people, what IS it there for?

Greg T. Jeffers said...

Donal:

The government is NOT there to "protect and support the people" from all harm and every outcome.

The government is there to maintain order, enforce property rights, and provide national defense.

And, to respect the laws under which it was organized.

PioneerPreppy said...

1. These are the workforce. If they are not making something of value, then the economy will NEVER recover.
2. If their not working, their not paying taxes.
3. Idle hands do the devils work. Crime will soar, possibly to the point of civil strife.

1. The government workforce is NOT producing. They may pay taxes on their income but since that income is taken from the few left that do produce it doesn't really count overall. These various departments produce nothing except shifting money and capital around and taking their cut.

2. see above.

3. I cannot say how each fed/gov agency runs but walk into any of the large state office buildings in my state capitol and you can actually see the waste. Many of these departments have no real clue they are not working because they have become so inbred and isolated. Their computers are full of personal junk, they spend hours just browsing, you name it.

The economy can no longer support such waste. It is that simple doesn't matter how needy someone would be without it. If it isn't there it isn't there.

Dan said...

Donal,

What these transfer payments do is maintain prices at an artificially high level. Que Bono? The low skilled guy who is priced out of the labor market? The owners of small businesses in the afflicted area? The owners of low cost retailers with global reach whose low cost model drove labor inefficient small shops out of business?

The price of labor needs to come down to where it is supported by organic demand. The prices of the FEW resources (Food, Energy, and Water) will be set from outside of poverty stricken areas however everything else needs to adjust to available incomes left over after the purchase of the FEW resources. Perpetuating a plantation economy for the benefit of the well connected is doing us, and them, no favors.

Dan said...

Also, have you seen where the architect of our current depression attributes those transfer payments you are clamoring for to the abandonment of the Gold standard? Since abandoning the gold standard is what allowed things to get so unbalanced in the first place I think this is key.


“I have always harbored a nostalgia for the gold standard’s inherent price stability- a stable currency was its primary goal. But I’ve long since acquiesced in the fact that the gold standard does not readily accommodate the widely accepted current view of appropriate functions of government-in particular the need for government to provide a social safety net.” Alan Greenspan

Link

Ps. I think the guy is a plant and he intentionally engineered the depression.

Anonymous said...

California won't go bankrupt. They can just start selling off state assets to the highest bidder.
The California freeway system should bring a good price.
Private toll roads are American as apple pie.
Of course, the new owners should also be able to do any thing they wish, such as put toll booths every mile, since it is their property.
America has no financial problem. We can sell off crap in the attic to keep the empire going for a long time.
We can do what all oligarch's children do. Party on the inheritance.
Banking Liquidator
The free market rules.

Donal Lang said...

Dan and PP; I repeat,
"1. These are the workforce. If they are not MAKING SOMETHING OF VALUE, then the economy will NEVER recover.
The capitals are to show that I wasn't supporting gov't transfer, I was talking about real jobs.

As far as low wages are concerned, the only way to get your wages low enough to compete is for a managed devaluation of the dollar. You can't just pay 2$ an hour to be competitive and expect the rest of your economy to survive.

The 10% that are currently out of work (plus the other 10% who should be working!) are either the resource that could drag the real economy out of recession, or the lead weight who's support will drag the economy into a 20 year recession.

Greg, I agree with you in principle. But the gov't are key to many of the programs that supply jobs and work, and however small you make the state involvement that is still going to be true. Gov't bodies supply armed services, police, transport infrastructure, education in the skills so people can work, and last-resort healthcare and support.

I agree about the primary role of the state, but in the real world it goes far beyond that. If the state establishes a system which employs all these people, and then f*ck up the economy so they can't afford it anymore, its not exactly fair on those people chucked out of work, is it?

Anonymous said...

Bur,

Treasury notes are not capital. Factories are capital. You participate in capital markets when you invest in stocks and bonds of companies that produce things that people are willing to buy. As manufacturing has left, so has capital, because it IS capital. Government bonds have value only to the extent that government can tax the productive. Treasuries are NOT capital, though they look like it.

That is why government has to shrink. The capital base that supports it has shrunk to the point that government can no longer be supported at its present size. The Fed is now printing money to support federal borrowing, and the states and cities are going bankrupt.

Your total confusion does drive me nuts. You are a degreed engineer, yet cannot apply mathematics, nor have you any concept of cause and effect. Amazing.

Regards,

Coal Guy

bureaucrat said...

Carbon,

We'll, don't take this stuff personally. Or even realistically. :) We have no idea how the next 30 years are going to turn out. All we have is educated guesses.

And while I do believe in the "every empire dies" historical reading, I also know as barely an engineer that progressions in machines to make things has gone parabolic since the industrial revolution. As time goes by, you need fewer people to do the same amount of (manufacturing) work. That means less "classical" manufacturing. So the dopes who said America would survive more as a "service" economy were mostly right. The U.S. will have to survive with fewer manufacturing jobs, and more jobs in services, elder care and government. It's a forgone conclusion. What we DONT need is all the wealth congregating in the hands of a few billionaires. We need socialist-country taxes. Even the guys at the car wash should get a living wage.

Anonymous said...

How well is that service economy working for us? Can't run an economy on nail salons and bypass surgery. Remember the BS about the "information economy" a couple of decades ago? Can't eat them databits or run your car on them either. It isn't so much the number of people employed in manufacturing, it is whether we own it or not. The eggheads can say what they want, but we have borrowed an built beyond our capacity to repay. That bubble masked the ruin of our productive base. Had it not been for credit expanding faster than the GDP, providing baseless money, the damage would have been clear decades ago. Our wealth is in our productive capacity. That extends to food, energy, transportation and all the segments of the economy that help get the things that people need to them. Government jobs don't count. Government produces nothing.

A large portion of our productive capacity has moved offshore. Worse, there is worldwide overcapacity and wage arbitrage, so it isn't coming back any time soon. We are a poorer country than we were. We will have to adapt. Government will have to shrink, no matter the tax rate. It isn't a choice.

Regards,

Coal Guy

bureaucrat said...

I'm not of the mind that this is a case of us all being equal 50 years ago and the U.S. fell behind. I think the U.S. had a HUGE advantage over the rest of the world in the 1940s & 50s as we rebuilt Europe, oil was plentiful and the credit thing hadn't really started. I think we are now falling to "average." We just don't know it yet, and we'll have to get used to being "just another country."

Like the Chicagoans yesterday who were so sure of the Bears to win, reality got in the way. :) We're just used to winning all the time -- having all the cards and chips. Being average ain't so bad.

Dextred1 said...
This comment has been removed by the author.
Dextred1 said...

I don't see your point about taxes. If we tax the rich, you are really only taxing the money that they made in the present not taking the capital they have already accumulated. Increasing taxes has been shown to lower the total % the rich pay. Lower tax rates actually shift the burden to the rich as shown by the Kennedy, Reagan and bush cuts. All lead to an increase in % of total taxes paid. Personally I would just like to see a graduated sales tax at first, with the rates brought down over time until they are flat and stable. Doing away with all deductions on everything. This is the hard part because the lobbyist have worked hard and paid a lot for these industry specific deductions. The one that would be hard to change would be the mortgage deduction; you would just have to grandfather the deduction in for current owners because most bought with that incentive in play. Industry deductions are not necessary in a sales tax regime thus the need to protect them goes down, though don’t expect the lobbyist the quit asking and paying. This would leave a much smaller IRS because of no need to file individual returns. Inheritance taxes don’t really take that much from the top 10-20% because they find creative loopholes to avoid them anyways. I think the national sales taxes really give us some advantages. I have heard some talk of giving a pre-bate to everyone. Let’s say it was 5,000, this could add on to the income of the poor to make up for the new sales tax, because they have never paid federal income tax and the burden would be destructive on the low end at first. The rich spend much more money and thus would pay much more taxes. This would also help develop a real capital base instead of the apparent fraud created by increasing base money. This needs to be done in a stable money environment so a return to gold linked money would fix this part (there has been no shown evidence that a advanced economy grows with a falling monetary unit, in fact just the opposite from everything I have read), just make the money only redeemable in the U.S. and not to foreign holders so we don’t have a 1930’s demand for gold for greenbacks situation. The last part would be a constitutional amendment to limit federal spending to historic intake of revenue (about 18-19%) and thus do away with the ability to incur debt. This is not that hard and would force Washington to balance the budget and be pragmatic on which programs to keep and which to cut or shrink to meet the reality of the situation. Not that hard to fix this mess really. We just are never going to be what we were in the 50-60’s so no use wishing for them days anyway. The world of cheap oil is over!!!

bureaucrat said...

Dex, I know everyone thinks they can become a millionaire, but almost no one ever becomes one. Stop being a yes-man for the wealthy. :) Join us in average-ville! Hahaha!

Anonymous said...

Bur,

Understand the MATH. Dex is right. Taxing the rich does NOT reduce their percentage ownership of wealth. They are wealthy because the own the notes. The only way to reduce the skew in wealth is for the rest of us to SAVE. That is to own stocks, bonds, farms, businesses, etc. And, also, we must pay off our debts. Same effect.

The UK with all its wonderful taxes has much more concentrated wealth than the US. Redistributing income does not help the distribution of wealth one damn bit. The people on the receiving end do not save. The rich just get richer because the high taxes make it that much harder for the lower income people to sock some away. Understand the MATH!!

Are you sure you aren't Nancy Pelosi?

Regards,

Coal Guy

Dextred1 said...

Did you read what I wrote? I am no yes man, but I am no dreamer like you. I am not rich by any means, but I believe you are entitled to what you have earned. I don't like the uber rich either because they use the behemoth federal bureaucracy to swindle the taxpayers because of their inordinate wealth and influence, though this is a facet of fascism and not of a republic. Get with it bro, I know you have to be smarter than this. You say tax the rich like it is ever going to happen. You might tax the upper middle class like yourself, but the billionaires you know will never be taxed. So marginal tax rates go up, who cares. The deductions and other shelters increase to. I am being pragmatic about this. We actually get more taxes from the rich as % if we lower tax rates and reduce deductions.

bureaucrat said...

The opinion polls are in my favor, gentlemen. Not to mention the rest of the world that matters has already gone socialist. High taxes are now inevitable, as we undertaxed for the last 30 years. We have a lot of old people to support. We'll see. :)

Dextred1 said...

Bur,

You are right that there are a lot of old people to take care of. You give a false choice of course. You make a straw man of our arguments. IT is not a choice between keeping all current programs and cutting all current programs, but one of finding a balance. The balance will be found by the free choice of voters or the Iron hands of the bond market. Anyways it really does not matter which way it is brought about, it will come and we will either print the money leading to massive inflation or cut the spending and thus save the current arrangement. As you point out bur I fear there is no political will to take on these issues now or for that fact ever. People like free crap and when the evil rich carry the cross it makes many downright giddy. This does not matter though in reality because as we play violins and argue ideologies the ship is sinking.

Anonymous said...

Nancy,

What do opinion polls have to do with facts? If 40,000,000 people share a bad idea, that does not make it a good idea. If the majority of Americans believe that the Sun won't come up tomorrow, it will still come up. When faced with the facts, you just change the subject. No one can argue with a genius or an idiot. I'm done with you.

Regards,

Coal Guy

Dan said...

Dex,

If you want to lift the masses out of poverty and return productive capital to our shores a regressive sales tax will not do it. The solution is to support the federal government with tariffs, just like before the 16th amendment. There is a Turkish proverb “Zararın neresinden dönülse kardır.” Meaning: No matter how far down the wrong road you have gone, turn back. It applies here in spades and would accomplish all the right things for all the right reasons.

Dextred1 said...

Dan,

Progressive to start because of the pragmatic side of actually getting it passed.
This is from first post:
"Personally I would just like to see a graduated sales tax at first, with the rates brought down over time until they are flat and stable"
We end in the same place, I jsut don't see that happening right away.

Dextred1 said...

Progressive only in the Pre-bate amount also. You could start with a larger lets say 50007000$ pre-bate on anything less than 13,000 (I think that is around poverty level) and phase it out at around 40,000 dollars for a family and still save a lot of money over current system. This could be phased out or left in place. That is why I put the 18-19% spending cap in amendment form.

Dan said...

Dex,

We do not end in the same place because with a tariff anyone can move production to the US to avoid taxes, thus activities that reduce dependence on transfer payments also reduce ones tax burden. Moreover since the only revenue agents are customs agents anyone not involved in importing goods can ignore the tax collection apparatus entirely. There would still be state and local sales taxes of course but anyone could control them by voting with their feet without expatriating.

Tariffs without complicates paperwork requirements favor small businesses and local producers with only importers dealing with bureaucratic hassle. On the other hand sales taxes without deductions favor multinational corporations off production, to avoid the sales taxes on inputs. There is a reason the rentier elements of our society occasionally push for a sales tax and only Ron Paul pushes for funding the federal government by tariffs.

Dan said...

Doh that should be:

Tariffs without complicated paperwork requirements favor small businesses and local producers with only importers dealing with bureaucratic hassle. On the other hand sales taxes without deductions favor multinational corporations offshoring production, to avoid the sales taxes on inputs.

Dextred1 said...

Dan,

Tariffs are just another name for taxes and we still pay them through increased price of goods!! Could you imagine the price of oil if put a tariff it. There were plenty of problems with those also. They hurt agricultural exports while protecting rust belt area factories. Go back and read about the earliest battles over tariffs. Go to 1930 and look at the mess smoot-Haley tariff act created. Before they we even implemented tariff wars started against us preemptively. Most economist blame the selloff in 29 on the tariff. Not to mention that big exporters and importers fight for their specific tariff which is the same manipulation they use now with tax code. Take a look at the Embargo Act of 1807, it was passed to restrict trade to Europe and almost lead to the Secession of the Northeast states (Hartford Convention). It stopped foreign shipping trade from U.S. ships. The civil war was hardly a humanitarian effort as much as a rejection of mercantilist policies that hurt the south. This time instead of the northeast shipping ports being hurt the southern Ag was hurt and was forced to buy more expensive goods from the northern industrial states taking hard earned money from the hands of mostly small farmers, not big factory farms (plantation) as most think of it. It is never as easy as it seems. Though I do think it would be fair to enforce currency manipulation laws, but we should never throw stones when we live in a house of printed fiat money.

We now are just mostly exporting inflation through printing money. The truth is we are buying oil, cars and tons of plastic junk with nothing but a big damn credit card which will never be paid back. We have the upper hand until of course we don’t (when the dollar crisis happens) I often think that we will still be in driver’s seat because we will be able to print a Gold backed currency if the Dollar ever fails. We could also go with a bimetallic currency standard and use silver to pay the small transaction with gold holding the larger value. We are the largest holders of Gold on earth. I miss read your comment thinking you were pointing out fault in sales tax. It is also easier to enforce sales tax than tariffs. Tariffs create a reason and a fairly simple way to avoid where sales taxes takes in taxes from all sources. The tariff system worked when the government hardly collected 5% of GDP and most of the time less.

Dextred1 said...

Dan,

I should mention that if we replaced current tax code with just tariffs I would be fine with that because it would curtail the size of government to 5 or 10%, there is no way to get more out of that type of system. I just don't think we actually get that passed. It would just be added along with the income, corporate, state, local, purposed vat, etc. I can just see a lot more of a base for a national sales tax. Still would collect enough to take care of worst off etc. Though government is the definition of fraud.

Dan said...

Dex,

Tariffs are indeed a tax however we pay them through an increase in price of imported goods, not all goods. However there is a good argument to be made that the cost of all goods will rise due to a decrease in global wage arbitrage. So be it, exchanging our better paying manufacturing jobs for minimum wage service jobs and cheap junk from china was a Faustian bargain anyway. What is wrong with protecting rust belt factories? What we just saw was the blue collar workers move into construction, because it can’t be offshored as easily, then overbuild and help push for laws that extended the malinvestment.

The world has changed; our agricultural exports will not be impacted the ROW desperately needs the grain. Presently there are food riots across the Middle East, the government of Tunisia just fell and Asia may be joining the party soon. This is not likely to change substantially until after a major famine, war, or plague. Hell, last year we had a bumper corn crop, the third largest on record if I recall, and it still wasn’t enough. On top of that scary situation congress wants to substantially up our ethanol production.

In regards to smoot-Haley; again the world has changed. In 1929 we were the worlds exporter of manufactured goods occupying roughly the same position china has now. Europe was the debt financed importer. Starting a tariff war under those conditions was insane. Today we need to reduce our imports and practically our only export is grain. Thus, we can raise a tariff with impunity. Our trading partners will howl but do nothing, see the second paragraph, and the S&P 500 will have a hissy but so what. GM is no longer an American company and what’s good for GM is no longer good for the USA. Same goes for GE, IBM, and the rest of the multinational corporations from Abbot to Xerox. They will be howling because their global reach no longer gives them a strategic advantage via the Double Irish and the Dutch Sandwich.

You certainly have a point with southern farmers being forced to buy more expensive goods made in New England. However so did farmers in Illinois, another state with an agricultural economy, and Indiana, and Iowa and… the economy of the entire country was largely agricultural; obviously that wasn’t the biggest issue.

The reason I favor tariffs is it would encourage onshore production, something we desperately need. When Only 47% Of Working Age Americans Have Full Time Jobs, the options are; higher prices due to tariffs, higher taxes or inflation to support benefits, or a full on war against the starving masses we no longer need for production. The beauty of a tariff is that taxes will go down as production and jobs are onshored reducing the need for welfare.

Dan said...

Dex,

At least one politician supports tariffs, and excise taxes to support the government. My guess is Jr. supports it to. While the surpluses he talks about are gone, so are the taxpaying citizens so basically it’s a wash. Two is a start, we can build from there.

Dan said...

By not protecting the rust belt we are not just losing the factories, we are losing the skill sets. In particular we are losing the ability to retool; because, the toolmakers are not training their replacements for lack of demand. This was driven home to me when I launched my now failed manufacturing enterprise in the spring of 2008 and was looking for tooling. Once the dollar gives up the ghost, not only will we not be able to import the things we need, we won’t be able to make them either. Worse yet it takes longer to train a toolmaker than to train a surgeon because of all the math and precision required; when a 500 ton punch press slams shut there is zero room for error. We are not just going to go down; we are going to stay down for a long, long time.

Dextred1 said...

The trade deficit dropped from 695.9 billion (2008) to 380.7(2009) billion. It is our dependence on foreign oil that drives this whole mess. We import about 249 billion a yr in oil related products. The oil deficit is over half the total deficit. We are 100 billion + positve in services and have a hell of a high end production advantage, but these will bo away to it seems as other nations ramp these up also.

Don’t think I totally disagree with because I don't. I am not dogmatic on this point. We are supporting this deficit with more debt and eventually this house of cards cannot stand. I would like targeted tariffs on things like clothing. The textile industry in the southeast has been destroyed over the last 20 yrs. I agree that this has burdened the state with the cost of paying benefits instead of people taking care of their own. You make some great points, I just don't know if it could happen. One problem I see is like smoot-Hawley we could lose 60% of exports and a lot of people would be hurting before it turned around and we started building the things we use instead of building things for export. This unrest could cause the system to just go ku-put and with the fickle nature of politicians they would ditch it before we got back to building things we need. We could let it be known that we are searching for trade parity by slowing raising tariffs maybe 1% a month. I am not so sure though that the fed is not doing this trough the increase of base money. In the last six yrs the dollar has lost 40% of its value to euro which makes our goods cheaper. One interesting thing about this recession is that imports fell from 2.3 trillion in 2007 to 1.9 trillion in 2009, while are exports only fell from 1.6-1.5 trillion dollars. Is this the result of the fed printing policy, I would think yes.

bureaucrat said...

You both do realize no one is reading these long, blathering screeds, right? Less is more, gentlemen.

Dan said...

Funny you mentioned textiles. I was talking with a friend about the opportunities in textiles a couple of years ago. The basic idea was to get someone really good to mind the store, take orders, measurements and do any final alterations. Then farm the bulk of the work out at piece rate to laid off seamstresses throughout the south who would make the clothes at home and mail them to the store. Never got into the nuts and bolts of it. What is the materials cost, shipping costs, how long does it take a seamstress to make a shirt etc. However when off the rack shirts made in third world sweatshops are going for $40 there is a lot of room to work with. If we weren’t in the middle of a depression, with the customers getting beat down and repeatedly bent over the table, it would probably work.