Decline of the Empire

America, A Faltering Empire

As DOTE readership grows, I occasionally feel the need to return to first principles. Is America an Empire? Is this Empire in Decline? Why is this view of our situation illuminating?

I have never directly addressed the question of whether the United States is an Empire, and I never will. I simply assume it, for this proposition seems self-evident to me and explains so much. It is worth noting that America is not a territorial Empire, as with historical examples like Persia, Rome or Britain. The United States exercises its power through its enormous military presence all over the world, and through the sheer size of its economy, which makes up about 25% of world GDP. These factors alone have allowed America to dominate global politics and thus trample over other sovereign states. 

If we assume that Empires rise & fall, and history tells us they always do, the question becomes where do we stand? Again, it is crystal clear that our power is waning, to wit—

• The Imperial Capital (aka. Washington, D.C) is now mostly out of touch with the citizenry, and thus no longer serves their interests.


• Corruption is rife in the Capital, with corporate special interests, especially in Finance, dominating any actions taken there. This makes a mockery of our so-called "Democracy."


• The things that made us great are falling apart. For example, our Middle Class is disappearing at an alarming rate. Wealth & income disparity in the United States is greater than at any time since the late 1920s before the 1929 crash and the subsequent Great Depression. These developments are related to the outsourcing of our manufacturing base, which began in earnest in the early 1990s during the Age of Globalization.


• The United States is effectively broke, or soon will be. The private sector no longer functions. Our failed domestic sectors are bankrupting us (e.g. Banking or Housing—see Citigroup, or Fannie & Freddie). The public sector grows overly large. We can no longer afford our Imperial Adventures, and must borrow money from rising powers like China to carry them out (e.g. Iraq, Afghanistan).


• The United States is heavily dependent on resources (chiefly oil) that it does not produce domestically. Thus America must defend far-flung supply chains to secure these resources, but its ability to do so, or coerce others to sell us what we need, becomes weaker & weaker over time.


• Corruption itself, aside from plain vanilla bribery, is a symptom of a lack of Vitality and a tendency toward Paralysis & Complexity which always arises when an Empire goes downhill. It happened in Britain, it happened in Rome, and it is happening here. I have written that our get up and go has got up and went. In other words, we are stuck on The Wheel of Suffering.
  
• And last but not least, the American football (soccer) team lost to Ghana, 2-1

By my reckoning, the Empire's Decline began in the early 1980s. I date it then because a wide array of disturbing economic data points to that period. For example, it is no accident that the so-called "credit bubble" got started during that time, and later grew to disastrous proportions during the Lost Decade 2000-2009.

Increasingly, people did not earn a living wage and spend their money based on savings & income. They spent money they didn't have because of easy credit. They speculated in stocks & houses, among other things. As Bill Bonner once pointed out, Easy Credit Is Stimulus. You can see why I find it a complete joke that we must now stimulate an economy that has been over-stimulated for nearly 30 years.

All of the above is incomplete, but I write about these issues every day here at DOTE. Let's turn to the third question: Why is this view of our situation illuminating? I will turn to what might look at first glance like a trivial example. Consider the text below from economist Mark Thoma. I ran across this item today—

Financial reform legislation fails to remove an important advantage that large banks have over small banks:

Financial Reform Legislation Does Not Eliminate Too Big To Fail

If financial reform legislation passes in its present form, it will have positive features. It creates a relatively strong and independent consumer financial products protection agency, it forces most derivatives to be exchange traded or passed through clearinghouses -- though important exceptions remain — and it provides regulators with resolution authority for large institutions in the shadow banking system. But overall, as with health care reform, the legislation is unsatisfactory in many ways — it leaves much of the job yet to be done — and it's not clear that Congress will have the will to follow through.

In both health care and financial regulatory reform, much of the job is yet to be done. About the lack of effective action, the real question becomes are these two failures merely a coincidence? Or are they related to each other through a systematic inability to respond to our problems? Clearly, the answer to the first question is NO, and answer to the second question is YES—these failures are related, not coincidental. That's what experience has told us for many, many years now.

And will Congress have the will to follow through? No way! Does anybody, including Mark Thoma, really expect they will?

These failures are merely symptoms of a faltering Empire. America is no longer able to respond to and fix its problems. Problems get worse, social inertia becomes more entrenched. We do not build high-speed rail systems. Instead, we think about (study) building high-speed rail systems. The oil spill in the Gulf of Mexico reminds us of our perilous oil dependency, but we can not, and will not, create a coherent, effective energy policy. And so on.

I don't expect DOTE to become wildly popular because many Americans, especially the powerful, influential ones, are vested in the Failed System I have described here. Thus they argue back & forth about this policy or that policy, or they argue that we need to do this or we need to do that. Some policies are better than others, and some actions are more effective than others, but it hardly matters if nothing significant is going to happen in any case. Inside the Beltway, they argue about things like the war in Afghanistan, another failed policy which is completely irrelevant to the ordinary concerns of most Americans.

People who are vested in a Failed System do not acknowledge the failed nature of that system because if they do, the game is over. This is especially true if playing this absurd game benefits them somehow (e.g. they have a good job, some influence, some money, a book publisher (hint, hint), a nice home, etc.). I'm pretty much outside of things, and poor, so it's easy for me to tell you the Awful Truth. My fall from grace happened years ago.

In the coming weeks & months, I will continue to document the Empire's Decline. I believe it's better than not to set your expectations about the future correctly, I believe it's better than not to be prepared for what's coming rather than let it take you by surprise. I'm not happy about any of this, but these are the Times We Live In.

The Stimulus Of Last Resort

I'm quite sure most Americans are unaware of the Big Trouble that appears to be brewing on the economic horizon. They're too busy getting taken to the cleaners by Steve Jobs waiting in line to buy Apple gadgets. I partly addressed the situation over the weekend in Crank Up The Money Printer! But I suspect many DOTE readers didn't see it—traffic falls on the weekends—so I will return to that subject today. Please read Saturday's post if you haven't already done so. (It's short.)

The economic situation is getting very serious, folks. Is 2010 akin to 1931? That's the question on the table.

As is often the case, we must turn to the British financial press to get a sense of a coming emergency. In the Telegraph, Ambrose Evans-Pritchard reports that RBS has told clients to prepare for 'monster' money-printing by the Federal Reserve—

As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

Entitled Deflation: Making Sure It Doesn’t Happen Here, it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."

Echos of 1931. Think about that. If 2010 is really analogous to 1931, all bets are off. Although Evans-Pritchard's tone is mostly neutral in this article, neo-Keynesian Martin Wolf of the Financial Times has no qualms about making his position clear. I quote from Why it is right for central banks to keep printing—

In current circumstances, the belief that a concerted fiscal tightening across the developed world would prove expansionary is, to put it mildly, optimistic. At this stage, I will inevitably be asked: what is the alternative? If these huge deficits continue, markets will take fright, interest rates will jump and the debt dynamics will become truly awful.

I have two responses to this.

The first, one I made a week ago, is that the de-leveraging cycle is generating huge private sector financial surpluses across the developed world. Unless we expect a shift into aggregate external surpluses (and corresponding deficits in the emerging world), these surpluses must now to be invested in government liabilities. This helps explain why yields on the bonds of safer governments remain so low.

The second response is that if governments need to run deficits, to support demand at a time of private sector weakness, they can always borrow from central banks. Yes, this is “printing money”. It is also an insanely radical policy recommended by no less insane a radical than Milton Friedman, back in 1948. His view was that the government could expand the money supply during recessions and contract it in the subsequent booms. A country with a fiat currency and a floating currency could, thus, stabilize the economy without destabilizing credit markets. The neat thing about this proposal is that one does not have to decide whether fiscal policy or monetary policy is doing the heavy lifting: they are two sides of one coin.

Let's look at the cold, hard facts. First, there will be no more fiscal stimulus of the U.S. economy now and for the foreseeable future (out to at least 2013). This is an election year, and most voters have been successfully indoctrinated with the idea that Government Spending Is Bad. In fact, our huge deficits are bad, but not for the reasons many voters believe. Republicans will likely take back the House of Representatives. Our dysfunctional two-party politics is about to get worse, assuming that's possible. An unbreakable deadlock in the Congress is a dead certainty from now until after the presidential election in November, 2012.

Our Central Bank acts independently of the Congress, which means Ben Bernanke can apply additional Quantitative Easing (QE) without consulting that August Institution. The Federal Reserve chief requires only the approval of the bank's board of governors. Martin Wolf believes it doesn't matter whether fiscal policy or monetary stimulus is applied, for they are but two sides of the same coin.

More money printing by our Central Bank is literally the stimulus of last resort. If that measure fails to achieve an economic lift-off—why would we expect it to succeed?—we will have officially run out of options, we'll have shot our wad. As Don Meredith used to sing on Monday Night Football after the game had been decided, turn out the lights, the party's over.

OK, think about 1931 again. That was the beginning of the worst decade by far the United States ever had. In 2010, commentators (including me) talk about a "double dip" in the economy, which means (technically) a contracting GDP number measured in trillions of dollars. Although I've been talking about that eventuality since I started this blog in January, when few people took the possibility seriously, it is now commonplace to read about the coming "slowdown" in the 2nd half of this year. Calculated Risk has been keeping track of all the reasons he expects growth to taper off—

But [State spending cutbacks] are just one drag on the economy. I've been forecasting a 2nd half slowdown in GDP growth based on:

1) less Federal stimulus spending in the 2nd half of 2010. The decline in stimulus will probably be a drag of about 0.5% on GDP growth by Q4.

2) the end of the inventory correction. The inventory adjustment contributed 3.79 percentage points in Q4 2009 of the 5.6% annualized growth rate, and 1.88 percentage points of the 2.7% GDP growth (annualized) in Q1 2010. This will probably fall close to zero in the 2nd half (maybe even slightly negative).

3) more household saving leading to slower growth in personal consumption expenditures. The personal saving rate increased to 4.0% in May, and will probably rise further in the 2nd half.

4) another downturn in housing (lower prices, less residential investment). This might subtract 0.25 to 0.5 percentage points from growth in the 2nd half.

5) slowdown and financial issues in Europe and a slowdown in China,

6) and the cutbacks at the state and local level. According the Mark Zandi, this will subtract about 0.25% from GDP growth.

As I've noted before, a quarter point here, and half point there ... and pretty soon you have some real drag.

Some "real drag" indeed! Calculated Risk forgot to include the lack of improvement in unemployment claims. We're having a "jobless" non-recovery. Is what's coming just another recession? Or a Great Depression? Or some new kind of depression?

 
Our Future?

Americans continue to hit the snooze button, but it's time to wake up. Professor Krugman thinks we may be looking at a Long Depression, whatever that means—

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

Everything Krugman says is politically motivated. He wants more stimulus, that's his agenda. I'm quite sure from previous remarks he's made that he would heartily approve of another expansion of the Fed's balance sheet. I myself don't think it will make any difference, I don't have an agenda. I expect another round of QE to fail.

What concerns me most about all this discussion is the very fact that we're having it. Unless all this talk is merely politically motivated hyperbole, we may really be up shit creek without a paddle for a long time to come. Why would British commentators have an American political agenda? I believe they think our situation is perilous.

Is 2010 really 1931?  I fear we're about to find out, and the news will not be good.

Shale Gas — The Hydrofracking Wars

Josh Fox's film Gasland has stirred up a lot of controversy over the environmental damage caused by shale gas drilling. Shale gas reservoir rock lies many thousands of feet below the surface, with the depth depending on the location. In order to get the gas to flow up to the wellhead, operators drill down to the shale rock layer, and then apply a process called hydraulic fracturing to "open up" the rock. This requires injecting a fracturing fluid into the shale at very high pressure. This fluid is mostly water, but also contains hundreds of nasty chemicals.

Where do the gas, the chemicals, and the contaminated water end up? The best outcome says that all three 1) flow up to the wellhead, where they are captured or produced; or 2) stay trapped in the shale rock many thousands of feet below the surface. This description is over-simplified, but basically correct. The gas industry wants you to believe this story. Josh Fox wants you to believe that these gas or fluids get loose, flowing into the water table or the air, and thus polluting both.

Which story should you believe?

You should believe both of these stories. How many times in the last 40 years have we seen this narrative play out? The answer is too many times to count. Does drilling and hydro-fracking sometimes pollute the environment? Sure it does! Does a bear shit in the woods? On the other hand, shale gas production is perfectly safe most of the time. No one really knows how frequently drilling pollutes the environment in a serious way, which is really the immediate issue at hand.

But we need to step back and look at the Big Picture. Do we need the natural gas? Yes, indeed—see my Betting The House On Shale Gas. Do we want to further pollute the environment? No, of course not—see any story on the BP oil spill. This is the bed we have made, and now we have to sleep in it.

Where are the wind farms, and the solar concentrators, and the whatevers which are supposed to alleviate pressures to produce more & more natural gas? They don't exist! We could re-frame that question. Where are the natural gas vehicle fleets & infrastructure that could alleviate pressures to produce more & more oil? They don't exist! I could go on and on here, and the answer would always be the same: They don't exist!

OK, why don't they exist? Once again, we get into two narratives. The oil & gas industry will tell you that renewable energy is not up to the task of replacing fossil fuels. The environmentalists will tell you the political power of the oil & gas industry prevents us from implementing renewable solutions. I could write a book about this too, but take note: we are still trapped in the same old pointless conflict. People want a sustainably clean environment, but they also want their homes heated (or cooled) and their lights to come on when they flip the switch.

In other words, we want to have our cake and eat it too. How do we break out of this vicious circle? One way we could have escaped would been to have a coherent, universally agreed upon energy policy in place over the last 3 decades after the energy dislocations of the 1970s and early 1980s. That policy could have been amended as circumstances changed. But it was way too much for us to expect such a wise policy in Cowboy America. No can do—we'll just make it up as we go along.

So, we don't break out of this vicious circle. This infantile Fossil Fuels versus The Environment debate has gone on for about 40 years now. This noise will continue well into the future until all the Big Questions have finally been resolved. And that resolution will mean that sometime in the 21st century, we will have exhausted most of our exploitable fossil fuel resources, and we will have trashed the planet.

All because we wanted to have our cake and to eat it too.

Here's the Hydrofracking Wars video from Tech Ticker. There's an update to that report here.

Note: pause the video when it's finished to prevent it from playing again

The World's Ending In 2012, So What's The Point?

I don't know why any of us go on & on about this problem or that problem—we're all going to be put out of our misery on December 21, 2012

Due to an illness in the family, I don't have time this morning for my usual acerbic treatment of some disturbing sign of the Empire's Decline.

The number of Americans who believe the world will end next year exceeds the number of DOTE readers by several orders of magnitude—

Jim Tolle, pastor of the 25,000-member Church on the Way in Van Nuys, said the Mayan prophecy is capturing the public imagination because some people feel the world is in the "beginning of sorrows of the last days."

An ABC.com poll last year found 16 percent of Americans expect apocalyptic events to occur on Dec. 21, 2012. Another poll found 59 percent of Americans believe prophecies in the Book of Revelation will come true.

"There is a premonition, there is an awareness, there is an almost subconscious, if not conscious, awareness of the end-times, the finality of things," Tolle said. "Everybody has it. Some deny it exists because they don't want to have to grapple with the situation.

Maybe I'm in the wrong business. Fox News deems the subject newsworthy, and the trailer for the movie 2012 (below) has been viewed 21,551,310 times. The Onion reports that we need more fair & balanced reporting (below the trailer).

Remedy du Jour -- June 26, 2010

What a week it was! We "reformed" the financial system and almost every indicator tells us we're in the midst of another economic downturn. Have You Ever Seen The Rain?

We need Shelter From The Storm.

Let's remember the good old days when Failure Was Not An Option.

And let's Thank God that things are not nearly as bad as they could be.

Crank Up The Money Printer!

It's almost been worth this depression to find out how little our big men know
   —Will Rogers

Ambrose Evans-Pritchard is reporting that Ben Bernanke is dusting off the money printer—

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion to uncharted levels of $5 trillion. But they are certain to face intense skepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

[My note: I showed the ECRI leading indicator in free fall in The States of the Union.]

If you are a regular DOTE reader, and thus among the best informed people on the planet , you already know why Ben wants to crank up the money printer—worrisome deflationary pressures and the imminent threat of another recession. We must further assume, as the St. Louis Fed does, that the "Great" recession actually ended in the summer of 2009. 

Data from the St. Louis Fed, taken from John Mauldin's The Multiplication of Money. Despite the expansion of the Fed's balance sheet, money is not multiplying in the economy as theory predicts it should. Read Mauldin's article for a more thorough explanation of what this graph means. The gray bars indicate recessions. Note that the St. Louis Fed assumes that the "Great" recession ended in mid-2009.

Evans-Pritchard quotes Chris Whalen—

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognize that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

I have great respect for Chris Whalen, but what leads him (or Ben) to believe that yet another expansion of the Fed's balance sheet is going to make any difference? How will a new round of Fed purchases—purchases of what?—stop private sector de-leveraging, which is both necessary & the root cause of our economic problems?

From Dave Rosenberg as quoted here. "Dave titles this slide 'The U.S. Will Spend Years Deleveraging,' and it’s certainly hard to quibble with that. If anyone has a reasonable argument to make that the downtrend in the chart above is going to reverse itself any time soon, I’m all ears."

Will Rogers said it was almost worth a Great Depression to find out nobody knows what they're doing. This time around, nobody is willing to admit what a deep hole we dug for ourselves these past 30 years, and we already know nobody knows what they're doing. Maintaining this fantasy of a miraculous cure, which I critiqued in Keynesian Delusions, just puts us in a deeper hole. Or, as Mish likes to say, what can't happen won't happen.

Sometimes it is best to face the thing you fear the most.

Financial Reform — We Get F**ked Again

It's always a good day when we can put a thorny issue to rest. As the nation slept, Senate & House leaders "negotiated" all night long to patch together the final Financial "Reform" bill. The official verdict has now been handed down: we got fucked again.

That's not a surprise, of course, it's just what we expected. Over the last 3 decades, Big Finance took over large parts of the economy by bribing key players to set up the rules so that They Win and You Lose. This led to a blow-up of the financial system after the Housing Bubble collapsed in 2006. There's nothing new in financial systems blowing up—historically, crooked schemes set up to bamboozle investors have blown up time & time again.

Having relaxed the rules to allow unlimited financial speculation & scheming, the Congress was presented with the exceedingly difficult task of "fixing" the monster they had created. This task is exceedingly difficult because it involves appearing to fix the system while doing nothing of the sort. But we should never underestimate the cleverness of men like Barney Frank and Chris Dodd when confronted with daunting challenges.

The Huffington Post's Shahien Nasiripour was apparently up all night recording the farce. You can find his excellent summary of the proceedings at Financial Reform Bill Passes: Banks Keep Derivatives Units, Volcker Rules Softened; House-Senate Conference Passes Financial Reform Bill After Marathon Session. (I think Shahien was a little tired when he wrote that headline.) Here are some choice tidbits to convey the flavor of what went on—

The so-called Volcker Rules originally banned banks from using their own taxpayer-backed cash to speculate in the financial markets. The federal government stands behind bank deposits, and banks have access to cheap funds from the Federal Reserve. Volcker argued that banks shouldn't use that subsidy to speculate...

As for the measure's proposed ban on banks trading with their own money, also known as proprietary trading, the agreed-upon provision calls for federal financial regulators to study the measure, then issue rules implementing it based on the results of that study. It could be anything from an outright ban to a barely-there limit.

The bill calls for a two-year study of the provision banning proprietary trading by the banks. Most news sources are reporting that the bill does indeed ban proprietary trading by the banks. Maybe it will and maybe it won't. Who knows what the "ban" will look like two years from now after the regulators have studied it? Let's hope they're not too busy watching porn on the internet...

This next bit, about Blanche Lincoln's (D, Ark) proposed reform, does not require comment, it speaks for itself—

Lincoln's provision, under fierce assault by the Treasury Department, the Obama administration, and a group of Wall Street-friendly Democrats called the New Democrat Coalition, also was softened.

Lincoln's proposal would have compelled the nation's megabanks to move their swaps-dealing units, which deal and trade in a type of financial derivative product, into a separately-capitalized institution within the larger bank holding company...

Though Lincoln's measure had the support of three regional Federal Reserve Bank presidents -- James Bullard of St. Louis, Richard Fisher of Dallas, and Thomas Hoenig of Kansas City -- representing the Fed and bankers in the broad middle of the country from Kentucky to Colorado, they ultimately were outmatched. The Fed's Board of Governors, led by the nation's central banker, Ben Bernanke; Federal Deposit Insurance Corporation Chairman Sheila Bair; Treasury Secretary Timothy Geithner; and the nation's largest banks were united in their opposition.

Two minutes before midnight, Collin Peterson, a Minnesota Democrat, announced that a deal over Lincoln's divisive measure had been reached.

"There's been some work done by the administration and some of the senators on a potential compromise, I guess you could call it," said Peterson, chairman of the House Agriculture Committee, in a reference to the Obama administration.

Rather than banks being forced to spin off their swaps desks, they'd be allowed to keep those units dealing with "the biggest part of all these derivatives," Peterson said. The rest would be pushed out to an affiliate.

The negotiations were not public.

I'm sure they weren't! Former SEC chairman Arthur Levitt had this to say about the reform package—

No matter the results of these final points, the bill is a huge failure and a major missed opportunity, according to former SEC chairman Arthur Levitt. “The bill, already weakened by deal-making as it emerged from the Senate, has been bled dry of nearly every meaningful protection of investors,” he writes in a WSJ op-ed.

I can't top that. In the video below, Tech Ticker's Henry Blodget and Aaron Task don't just come right out and say the Empire is in Decline. But you know that's what they're thinking.

Peak Oil — A Crisis Postponed

As the global economy goes, so goes oil demand. If the outlook for the global economy is not so good, oil consumption will stagnate or increase very slowly. If oil demand grows slowly or not at all, consumption will remain below the world's productive capacity, as measured in millions of barrels-per-day. If oil demand remains below the available supply, there will be no oil price shock.

A new oil price shock tells us that "peak oil"—an inability to grow supply to meet growing demand— has returned with a vengeance. The last time supply could not meet demand was in the years 2005-2007. The growing gap led directly to the oil price shock of 2007-2008. After July of 2008, the world economy unraveled, leading to the relatively low demand environment we have today.

Although this simpleminded explanation smooths out all the messy details, it is basically correct. So where do we stand?

The International Energy Agency has just released its 2010 Medium-Term Outlook reflecting its projections for the period 2010-2015. Here is the relevant text from the summary—

Although economic recovery has become re‐entrenched, in sharp contrast to last year’s back‐drop, concerns persist about its strength and durability. As a result, two oil demand scenarios are again presented. Using May 2010 OMR data as our starting point, we have developed two contrasting views on economic growth, with the lower variant also tempered by weaker assumed efficiency gains. Common features however are the predominance of both the non‐OECD countries and the transportation sector in driving demand growth.

In the higher GDP and efficiency gains case (the base case for our analysis), oil demand grows by an average of 1.2 mb/d annually (1.4%), reaching close to 92 mb/d by 2015. Oil demand recovers to pre‐crisis 2007 levels again by 2010. This presupposes GDP growth around 4.5% per year from 2010 onwards (in line with recent IMF projections) and a reduction in oil use intensity of 3% annually, near the level seen in the last five years.

But many voices still envisage a weaker path for global economic growth, amid world trade imbalances and the weakening impact on activity of aggressive fiscal consolidation. This suggests a lower GDP and efficiency gains case. Here, global GDP grows by a weaker 3% annually, while the progress in oil use efficiency is slowed by the weaker investment environment, pushing anticipated reductions in oil use intensity back to the 15‐year average, near 2% per year. In this case, annual oil demand growth averages 840 kb/d (1.0%), taking total global demand to 90 mb/d by 2015, with the re-attainment of 2007 demand levels deferred to 2011.

I am among those who "envisage a weaker path for global economic growth." In so far as the IMF always expects strong growth—after all, they are run-of-the-mill economists—we can safely ignore their projections. This is one set of bureaucrats (at the IEA) predicting a rosy future based on the optimistic views of another set of bureaucrats (the IMF).

I will not lay out the case for my pessimism here, but recent events in the United States (e.g. in the housing market) are among the many indicators of a global economic slowdown. Here's a chart of global growth from Thomas Berner, the Chief US Economist at UBS—

Source

World GDP is above "potential" (3.5%) but is tailing off. Considering recent events in the United States, China and the Eurozone, it appears that the IEA's 3% low annual growth scenario—or perhaps something much worse—is the best we can expect for the years 2010-2012.

The low growth scenario has oil demand growing at 1% per year (840,000 barrels-per-day) and assumes that oil intensity reductions are smaller than in recent years. That takes us to 90 million barrels-per-day (all liquids) in 2015. "All liquids" means any liquid fuel type, not just crude oil (e.g. biofuels, gas liquids). The IEA's term "oil" is a short hand for all liquids. (There will be a quiz later.)

In my view, the world will never produce 90 million barrels of liquid fuels on a daily basis. But I wouldn't mind being wrong—maybe we'll get to 91 or 92. These are mere details in the Grand Scheme of Things. The longer term outlook remains bleak. Sticking to my current view of never 90, that puts the next oil price shock nearer to the end of the 2010-2015 period than its beginning.

Thus I tentatively conclude that "peak oil" is a crisis postponed. Actually, I am fairly confident about this prediction, but it is always wise to hedge your bets. Nevertheless, I am going to wait a few months before I update my own "official" estimate of the situation as laid out in The Next Oil Price Shock. When I do update it, I will very likely push out the date of the next price shock one year to 2013 ± 1 year. If the global economy goes all to hell next year, I will push the date out further to 2014 ± 1 year.

Many of those concerned about the oil supply write or speak as though The End Is Near, or The End Is Here—I will not name names, although Matt Simmons comes to mind. Needless to say, I have seen many predictions of the Oil Apocalypse come & go.

The End Is Near, but not quite as close as some people think. On human timescales, which tend to be quite short, the deteriorating state of the global economy has bought us some time. I seriously doubt that governments will make wise use of that time. Preparing for the ongoing oil crisis would be a huge departure from their normal behavior, which here in the United States, consists mostly of making matters worse and then telling The People not to believe what they can plainly see right in front of them.

Our Future Debt Train Wreck

As I watched Tech Ticker's Henry Blodget interview his Business Insider colleague Joe Weisenthal about America's hysteria over government spending, I knew the time had come to talk about the deficits and the debt. From the article—

The country has been seized by a new "austerity" ethic, as Americans suddenly begin to panic about our out-of-control spending, debts, and deficits.

Concern about this issue has helped the "Tea Party" seize part of the national consciousness, and Republicans will likely campaign hard on it this summer and fall.

But should we really be worried that our debt and deficits will immediately take us to hell in a handbasket?

No, says Joe Weisenthal, Deputy Editor (and my colleague) at Business Insider.

First, let's discard this "Tea Party" red herring. Politics in Imperial America is about WINNING, not about wise governance. To say our 2-party system is dysfunctional considerably understates the case. For Republican demagogues, whipping these clueless Tea Partiers into a frenzy is a strategy for taking back control of the Congress. That's all it is. If you're going to worry about something, worry about why our Democracy is broken, and what that means.

Before I turn to Weisenthal's arguments, let's look at where our future debt will come from. This graph is from Kathy Ruffing's Whose Deficit Is It, Anyway?

Causes of our future debt. For more detail, see here.

Ruffing works for the Center on Budget and Policy Priorities, a Washington think-tank. Despite that suspicious circumstance, I'm going to trust that her analysis is more or less correct with a few major exceptions. The estimated worst-case cost (loss) of the government bail-out of the housing market and the banks, implemented by the takeover of Fannie Mae & Freddie Mac, is now put at $1,000,000,000,000 (trillion). Ruffing's graph does not reflect this cost.

It is also curious that Ruffing's graph does not reflect sharply rising health care (Medicare) costs throughout the next decade, most of which come from the need to support retiring Baby Boomers. See my March post A Rounding Error In The Right Direction. Nor does the graph include rising interest payments on our debt.

A quick glance at graph reveals the following—

1. Paying for our Imperial Wars makes up a substantial part of our future borrowing needs


2. The single biggest factor creating future deficits is the Bush tax cuts for the rich. I heard a story that goes like this: when W proposed these cuts, he questioned why the rich needed a tax break. Supposedly, W said to his handlers "Don't those people have enough money already?" Even if this story isn't true, I'd like to think that it is.


3. The next largest factor is the economic downturn itself, which has the effect of lowering government revenues for years to come. That blue area in the graph is likely grossly underestimated. With the stimulus running out, the economy is going down the tubes again. The most likely outcome is a "Lost Decade" in the United States (like Japan during the 1990s).

Taking everything together—the wars, tax breaks for the rich, anemic future economic growth, Fannie & Freddie, soaring health care costs, the rising interest on the debt—I would say we've got a pretty serious situation on our hands.

Back to Joe Weisenthal. He cites the usual reasons why the debt, at least in the short-term, is not a problem.

• The U.S. is not like Greece. That's right, Joe, we aren't. The dollar is the world's reserve currency and we own the money printer. It's California that resembles Greece.


• The markets are "unconcerned" about our debt. Joe means that our short-term borrowing costs are low and likely to remain so for "an extended period" (like the Fed Funds rate). And Joe's right, because the U.S. is the Smartest Kid In The Stupid Class. In other words, we are the best of a bad bunch of countries & currencies. Being an Empire has its privileges—while the good times last.


• The same people have been "screaming" about deficits for decades. That's true, Joe, but the budget was balanced when Clinton left office. In an orgy of cyclical ("good times") spending, W ran up the debt as though tomorrow would never come.


• Japan has done fine with massive (200% of GDP) debt. Well, Joe, Japan's citizens own most of its debt. Japan, which is experiencing outright deflation right now, should not be held up as a role model for the United States.

As Niall Ferguson is fond of pointing out, thriving Empires do not owe money all over the place. We owe money to the Brits, the Chinese, the Japanese, the Saudis, etc. As any loan shark will tell you, the more you owe all over town, the higher the vig. By the end of this decade, unless radical action is taken, the interest on our debt will likely be in excess of 6% of GDP (whatever that is). Our debt has nowhere to go but up at this point. This situation is unsustainable. 

Weisenthal is correct that in the short-term, America's debt is not a problem. As I said above, the "hysteria" is merely political fodder for ignorant voters. But it was short-term thinking that got us here, and it is shortsightedness that will destroy us in the end.

Maybe America's debt crisis, whatever form it takes, will occur in 5 years, or in 7 years. Who knows the timing? But we do know there's a Debt Train Wreck in our future.

The States of the Union

I like to align our expectations with reality here at DOTE. Thus I am constantly fighting an uphill battle to counter official optimism about our immediate economic prospects, which I regard as dismal. Unbeknownst to many courtiers & socialites in our Nation's Capital, there are 50 States in the Union, and each of them has its own government. And when we think of dismal prospects, we need look no further than the fiscal future of these governments.

The States have been beaten-up pretty badly during the long recession, but some observers now believe, or hope, they've hit bottom, that the worst is over—

States expect to hit bottom this year after two years of steep declines in revenue that created historic budget gaps. But no one is cracking open any champagne bottles yet.

“2011 is going to be the worst year … but the good news it’s the bottom,” said Raymond C. Scheppach, executive director of the National Governors Association as he released June 3 the latest state fiscal survey with the National Association of State Budget Officers.

“My hope is within two quarters, we begin to start to see some very, very small revenue growth,” Scheppach said.

The new fiscal year that begins July 1 for most states could be the most dire yet since federal stimulus dollars are dwindling as demands on state services continue to rise.

States have already closed $170 billion in budget gaps since fiscal 2009 but are looking at another $127 billion in gaps between now and fiscal 2012.

State spending (shaded area) is about 13% of U.S. GDP (in billions of dollars). Source

The States were nervous that Congress might not allocate the dollars they need to pay out Medicaid and unemployment benefits to the jobless. Their fears have been realized. They are now looking at deficits well in excess of the $127 billion mentioned above. The New Austerity, which places a greater value on the war in Afghanistan than the fiscal health of the States, will require that places like Pennsylvania go back to drawing board to balance their budgets—

Complicating the situation is the failure of Congress to approve an extension of the federal budget aid that has helped cash-strapped states through the recession.

Pennsylvania Governor Ed Rendell had planned to get an extra $850 million, and Sen. Bob Casey said Monday that Democrats were still trying to come up with enough votes to pass the bill.

But if budget makers are forced to cut that amount, Rendell is warning that there will be thousands of layoffs at all levels of government beginning in July.

The States are counting on the much vaunted economic "recovery" to slowly but surely raise their tax revenues. But the economy is rolling over again—

The U.S. economy continues to lose steam.  The growth of the Economic Cycle Research Institute’s weekly leading index fell 5.7% last week.  That follows a drop of 3.7% the prior week, the first time it went negative since early 2009.  “Let’s not sugarcoat it, it’s a sharp drop,” says ECRI managing director, Lakshman Achuthan.
 
The drop in the index is a reason for concern but it doesn’t mean we’re in a recession or assured of a double-dip in the near future. “I am definitely on alert, we’re not brushing this off, but it’s premature,” Achuthan tells Aaron and Henry in this clip. "We're definitely rolling over" but it will take a “couple of months” before ECRI can make a definitive call.

Cliff diving in ECRI's WLI doesn't necessarily mean we're up shit creek without a paddle according to Lakshman Achuthan or insightful Big Picture blogger Barry Ritholtz.

Raymond Scheppach hoped it was the bottom for State budget woes, but it looks like things will only get worse from here. And if the economy is taking another nosedive—as measured by Sacred GDP numbers—then we've got a positive feedback loop going in which the economy gets worse, which prompts State budget cuts, which makes the economy worse, which prompts more State budget cuts... and so on.

Of course, not all states are equal in this regard. California sets the "Gold Standard" by which all other states are measured.

Red indicates big trouble. From The Pew Center's report Beyond California

I don't have the time or space today to delve into the troubles of the "Red States" in the Pew Center's study. Looking at the States (in the aggregate) provides an object lesson in how things go downhill in an Empire in Decline. Perhaps the poet T.S. Eliot said it best in The Hollow Men—

We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats' feet over broken glass
In our dry cellar...

Between the idea
And the reality
Between the motion
And the act
Falls the Shadow...

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper