Category Archives: Economics

Game Over, How You Can Prosper in a Shattered Economy

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This book by Stephen Leeb is the second recent review about the inevitability of an economic collapse. The review of the book posted last week predicts what will happen in the United States compared to what happened in Russia after the Soviet Union collapsed. That book provided little guidance other than encouraging stockpiling of food, medicine, and barter goods. There is advice in “Game Over” on how to be best prepared for predicted collapse caused by runaway inflation and shortages of commodities.“Growing numbers of the world’s 6.6 billion people are now actively seeking to equal Americans’ high consumption lifestyle…” There are limits to all commodities, and governments and central banks are not acting as if they have the restraint necessary to keep inflation under control.

Peak and decline of oil supplies and inadequacies of alternative energy production are likely to cause energy production to fail to keep up with the world’s appetite. Replacing carbon fuels with wind is impossible, because there isn’t enough iron oxide to build enough towers and turbines. It is not yet clear whether solar cells produce a net gain in energy. Thin film photovoltaics require cadmium telluride, and there isn’t a wealth of that available in the world. Producing energy by converting corn into ethanol uses more energy than is gained and making fuel out of food when there is a shortage of food is, to be kind, idiotic.   Continue reading →

Reinventing Collapse, The Soviet Example and American Prospects

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This book by Dmitry Orlov predicts a U.S. economic collapse, and it is both interesting and often oddly entertaining. The author was born and grew up in Leningrad, but lived in the U.S. until the mid-seventies. He had several visits to the Soviet Union during the years that political system was preparing to collapse or after it had collapsed. He believes that the U.S. will only have the option of inflating to escape excessive debt or defaulting on obligations. “But the results are the same: a worthless national currency and unhappy international creditors unwilling to extend further credit.” That scenario leads to the need, if the author is correct or partially correct, for individuals to consider what they should do, or prepare to do, if there is a collapse of the U.S. economy.  I don’t agree with some of what is written (the risk from global warming, as one example) but I believe the book is worthwhile.

The descriptions of the visits to the Soviet Union are an example of how the author can take the edge off serious matters with clever writing. “The stores were largely empty (in the sense of being quite uncontaminated by consumer goods) and often closed.” He quickly learned a half-liter of vodka could be easily exchanged for ten liters of gasoline, “…giving vodka far greater effective energy density than rocket fuel.” People were willing to exchange items of great value for American jeans. This is an important point. When an economy collapses, it is important to have desirable items to barter for what is needed for survival. The author also warns that, “Access to actual physical resources and assets…and relationships, quickly becomes much more valuable than mere cash.” Continue reading →

Weasels and Social Security

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I’ve tried to maintain interest in politics, but it is challenging. Republican candidates demean each other while the Democrats demean the Republicans ranking highest in the polls at the moment.   The spectacle brings to mind an article titled “On Weasels and Removal Thereof Though Unified Action” by Susan Westfall. The author wrote that she “…decided to settle on a word to use when referring to politicians…and special interest groups who work so hard to sell the sovereign countries of the world down the road for personal gain, all the while espousing their good intentions for the ‘general welfare’ of the people.”  “Ultimately, I settled upon the term ‘weasel’.” That term is used to describe people who are acting in “…a cunning/and or deceitful fashion to achieve desired ends.”

We need fewer politicians willing act like weasels to buy enough votes to be reelected. Government entitlements such as Social Security and Medicare are popular with voters and any politician mentioning changes to improve the long term economics of the programs will face the wrath of voters. Too many politicians buy votes by defending both of the programs even though they know the programs need to be fixed.

President Clinton spent a year at town hall meetings talking about Social Security and that we should “…fix the roof while the sun is shining.” He was and is a clever politician, and he didn’t lay out details of how to fix the program. That resulted in people nodding knowingly that something should be done.

George W. Bush wasn’t as clever. He actually suggested that we begin to fix the Social Security by letting younger people voluntarily put a third of their Social Security “contributions” into private retirement accounts similar to IRAs. The account owner could then select how the money was invested, and they could select treasury bills or insured certificates of deposit if they wanted to be conservative to assure the money was there for them when they retired. They could also select the beneficiary, while Social Security is limited to dependent children and legal spouses (and is therefore homophobic).  Democrats were mortified. Robert Reich, who had been Clinton’s Labor Secretary, responded, “If it ain’t broke, don’t fix it!” Alliances were formed with older people who were told Bush wanted to destroy Social Security by “privatizing it.” I was discouraged that members of Congress and evidently their voting constituents believed the government could more intelligently manage money than the people who originally earned the money.  Bush lost, and future politicians received a clear message. Act like a weasel if you want to be reelected.

I have one hope, and that is some future politician will have the courage to offer what Franklin Delano Roosevelt proposed in an address given November 14, 1934. “It takes so very much money to provide even a moderate pension for everybody, that when the funds are raised from taxation only a “means test” must necessarily be made a condition of the grant of pensions.” He not only recommended a means test to determine whether people should receive a benefit, he also said he believed the taxpayers should only support the program for thirty years (until about 1965) at which time it would be replaced by private accounts.  When Bush’s opponents commented that Bush wanted to “destroy FDR’s legacy program,” they apparently believed what he had proposed didn’t go nearly far enough to implement FDR’s vision.

(Some readers might hesitate to believe the previous paragraph. A link is provided for those who want to read FDR’s comments in context. I predict you will find what I’ve written is accurate. Links are also provided to speeches by President Clinton and George W. Bush on the Social Security web site.)

Realistically, FDR probably would have been pleased with the backlash at Bush for suggesting changes. He even predicted that once the program was put in place “…no damn politician…” would ever be able to change it.  An advisor told FDR that Social Security wasn’t good economics. FDR famously responded, “I guess you’re right on the economics, but those taxes were never a problem of economics. They were politics all the way through.”

A few years back there was a bumper sticker popular in areas of the country where you would find large concentrations of retirees on vacation that read, “We’re spending our children’s inheritance.”   I hadn’t seen the sticker lately, and it occurred to me that message is no longer valid.  We retirees are no longer satisfied with spending only the children’s inheritance.  The Social Security program is diligently collecting substantial portions of incomes from the salaries of young workers and transferring it to those of us who are retired after skimming the cost of operating the bureaucracy.  Not fixing the program means we are willing to take that money with the promise workers under the age of about forty won’t receive equivalent benefits unless more money is taken from paychecks of the shrinking numbers of employed younger people.

I have advocated ending the cost of living adjustments to Social Security beneficiaries, and I’m guessing that one suggestion means there’s no risk of me being elected to any political position. However, I promise I’ll vote for people who show the courage to do something to improve future prospects for the country. My appeal is for others to join me in a quest to show the weasels the door. The other alternative is to wait for the eventual bankruptcy of the U.S. economy and the end of those monthly Social Security checks. I don’t think I’m the only grandparent who is willing to see changes to the Social Security program that would  give our families a better future.

Bad Money: Reckless Finance, Failed Politics, and Global Crisis of American Capitalism

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This review will be one of the few times I spend a significant amount of time writing about what is wrong with a book. Perhaps I should have posted this on the blog link, since my opinions consume a significant portion of the posting. However, I picked up the book at the library because I wanted to review a book on this subject. I prepared a combination blog/review posting because I found what was not included in this book to be more interesting than the content.

The book discusses some of the causes of the mortgage crisis, but I can’t explain the omission of the government’s role. Politicians have long looked for policies that would open the American Dream of home ownership to more people. (The idea is admirable as long as the people who are given access to a home have some chance to actually afford the costs.) Loan agencies began to be forced to make loans to people who couldn’t previously qualify. The Community Reinvestment Act (CRA) was passed during the Carter era to monitor and punish banks that weren’t making enough loans to people in inner cities, and the CRA is not even listed in the table of contents. CRA was just the beginning of government meddling. The Clinton administration added more penalties for loan agencies that turned down loans to people who weren’t previously approvable. The Government Sponsored Entities (GSEs)  Freddie Mae and Fannie Mac were directed to make a significant percentage of their lending support to “affordable housing.”  (There is a short discussion of the two GSEs on page 187 of this 209 page book.) Continue reading →

Unintended Consequences of Financial Regulations

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I’ve expressed skepticism about the move by regulators to take advantage of the 2008 financial crisis to impose more control on business by government in previous postings on this link. The negative impacts from the massive Dodd-Frank law continue to mount. I don’t know how to measure the impact from businesses being cautious about their plans until the hundreds of new regulations are finally developed and implemented. However, there are some negative impacts being experienced by small businesses and people employed by the banking industry.

David Migoya wrote an article in the Denver Post discussing how the limits on bank card fees are adding costs to small businesses that are or will be passed to consumers. Dodd-Frank decided that the previous charges to retailers of 42 cents per swipe of a debit card was excessive, and capped the charges at 22 cents per swipe. They had previously charged as low as 2 cents for a dollar transaction and that escalated on a graduated scale up to the maximum of 42 cents. Debit card companies began charging 22 cents for every swipe after Dodd-Frank passed. According to Mr. Migoya’s article a popular site in a food court in downtown Denver was losing 3.8 % of revenue to the new fees, and the owners were worried that they would have to raise prices to remain profitable. Businesses that “…primarily run charges of less than $10 are being slammed.” Vending businesses are faced with raising prices to protect already thin profit margins. I expect that Mr. Dodd and Mr. Frank would explain that it was worth it to try and prevent banks from making a profit.

A report by the Financial Services Committee titled “One Year Later: The Consequences of the Dodd-Frank Act” by Chairman Spencer Bachus and Vice-Chairman Jeb Hensnarling does not report that the act had the intended consequences of improving the economy. The hundreds of new Federal Regulations creating massive bureaucracies when the economy is fragile had the opposite effect. The regulations did not address “too big to fail,” but instead provided financial support to large financial companies while businesses “…too small to save are left to fend for themselves.” The Federal Reserve Board’s Chairman acknowledged “…that the government is not capable of calculating the effect of the cumulative regulatory burden imposed over the past year…on the strength of the U. S. economy.”

It is really quite simple. The government decided that there were 387 new sets of rules needed. Most of the new bureaucracies haven’t had high level positions filled to impose the regulations, few if any deadlines to impose regulations have been met, and businesses that could be the engine to economic growth are waiting to see what the government is going to do.

Let me ask a question that makes the question personal. What would you do if you were contemplating a new business if you didn’t know what the government was going to require? What would you do if you were an existing business that will undoubtedly be impacted by whatever the new regulations might be? Would you hire people thinking the new regulations will be “business friendly?” I think the answer is “Not likely.”

I saw a report on CNBC about the banking industry, and there have been about 40,000 jobs cut from large banks, I’m guessing the people who lost their jobs were not those who received huge bonuses for driving the businesses into huge losses during the 2008 economic crisis. They were probably “middle class Americans” who had nothing to do with the risky investments that caused the crisis. Of course the Dodd-Frank law didn’t do anything to help those people since they were associated with “big banks.”

The quest of the government to protect “average Americans” has harmed thousands of “average Americans.” Perhaps someday we will learn that more government doesn’t help. Perhaps not.

Economic Recovery versus Red Tape

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The story of two pipeline projects provides one explanation of how a morass of government regulations is obstructing economic activity and recovery. President Obama proposed work on “shovel-ready projects” to spur economic activity, and it would be tempting to think that the number of shovels needed to build long pipelines would be viewed favorably by a government and country hungry for new jobs. One of the pipelines has been completed despite massive regulatory interferences, and will transport natural gas from the Wyoming to Oregon. The other is a planned 1711 mile pipeline that would transport crude oil from the tar sands in Alberta to refineries in Oklahoma and Texas.

El Paso, a Texas-based company, constructed the 682 mile Ruby natural gas pipeline at a cost of $3.65 billion in the three-and-a-half years required to obtain regulatory approvals and complete the project. The project came in at 23% over budget and missed scheduled completion by four months, primarily because of delays in meeting demands of dozens of U.S., State, and local agencies.   The project created thousands of jobs and provided revenues for communities, counties, and state governments.

The Ruby project provided jobs not only to construction people but to environmental specialists who had to complete studies and publish a detailed Environmental Impact Statement (EIS). The EIS had binding requirements for rights of way and endangered species such as the black footed ferret and the Ute ladies’ tresses orchids. There were also descriptions required on how the nearly 6000 workers would be housed. Paleontology rules required that the pipeline had to avoid the “rock stacks” used by Native Americans as navigational tools, even though the pipeline did not cross any reservations. It took two and a half years and 125 meetings and agency “scoping hearings” for El Paso to receive the final signoff to build the pipeline. There were 215 archeologists in the field at the height of construction to “mitigate affects to cultural resources,” as required by the National Historic Preservation Act of 1966. A Forty-four member team monitored migratory bird protection, and they did succeed at moving a nest containing four eggs. The ditch where the pipeline was being laid had to be outfitted with temporary ramps so wild horses and burros could climb out if they fell in. Apparently the workers couldn’t be trusted to hoist out an animal if one did fall in.

The expensive gamble by El Paso to build the pipeline was initiated in the face of natural gas prices that would be slashed in half during the construction of the pipe line. The workers, land owners where the pipeline was constructed, regulators, and environmental groups (who were paid to secure their cooperation) all profited from the risk taken by El Paso. Property tax revenues were boosted by 25% in some areas.  Pre-filling the pipeline has begun under the watchful eye of regulators. A Federal Energy Regulatory Commission director warmed El Paso that they are monitoring El Paso efforts to prevent the spread of nonnative foliage and will take corrective action if restoration doesn’t meet their requirements.

The other proposed pipeline, called Keystone XL, is intended to deliver tar sand oil from Canada to U.S. refineries. It is estimated that the $20 billion dollar project would produce 13,000 union jobs, and would seem to be the kind of “shovel ready” project that people looking to stimulate the economy would favor despite the fact the jobs aren’t “green jobs.” Applications were filed in 2008, and there have been dozens of public meeting with the entire large mix of regulatory agencies. Even State Department approval will be required because the pipeline would cross the 49th parallel. The draft EIS concluded the project poses little risk to the environment. The EPA didn’t like that EIS, and sixteen months later a new eight volume report that included consideration of “direct impacts to beetles” also concluded “no significant impacts to the environment.” The EIS now goes into a 90 day review to determine whether the project is “in the national interest.” In addition to environmental impact the project must prove economic, energy security, and foreign policy benefits to at least eight federal agencies.

The “green movement has geared up against the project, and there have been organized protests outside the White House. The Sierra Club is warning President Obama that he can’t count on their votes in the next election if he approves projects such as Keystone XL. We’ll see whether those 13,000 workers standing by with their shovels to build a pipeline take precedence over bureaucratic red tape.