"The Federal Reserve will not Monetize the Debt"

"The Federal Reserve will not Monetize the Debt" - Fed Chairman Ben Bernake testifying before Congress.

And with that 8 word statement, the Fed Chairman announces the end of empire (not that empire was such a good idea), the end of Medicare, Social Security, etc...

The fact that a Fed Chairman has to make this denial should make it abundantly clear that most feel that the Fed has little choice. But what is the Fed to do? Speak plainly and truthfully? The Fed is, in fact, a government agency and a political body, irrespective of its claim of independence. It is not in the business of being truthful. 

Governments with massive armies just miles away from their capital cities issue stirring orations of impending victory. Cancer patients speak of "beating this thing". The spouse is the last to know. That is how denial works.

But the emperor has no clothes. What engine is going to drive the repayment of the debt and fund all of those silly programs those dim-witted pols out of San Francisco City Hall thought were such a grand idea?  

The Fed will monetize the debt. It will do it over time, like Chinese (American?) water torture, but in the end the Fed alone has the power to soak up all of that paper.

The truly sad and disturbing thing is that when one states the obvious, and lays it at the feet of those responsible, their minions, the "True Believers" come back with sarcastic remarks that anyone who dares to state said obvious must be a capitalistic pig whorefuses to pay his "fair share", a Nazi, a fire breathing right winger, supporter of Oligarchs, cruel to orphans, not to mention, when all else fails, "stupid".

My apologies to the converse sneaker and hip T-Shirt clad, pony tail sporting, testosterone challenged, trust fund benefited Man from Berkley. (sorry, that one got away from me)

YOUR IDEAS HAVE FAILED!! FAILED!!! 

Get a new schtick!

Because once the Fed does its little monetizing trick, all those people your posse addicted to those social programs will not take to the streets to thank you for the wonderful largess you have supplied them with.  But they will take to the streets, to cook trust fund brats over a garbage can fire - medium rare.

Mentatt

ELP from the guy that thought up ELM

More from Jeffers Farm here for folks interested in self sufficiency and small holdings...

Here is an excellent article from our friend Jeffrey Brown, also known as Westexas within the Peak Oil community...

Jeff is one of those rare folks that is blessed with both the ability to think and analyze abstractly, and to say it out loud when no one else was willing to.  

I give you "Westexas"...

How to Prepare for Peak Oil and Economic Collapse: The "Economize, Localize, Produce" Plan ("ELP")

by Jeffrey J. Brown

I have been advising for anyone who would listen to voluntarily cut back on their consumption, based on the premise that we were probably headed, in a post-Peak Oil environment, for a prolonged period of deflation in the auto/housing/finance sectors and inflation in food and energy prices.

To put our current rate of worldwide crude oil consumption in perspective, during George W. Bush's first term, the world used about 10% of all crude oil that has been consumed to date, and based on our mathematical models, the world will use about 10% of our remaining conventional crude oil reserves during George W. Bush's second term.

First, a discussion of our current economy.

The Current Economy, "The Iron Triangle" & The Mortgage Meltdown

Author Thom Hartmann, in his book, "The Last Hours of Ancient Sunlight," described a high tech company that he consulted for that went through several rounds of start up financing, and then collapsed, without ever delivering a real product. At the peak of their activity, that had several employees and lavish office space--until they ran out of capital. His point was that this company was analogous to a large portion of the US economy, which has the appearance of considerable activity and uses vast amounts of energy, but how much of this economic activity delivers essential goods and services?

I have read, and it seems reasonable, that the majority of Americans live off the discretionary income of other Americans. We are therefore facing a wrenching transformation of the US economy--from an economy focused on meeting "wants" to an economy focused on meeting needs--and the jobs of a vast number of Americans are thereby directly threatened in a post-Peak Oil environment.

I have described three segments of what I call the Iron Triangle:

(1) The auto/housing/finance group (the "Debt" group);

(2) The mainstream media group (the "MSM" group) and

(3) Some major oil companies, some major oil exporters and some energy analysts (the "Energy" Group).

The Debt Group wants Americans to keep buying and financing large SUV's and houses. The MSM Group wants to keep selling advertising to the Debt Group. The Energy Group provides the intellectual ammunition for the Debt Group and the MSM Group, i.e., we have trillions and trillions of barrels of remaining oil reserves, and Peak Oil is something that we don't have to worry about for decades.

Unfortunately, the net effect of the efforts of the Iron Triangle is to encourage Americans to continue buying and financing large SUV's and houses at great distances from their jobs, because higher oil production, and thus lower fuel prices, are right around the corner.

The US Mortgage Meltdown was inevitable, but in my opinion, the trigger for the meltdown was the increase in oil prices in the second quarter of 2005. The US Personal Saving Rate metric is not perfect, but it is a consistent measurement, and in recent years it was positive--until the second quarter of 2005. It has been negative ever since the second quarter (April, May, June) of 2005 .

The average monthly Brent spot crude oil price, in the 20 months prior to May, 2005 (the middle of the second quarter) was $38 per barrel. The average price after May, 2005 has been about $62, within a range of $54 to $74. I believe that this increase in energy prices was the final straw that pushed many US households into a negative saving rate, triggering the current wave upon wave of foreclosures.

Daniel Yergin, chairman of Cambridge Energy Research Associates (CERA), in 2004 predicted that the long term oil price would be $38 per barrel, because rising crude oil production would force oil prices down in order to equalize supply and demand. In reality, flat to declining crude oil production since May, 2005 has forced prices up in order to equalize supply and demand.

Those who listened to the false promises of energy abundance made by CERA, et al, have had considerable reason to regret it.

What have I and others been advocating? Let's start with Economize.

ELP: Economize

For some time, I have suggested a thought experiment. Assume that your income dropped by 50%. How would you change your lifestyle?

Many employees of Circuit City don't have to imagine such a scenario. Many higher paid employees at Circuit City have been fired and then been told that they are welcome to apply for their old jobs, subject to about a 50% pay cut.

In my opinion, the unfortunate new reality is that we are going to see a growing labor surplus--against the backdrop of deflation in the auto/housing/finance sectors and inflation in food and energy prices. By reducing your expenses now, while you can do it voluntarily, you will at least be better prepared for whatever the future may bring.

A key way to Economize is to Localize.

ELP: Localize

I recommend that you try to reduce the distance between work and home to as close to zero as possible, and furthermore, that you live in smaller, much more energy efficient housing, preferably close to mass transit lines.

If you can walk or take mass transit to work, in many cases you can get by without a car, or least fewer cars--and save considerable amounts of money. Currently, it costs about $7,500 per year to drive the average late model US car about 15,000 miles per year. As gasoline prices increase, and as depreciation rates probably also increase, the cost per mile of driving cars will continue to increase.

I would further recommend that you integrate yourself into your local community. Get to know your neighbors. Become involved in local government, etc.

I would especially recommend support of local food producers, perhaps via Community Supported Agriculture, and support of local manufacturing and local businesses.

Finally, the Produce recommendation.

ELP: Produce

Jim Kunstler has suggested that we should not celebrate being largely a nation of consumers. I agree with Jim. We need to once again become a nation of producers. I recommend that you try to become, or work for, a provider of essential goods and services.

Key recommended sectors are obviously energy--conventional, non conventional and alternative energy production and energy conservation--as well as food production, especially local organic farming close to towns and cities.

Other sectors to consider are repair and maintenance, low cost energy efficient housing, low cost transportation, basic health care, etc.

The biggest risk to family finances is trying to maintain the SUV, suburban mortgage way of life in a period of contracting energy supplies. Beyond that, one of the next biggest risks in my opinion, is excessive and unwise spending--especially debt financed spending--on college education costs.

While we will desperately need engineers and many other technically qualified graduates, we are seeing wave upon wave of college graduates entering the work force with degrees that very poorly prepare them for work in a post-Peak Oil environment. We may ultimately see college graduates competing with illegal immigrants for agricultural jobs.

Perhaps the best education investment that many young people could make is a two year associate degree in some kind of repair/maintenance area, perhaps with summer jobs in the agricultural sector.

I would especially recommend that you consider buying, perhaps with a joint venture group, a small farm, either currently organic, or that can be converted to an organic farm. In the short term, if nothing else you could lease it out to an organic farmer. Longer term, you might consider building or moving a prefab, small energy efficient house to the farm. If nothing else, this plan may provide a place of work for your unemployed college graduate.

I think that "Tiny Houses" will become more popular, as larger homes are no longer viable. Where there are jobs nearby, many McMansions could be subdivided, but absent local job centers, I expect large swaths of American suburbia to be essentially abandoned. As Jim Kunstler warned, American suburbs represent the "Worst misallocation of capital in the history of the world."

Very small (250 square feet or so), highly energy efficient, perhaps prefabricated housing makes a lot of sense, and this may become a growth sector.

I should confess that I in no way have a green thumb, but others certainly do, and there are some very encouraging case histories of Americans doing quite well with their own "Victory Gardens" so to speak, such as this case history: "Berkeley: Urban farmers produce nearly all their food with a sustainable garden in their backyard."

How have people responded to these recommendations?

The Responses Thus Far:

Two responses, from recent years, are illustrative.

First, the West Texan. After outlining my plan, a friend of mine from West Texas thought about it for a moment and then said, "But if we stop borrowing and spending, what will happen to the economy?"

Second, the Dallas socialite. Again after outlining my plan, this lady said, "You're not from Dallas, are you?" I replied that I was not. To which she said, "No one raised in Dallas would ever talk about living below their means."

So, living below one's means, at least in years past, was somehow considered vaguely un-American and socially unacceptable.

However, recently people who have followed some version of the ELP plan, either because of my recommendations, or based on their own evaluation of the present environment, have had considerable reasons to be glad that they voluntarily downsized. So far, I have not heard any regrets from anyone who downsized.

Or, turn it around. Does anyone now wish that they had bought a large SUV and large suburban McMansion--all with 100% financing--on January 1, 2006?

Finally, if we are wrong about Peak Oil, and if you followed the ELP plan, you will have less--or no--debt, more money in the bank, and a lower stress way of life.

Please note that the next essay in this series probably won't be posted until the week of April 16th. I will be doing ELP research, checking out post-Peak Oil locales.

Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area. His e-mail address is westexas@aol.com

I have been reading Jeff's stuff now for over 3 years.  "Reduce your need for income", "cut your overhead now, voluntarily before you are forced to", and "get to the essential production side of the economy" were his mantra long before the "Great Recession" reared its ugly head.  At the time, 2005-06, the economy was going gang busters and he appeared to many in the MSM to be alarmist, if not shrill and a bit laughable.  NO ONE IS LAUGHING NOW.

People from very diverse backgrounds - the Mad Scientist, The Jewish Farmer (Sharon Astyck, my favorite blog), Westexas, Mentatt (yours truly), JH Kuntsler, Matt Simmons, Congressman Roscoe Bartlett, the Juris Prudence of Doom (Matt Savinar), et al, have all contributed significant (and free) research and critical thinking on the subject - and most have come to very similar conclusions (although that might not necessarily be a good sign... in the immortal words of Mark Twain: "Whenever you find yourself on the side of the majority it is time to pause and reflect").

In any event, I enjoy Jeff's take on the subject.

Mentatt (at) yahoo

The Mad Scientist takes a Bow

It was the Mad scientist that told me months ago that the rate of change in the unemployment picture would begin to change right about now - that corporate America did not have many folks left to lay off.  Great call.  He also called the decline in the US$ during this recent period.  I should have made some bets accordingly.

I won't get into all of our discussions or his calls as you can read them for yourselves at his excellent blog:  ispeakofpeak.blogspot.com

But my hat is off to him and his incredible ability to connect dots mere mortals just can't see.

Mentatt

Social Program Spending Hit's $2 TRILLION in '09

Before I get to my short rant, those of you interested in small holdings and self-sufficiency can read my most recent Jeffers Farm post here.

I have been pounding on the unsustainable social program spending in this country, and the mutually exclusive issue of providing food assistance to families with children and elderly.  I was thrilled to see Mike Shedlock addressing this in his excellent blog today.

I don't have to repeat it, just click the link.

Bottom line: In a $14 Trillion economy, $2 Trillion is being spent on entitlements and the annual  interest expense on the national debt is greater than the average increase in GDP for the past 150 years.  I hope FDR has gotten over his guilt about being born into privilege.  Oh, I forgot, he's dead.  In that case I hope he is turning over in his grave.  Thanks, Franklin.  

Mentatt

Today's EIA Report

Today's EIA inventory report today would not suggest that the U.S. economic recession has lessoned very much, nor that Oil should be much above $50 per barrel.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.9 million barrels from the previous week. At 366.0 million barrels, U.S. crude oil inventories are above the upper boundary of the average range for this time of year. Total motor gasoline inventories decreased by 0.2 million barrels last week, and are below the lower limit of the
average range. Finished gasoline inventories fell last week while gasoline blending components inventories rose during this same time. Distillate fuel inventories increased by 1.6 million barrels, and are above the upper boundary of the average range for this time of year. Propane/propylene inventories increased by 1.9 million barrels last week and are above the upper limit of the average range. Total commercial petroleum inventories increased by 15.1 million barrels last week, and are above the upper limit of the average range for this time of year.

That last line: "inventories increase by 15.1 million barrels" is a biggie.  Please note table 1, first compilation "Total Net Imports" for the year is down 4.5% for the first 148 days of 2009 compared to the same period from 2008.  For all of 2008, imports were down 8% from 2007.  

Should this trend continue, and I think it will, industrial production and real economic output will decline at the same time that money supply increases from the Federal Reserve buying Treasury paper... will lead to one heck of a blow off.

You see, it is all about ratios.  The absolute number of dollar units means little without its relationship to the economic out put of the system.  If GDP contracts and money supply remains the same, well... that's inflationary.  If GDP contracts and money supply increases dramatically...

This is not to say that one more wet-your-pants, sh*t-the-bed kind of deflationary scare is not in the offing - in fact, I am betting that it is - but my bet is that it will be the last.

-----------------------------------------------------

This report left me in despair about my fellow human beings.  

That 50% of my fellow citizens said that torture was acceptable in certain circumstances is beyond my comprehension.  Only the pea-brained fail to make the connection that torture, besides being unconscionable, is a 2 way street?  If one side tortures, the other side will do the same to you and yours.

I have ALWAYS had a very dim view of the mentality of people in Law Enforcement ("The Authorities") of all stripes.  Anybody that WANTS to carry a firearm and a club (and is willing to point that firearm at someone for say, smoking pot), and walk around in an outfit that by all appearances looks like they are about to invade Poland should be summarily disqualified from working in Law Enforcement as they are mentally deficient as a human being.  Law enforcement personnel should be DRAFTED from the general population, with extra effort deployed in drafting philosophy students from the major universities, and rotated out of Law Enforcement after a several year stint.  After all, ANYONE working in a sewage plant and given enormous powers will shortly stink to high heavens.

Think about who the people carrying out the torture are:  They are the "Authorities".  Did they kiss their wife and kids good-bye that morning, drive to the office, warm up with some Nazi S.S. videos to set the mood and then step into the torture chamber ready to physically harm a helpless and restrained human being (enemy or no)?  Do we want these torturers then walking around in society?  WTF??!! I know that I am not the only one that sees a problem with this, but the fact that half of our society DOES NOT does not leave me with a warm and fuzzy.

This is not to say that Law Enforcement is not necessary. It is.  But it is important to recognize that while it is necessary, it is also an "evil" of sorts, a necessary "evil" that we have let run amok.  How many Law Enforcement personnel and citizens have to die each year in confrontations that just were not very important?  Clearly, thousands - but my bet it was the half that think torture is a good idea that also find this acceptable.

To the nit wits that think torture is acceptable:

The U.S. has hundreds of thousands of people serving in our military overseas.  Your inability to engage in abstract thought has left them vulnerable to the only fate worse than death.

I would have made a shitty politician.

BTW, I will be back to my usual assaults on the ridiculous sensitivities of the Left shortly, but the Left got this one spot on.

---------------------------------------------------

The world ain't coming to an end - even if the US$ gets mushed, and people have to walk more, and have to grow a victory garden, and give up their cell phone and cable T.V.,  and can't afford a car, and have to live in smaller homes, etc... - unless people insist that they would rather the world come to an end than make these compromises.

I am not a doomer.  There will still be a stock market, a fish market, a meat market, an Ag market, etc... The sun will come up, the surf will roll in, wine, women (or men, or.... whatever) and song will still be the stuff we live for... but you ain't getting that pension you were promised, so you "are going to have to make other arrangements".  

We are going to have a currency crisis, an entitlement crisis, an energy crisis... those are not really crisis's.  Not enough food to go around, now that would be a crisis - as it is in fact a crisis in many parts of the world.  Well, each country is going to have to look out for itself first in this regard, and the U.S. should spend a great deal more of its resources on food security than it is doing at the moment.  The U.S. has spent multiples of THOUSANDS more on securing its financial system than it has on its food system.

Does that sound proportional to you?

The fertilizer industry has been warning the American political establishment for some time that the U.S. food system has zero room for error - crop failure, drought, storm, whatever.  

All those other issues?  They only affect your convenience.  That just ain't the case with food.

Mentatt

2 Years Ago...

2 years ago this week I had this to say in my May 28, 2007 posting:

Denial II – Why we deny our Energy Condition

“Denial is the psychological process by which human beings protect themselves from things which threaten them by blocking knowledge of those things from their awareness. It is a defense which distorts reality; it keeps us from feeling the pain and uncomfortable truth about things we do not want to face. If we cannot feel or see the consequences of our actions, then everything is fine and we can continue to live without making any changes.” - CAIP website, author unknown

Before I delve further into the psyche of our national denial I want to make clear that I am not hoping for an energy crisis, population decline, financial crash, or even a date with Jessica Simpson (I'm happily married). I just call it as I see it. Further, I am more than willing to change my conclusions and assertions the VERY MOMENT THAT THE DATA CHANGES. I merely wish to explore the truth. That said, let's get to it.

Our collective denial regarding our society’s energy situation begs the questions why and how (or, more precisely, the process of how)? The “why” is, perhaps, more simply explained. The “how” is somewhat more complicated.

I am often asked: Does the “government”, or “the President”, or do “They” know about “Peak Oil”? And, “if this is true, why haven’t I/we been thoroughly informed”? Though the United States federal government has funded and received detailed reports on the issue from the U.S. Department of Energy and the Pentagon, the American body politic, and the American people, have and must continue to deny the reality of a permanent and accelerating decline in energy supplies – if we do not continue this denial WE WOULD HAVE TO ACTUALLY DO SOMETHING ABOUT IT. And those “somethings” are going to have real and immediate intended AND unintended consequences, much to the chagrin of our political leaders.

Why isn’t this front-page news? Why, indeed. It is not a conspiracy. The mainstream media is in the business of selling advertising, not public service. While they delight in the opportunity to bleed one unfortunate sot or another on the rack, they have little incentive to gore their holy cow(s) – the energy intensive industries that make up the backbone of their advertising revenues - residential real estate and automobiles.

Don’t count on Big Oil to be forthcoming on the issue. The executives at Big Oil are pulling down as much as 9-figure (that’s over $100,000,000) yearly compensation, and not for their brilliant execution (although that’s what the press releases claim). The record profits these corporations are enjoying at the moment have nothing to do with executing and everything to do with commodity prices (which these executives have no control over and have provided no value added, although they have been paid as such), but if you were in line for a $400 million compensation package, would you let ”Peak Oil” and high commodity prices take credit?

Corporate America outside of the energy sector is in no mood to be a hero (martyr). Once this issue breaks into the national dialogue corporate America’s stock options and 401k’s are going down like a rock in a pond.

If the media, corporate America, and our elected officials are disinclined to bring this issue to the fore… why would John Q. Public? It is far easier for John Q. Public to use his highly developed sense of denial (the same technique he uses for his obesity, smoking, drinking, lack of savings… we might not be able to save for the future but we sure can work the denial button).

Consider what might result should a sitting President (I should say "when", because this speech is coming, relatively soon) of the United States hold a news conference and state:

"My fellow Americans. It is my unfortunate duty to inform you that our petroleum supplies have entered a period of sustained and accelerating decreases in supplies. Within 15 years America will have 50% less oil available to its citizens than today, and within 30 years approximately 90% less….” (This speech does not have to take place all at once… it might be delivered over the course of several years by many political leaders. It might have already begun with the “America is addicted to oil” line in the last State of the Union address.) The speech will be entirely reactive. Most informed people will already know that we have entered terminal decline of energy supplies, and the uniformed will just be angry.

Of course the speech would be much longer and filled with pointless platitudes about the American people’s ability to handle adversity, blah, blah, blah… but then things get interesting. Upon waking from their denial, and once the idea is in the public domain and now without fear of ridicule, the American inteligencia would begin to explore the ramifications, combinations, and permutations of all of the possible outcomes, as well as the timing, of the overwhelming impacts that energy descent will have on our political, social, and economic structures, and they are going to do it OUT LOUD. Denial is going to evaporate instantly, only to be replaced by something worse – panic. Right now there is the heavy brake of denial slowing its momentum, but once we reach critical mass, nothing, and none of us, will be able to stand in its way.

The inteligencia will be the spark - but it is “middle management” on down to migrant farm worker that will become the fire. The lumpen masses will figure out that their ship ain’t coming in, and some might even be bright enough to figure out that they were the victims of societal propaganda, and that their ship was NEVER going to come in – and then they might get mad (more on that in the next article in this series titled ANGER). But first they will hoard.

They will hoard gasoline, propane, kerosene, etc… they will hoard food, water, and medicine, etc… they will hoard gold, silver, diamonds, etc… they will hoard weapons, etc… THEY WILL HOARDE EVERYTHING (everything except US dollars). This is the point when systems will likely begin to break down. But I digress; we are talking denial here…

I received more emails about the implications of declining energy availability and population on the housing market than anything else! What happens to housing when people can’t get to their second home in the mountains or at the beach, and there are less people in the society in the first place? Talk about denial: This is barely worth discussing – we have much bigger problems, folks.

Can the U.S. fiat currency system survive the knowledge that most fossil fuel energy supplies will dwindle to nothing before my infant son reaches middle age? NAFC (Not A Freaking Chance). Will people continue to pay back their 30-year mortgage? They won’t be able to (and will have no incentive to do so). So what happens to the financial markets and the banking system if people do not pay back their loans and the currency collapses? Nothing good. Unemployment in this environment would make the 1930’s look like a prom date.

Just “how” did we get to this level of denial? Not enough space here to do that justice. It was not some great conspiracy; more of a phenomena. Our method of government is purposely decentralized and its missions fragmented, our corporate institutions were not charged with saving us from ourselves, the media is there to entertain (after all, how can the media explain such a complicated issue in 12 minute segments punctuated by 3 minutes of 30 second distractions extolling the virtues of eating, driving, and then dieting, with the occasional “hope in a bottle” pitch?), and our educational institutions were too busy deceiving the American proletariat into believing that if you spent 10% of your working life and several hundred thousand dollars at their schools getting a certificate that says you were competent in sports massage therapy, art appreciation, or sensitivity training, or some other impossible to measure, nearly worthless “skill” (easy, if you think the skills have value, why are their compensation rates so low?), that you could compete with Ivy League graduates from establishment families, get a job at a Goldman Sachs, Lehman Brothers, or Bear Stearns (where the AVERAGE employee compensation, including secretaries, is over $500,000 per year) and live in a mansion in Greenwich, irrespective of your families social position.

I am not suggesting American life is, or should be, fair. Only that we have deceived ourselves into believing that it is. Life has always been a competition with its resultant “winners” and “losers”. If you are a self-made “winner” that came up out of the muck and mire, you understand this without further explanation. If you were born into a “winner” family, advantages such as private schools, summers on the Vineyard, a semester abroad, before beginning your career on Wall Street, the Law, or Medicine were the norm. Our very own George W. Bush, an admitted “C” student, was accepted to the prestigious Harvard Business School. Considering how limited seating was at HBS my bet is that some less-well-connected straight “A” student was the “loser” in that competition (it gets even better… “W” once said in commenting on performance enhancing drug use by athletes that “there are no short cuts to success” – "W" was a Yale legacy student (his family were Yale Aumni)! Hypocracy knows no bounds.) If you were born into a “loser” family, your experience was somewhat different than W’s. Still, “losers”, at least in America, did not starve. The rest of the world’s “losers” have not been so fortunate.

The definition of “winner” is going to be markedly different in our new environment: your progeny will survive. “Losers”, in the 21st century, will get a far less satisfactory consolation prize than the “losers” of the 20th century. That’s what population decline means. It’s just that when the U.N. says it, it sounds nicer.

We were all too busy with our nose to the grindstone to notice that the scale of growth in our population, energy, food consumption, and environmental impacts (over-fishing, anyone?) had grown beyond our ability to sustain them. Well, not everybody. SOMEONE OR SOMETHING spent an awful lot of money to dissuade Americans from accepting mankind’s contribution to climate change and that they could pump CO2 into the atmosphere with reckless abandon and without consequence. It wasn’t until the Chinese threatened to usurp our position as the CO2 emission leader that we began to realize that, while it is OK if WE do it, everybody can’t live like this (and by the way, why are you guys trying to steal “our” oil?).

I continue to maintain that there is no macro solution to this condition - and it is a condition, not a problem; problems have solutions - any more than there was a solution to the Tsunami of 2004, or the 1918 flu pandemic. You either survived these challanges or you did not, you were either a "winner" (survivor) or a "loser" (casualty). There will be "winners" and "losers" in the new paradigm brought to you courtesy of energy descent, and all of our denial in the aggregate will not change that outcome.

My infant son, born earlier this year, will likely never need a driver’s license. His children will not experience air travel. My older son’s first car will survive its fuel supply. Our denial is most prominently displayed in the way we prepare our children for their future – a future that will not exist.

End of post from May 29, 2007


Not bad, if I do say so myself.

Mentatt

Couldn't have said it better myself

I couldn't have said it better myself - so I didn't:

Commentary by Kevin Hassett

June 1 (Bloomberg) -- There is an old joke that a borrower dies if everyone stops believing in him. A look at the history of financial crises suggests there is a kernel of truth in this.

That’s why the California budget crisis may well lead to a second financial calamity that would be far worse than anything experienced over the past 18 months.

California is, of course, facing a debacle. Voters rejected a series of ballot initiatives designed to restore some sense of sanity to the state’s budget. As a result, California is more than $21 billion in the hole.

Governor Arnold Schwarzenegger is struggling to find enough spending reductions to close the gap, but investors are skeptical. According to Fitch Ratings, which in March downgraded California’s general obligation bond rating, California has the worst rating of any state.

Even amid economic calamity, the people of California are relatively wealthy, and the state’s economy is an impressive engine. If California were a country, it would have the eighth- largest economy on Earth. Given those advantages, the notion that California might default on its government debt might seem farfetched. After all, the reasoning goes, they can always raise taxes to pay off debt. Even a gridlocked legislature might act if California gets too close to the edge.

The problem with that line of thinking is that California’s politicians might get little notice that desperate times are at hand. For some borrowers, the first sign of problem is their inability to make an interest payment. For others -- and here lies the nightmare scenario -- the problem first becomes visible when all the lenders disappear.

Lenders’ Response

Imagine, for example, that California returns to credit markets in the coming months simply to roll over some of its expiring debt. Maybe the state borrowed money from China for two years back in 2007 and now has to borrow again to give the Chinese their money back. What happens if, seeing the catastrophic budget situation, lenders decide to shun California altogether?

If that happens, California would have to default on its obligation to give the Chinese their money back. It might do so by extending the terms of the existing debt, but that would be, nonetheless, a default, and a run on California debt surely could ensue.

Once a panic occurs, similar assets tend to be swept up in the wave. Bad news spreads. Witness the run that occurred during the Asian financial crisis of the late 1990s.

So if the unofficial eighth-largest economy fails on its debt, might the debt for the largest economy go with it?

Deficit and GDP

A look at President Barack Obama’s budget suggests that the U.S. government’s fiscal situation is in worse shape than California’s.

The deficit relative to gross domestic product for the entire U.S. this year is 12.9 percent, according to White House estimates released last month. If California had the same deficit relative to its GDP, it would be short about $230 billion -- 10 times the size of its current shortfall.

What’s worse, the Obama administration’s attitude toward economic policy comes right out of the California playbook.

Notwithstanding White House claims that the federal deficit will drop to 8.5 percent of GDP next year, there is little cause to believe that the U.S. faces a brighter future than California. That shouldn’t come as a surprise.

The Democrats have controlled the California legislature for most of the past four decades. In spite of protestations by the occasional powerless Republican governor, the Democrats adopted economic policies that define left-wing nirvana.

Top Tax Rate

Roughly 40 percent of California’s income-tax revenue comes from the much-harped-upon top 1 percent of earners. Thanks in part to the “millionaire tax” approved by voters in 2004, California’s income-tax rate has reached 10.55 percent on the highest earnings -- second only to Obama’s native Hawaii, which taxes some income at 11 percent.

High tax rates on individuals, of course, hit many small businesses hard. If you wonder why the California economy is going so much worse than most of the country, this is a good place to start.

California has to answer for its treatment of corporations as well, socking them with an income-tax rate that is just shy of 9 percent. Since the U.S. federal rate is so high relative to our trading partners, corporations that operate in California face a combined local and federal tax rate higher than that of any other country. (Japan is a distant second.)

In case you wondered, California’s sales tax is high, too. Most places in California, the combined city and state sales tax rate is more than 8 percent.

California is in crisis because state spending is so high that even those hefty taxes aren’t enough to balance the budget.

California in D.C.

Except for the sales tax, the Obama administration’s plan is to copy California’s policies.

Obama has proposed a massive tax increase on U.S. corporations by curbing the deferral of taxes on corporate income earned abroad. He also has advocated higher marginal tax rates on the rich, by letting George W. Bush’s tax cuts expire.

Even with those tax hikes, Obama projects that deficits are here to stay because, like California’s Democrats, Washington’s can’t resist increasing government spending.

It is easy to see how investors might stop believing in California. If they do, it would be rational for the U.S. to be next.

OK. Now what? California has been the Left's Little Utopia for, what was it, 4 DECADES!!?? And with the highest taxes in the F&^%^$!!!! country, California is very near a massive default!!?? Substantially ALL of California's insanity was covered up by the very credit bubble the ignorant Left claims Bush created. Let me ask you guys on the Left something: Have you EVER read the Federal Reserve Act? What makes you think ANY sitting president has control over monetary policy? Yes, Obama could refuse to reappoint Bernake... and I got a better shot of having black hair again. Obama IS going to reappoint Bernake. Does he now get the same beat down you guys laid on Bush for his economic policies (I know, Iraq... a superbly dumb idea... but we are talking economic policies here).

The truth is BOTH parties, and both extremes of political philosophy have led the U.S. to the precipice.

The U.S. appears to me to have entered an era where interest costs on the debt will grow faster than real GDP. As I see it, the Administration has 3 options (much of this influenced by the Mad Scientist) to deal with an exponentially increasing budget deficit and a massive Treasury debt funding shortfall:

1. The U.S. could default outright on its debt. Pull a Russia or Argentina. Politically, this is at once the most unthinkable, but probably the best possible thing, that the administration could do to protect the U.S. from an internal political crisis. I also give this no shot of occurring (The MS gives this a greater, albeit small, chance of occurring).

2. The U.S. could engage in a one time currency devaluation. All debts would remain constant, but each dollar or deposit or Treasury bond would increase by a factor of "X", i.e. if you had $1 million in the bank yesterday, today you now have $2 - which would mean a 50% devaluation of the currency. I give this a very low probability of occurring.

3.. Monetary (and price) inflation by means of the Federal Reserve buying the Treasury's debt from money created out of thin air. I give this the highest probability of occurring, and the most likely to be tried first (if this does not succeed then choices 1 and 2 obviously become very probable - we will have little to lose).

The U.S. bond market is already beginning to show signs of distress, with long bond prices down over 25% for the year. Higher interest rates, together with front month Oil having risen back to nearly $70 per barrel, will in the very near future be quite challenging for the U.S. economy and equity markets, and somewhere in this confluence of events we hope an opportunity is created.

The equity market appears to believe that a "V" bottom is in, primarily because the data of late is "less bad" than it had been (said data is still getting worse, but at a slower rate). The U.S. equity market lost nearly 8,000 Dow points, peak to trough, and has since gained back 2,400 or so of those... so, only 5,600 or so to go, right? While this might actually occur as a result of hyper-inflation (a case where it was necessary to cure the fever by killing the patient), I think the U.S. equity market will present better entry points before the end of the year, and will not see the "benefits" of hyper-inflation until well after the fact.

Of coursed, I could be wrong... but no where near as off as the MoRons that came out of San Francisco city hall... I want to congratulate those nitwits on the coming unimaginable unintended consequences.

Mentatt