Decline of the Empire

Wyoming Still Unprepared After Narrow Defeat

Hot off the presses

CODY, Wyoming (Reuters) - In a sign of rising consumer confidence prevailing over go-it-alone pessimism in the Cowboy State, Wyoming lawmakers on Tuesday narrowly defeated a "doomsday bill" to help the state prepare for a total collapse of the U.S. government and economy.

The bill, rejected on a 30-27 vote by the state House of Representatives, would have allocated $16,000 for a panel of legislators and emergency managers to study various measures, including a new state-issued currency, for handling a range of apocalyptic scenarios.

The bill's chief sponsor, Republican Representative David Miller, originally had sought $32,000 to fund the task force, but the Joint Appropriations Committee later cut that amount in half. Republicans control both houses of the state Legislature.

House members on Monday had given the bill their initial backing after striking a "poison pill" amendment that mockingly asked whether Wyoming should purchase its own aircraft carrier and fighter jets.

"I guess a lot of people think if you're trying to prepare for a disaster, it makes you seem crazy," co-sponsor Kendell Kroeker said. "I was interested in it mainly because I don't think there's any harm in being well-prepared."

Supporters of the legislation had cited recent global economic turmoil and political unrest as reasons to plan for a range of hypothetical worst-case scenarios.

The bill would have funded contingency planning to guide Wyoming through "a situation in which the federal government has no effective power or authority over the people of the United States," as well as disruptions in food and energy supplies.

One option the bill contemplated in the event of a rapid collapse of the U.S. dollar was "the ability to quickly provide an alternative currency"...

Bonus Video — Wyoming's National Parks Yellowstone and Grand Tetons

 

Bonus Video #2 — Heartless Bastards, Parted Ways

 

That Elusive Bottom For Housing

Delusional optimism expresses itself in many ways just as we would expect. It has been very popular for some time now to confidently assert that the "bottom" has been reached in the Housing Market, signaling that the economy is set make a miraculous comeback. The runaway express train our future economy will soon become will led by a big rebound in housing starts, purchases and prices. Before you know it, American "consumers" will once again be marrying & procreating, signing the bottom line on huge mortgage loans, living in 5000 square foot McMansions, installing granite counter tops, buying big screen plasma TVs, spending countless hours watching The Simpsons and Futurama... It's all good!

Or will be, when we finally reach the housing bottom. While optimistic calls proclaiming the bottom are never-ending, the bottom itself has been elusive. Lance Roberts of CNBC's Street Talk Live has created a helpful Total Housing Activity index which puts the housing problem in perspective.

There have been numerous media stories out over the last couple of weeks about the recovery, at long last, in housing. Of course, this is the same housing bottom call that we heard in 2009, 2010 and 2011.

So why not drag it out again for 2012? Eventually, the call will be right, and they will be anointed with oils and proclaimed to be the gurus who called the bottom. In the financial world you only have to be right once.

However, back on earth, where things really matter, housing is a major contributing component to long-term economic recovery. Each dollar sunk into new housing construction has a large multiplier effect on the overall economy. No economic recovery in history has started without housing leading the way. So, yes, housing is really just that important, and we should all want it to recover and soon. The calls for a bottom in housing now, however, may be a bit premature, as I will explain.

Lance says "The Total Housing Activity Index shown here is a composite of the sales of new and existing homes, new construction permits for single family homes and new single family home starts. As you can see, we are still near the same lows that we were in 2009 at the end of the recession. Furthermore, and what is really worse, is that the "recovery" was built on the back of a whole slew of tax payer funded bailouts, tax credits and incentives from HAMP to HARP to the Home Buyer Tax Credit. Not quite the recovery the government was hoping for."

Further proof that we can not find the housing bottom comes from the most recent Case-Shiller Home Price index. Tim Iacono gives us the story.

Standard & Poor’s reported that home prices continued to decline in late-2011, the national composite index down 3.8 percent in the fourth quarter, 4.0 percent lower for the year, while both the 10-City and 20-City monthly indexes declined 1.1 percent in December and saw annual returns of -3.9 percent and -4.0 percent, respectively...

David M. Blitzer, Chairman of the Index Committee at S&P Indices noted the following:

While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended. After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized.

Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011. The National Composite fell by 3.8% in the fourth quarter alone, and is down 33.8% from its 2nd quarter 2006 peak. It also recorded a new record low.

Despite our hopes that watching the Housing Market has been a valuable learning experience for those for whom the glass is always half-full, it looks like these people have learned nothing. Nor will they.

Even if we do find the bottom in housing some time in the next few years, it won't mean a robust economic recovery is right around the corner. The structural problems plaguing our economy aren't going to just magically disappear. Great hopes for the housing market are a form of nostalgia for the "happier" times before the bubble burst and Wall Street melted down.

Wishful thinking may make people feel better in the here and now, it may help them get out of bed, but it won't change the fact that all that miraculous growth was a flimsy House of Cards to begin with. It won't change the fact that those days are never coming back. Nor should they.

Humans Are Not Rational Problem Solvers

Anyone who has read this blog for some length of time knows that humans are not working hard to fix the large problems confronting them in the 21st century. Why is that? The answers are complex in the details, but can be boiled down to a few simple precepts in the abstract.

One answer states that for humans, the economy is everything. We don't do anything about the imperiled crude oil supply and anthropogenic climate change because we need energy to support growth, both of populations and the economies which support them. In the former case, human generally deny that peak oil is a concern, despite mounting evidence which suggests we're at the top of the production curve, because it is literally unthinkable that we might not have enough of the stuff (along with coal and natural gas) which allowed human populations to grow and grow in the 19th and 20th centuries. With respect to global warming, fixing that problem would also mean the end (and no doubt a reversal) of growth in populations and economies. See my posts The Inherent Contradictions Of Pro-Growth Environmentalism and Carbon, Energy And Craziness. Growth is an ineluctable imperative for the human species.

Another answer states the inarguable view that humans are flawed and corruptible. At all times since the rise of complex human societies, and in all places, it is guaranteed that some portion of the human population will be attracted to, seek out and attain great wealth, power and influence which is all out of proportion to the rest of society. In short, all complex societies which may be called civilizations have been run by elites sitting atop the wealth and power pyramid. There are no significant exceptions to this rule. The hierarchical nature of complex human societies is not an accident. Such outcomes appear to be inevitable, and the resurgence and strengthening of such elites in the declining Amercian Empire is simply one example among the countless others which five thousand years of history records. Ronald Wright's A Short History Of Progress, which I read recently, discusses this unsolvable dilemma at some length.

Despite these intractable problems, which appear to be deeply rooted in Human Nature, I see the same fallacy repeated over and over again in modern times. We might call this fallacy the Imputation of Rationality, meaning that the speaker assumes that humans are rational problem solvers, despite ample empirical evidence to the contrary.

I will provide one telling example today, but I intend to return to this subject in the future, for there is no dearth of good examples to pick from. Woody Brock, founder of Strategic Economic Decisions and author of American Gridlock: Why the Left and Right Are Both Wrong, is upset about the political paralysis in Washington. I will quote from his interview with Aaron Task (video below).

The people in Washington know the K-Street system is not working... The rascals [our Washington elites] are going to be thrown out [in 2016], or pitch-forked out, as I prefer [to say]. So, once you show them there are win-win policies that don't screw the left or screw the right, which they do not understand right now, and that's why I wrote [my book] ... you show them that there's a way that their constituents will be very happy that a problem gets solved, and they're not eating [that problem], do you see what I'm saying? It's win-win.

You might ask what planet is Woody living on? and that's the right question, because it's certainly not Earth. His thesis is that if we only show our political elites that there is win-win opportunity ripe for the plucking, they will end all this petty bickering and our elected government will once again start solving problems instead of creating them. This is the Imputation of Rationality in a nutshell.

What is missing from Woody's tidy little explanation? Many, many things, too numerous to list here, but I'll list some. Where is the simple understanding of human motivation? Of the unalterable nature of opposed human groups? Of the shared but irrational belief systems which bind those groups together? What about the overwhelming human impulse (among strivers and sycophants) to wield influence and attain great wealth and power? What about simple corruption, aka. money in politics, which paves the road to that influence, wealth and power? What about the crucial role of media propaganda designed to shape the views of pliant (and ignorant) voters?

I could go on and on. This is all Human Nature 101, a course no university offers.

If all that were necessary was to simply demonstrate to our Washingon elites that there are rational, win-win solutions to our problems, assuming these exist at this late stage in our history, those problems would have been fixed long ago. That's the Imputation of Rationality in a context which is anything but reasonable. Humans are not rational problem solvers, which goes a long way toward explaining why humanity in general and America in particular are in such deep trouble today.

 

Understanding The Current Oil Market

Every other week I post the Saturday Oil Report. I've provided links to recent reports at the end of this post. It appears that few people pay attention to these reports, but I don't really care. I cover the oil markets generally, including Chinese, U.S. and European demand, the financialization of oil prices, Saudi spare capacity, where we stand vis-a-vis peak oil, factors which are contributing to short-term price rises or declines, and problems with our flawed benchmark crudes (Brent, WTI). Those who run across these reports are free to disagree with my analyses. These readers are also free to be wrong

The Business Insider's Joe Weisenthal, who is not famous for his expertise about the oil markets, is surely among the countless millions of people with an interest in these markets who do not read my Saturday Oil Report. However, with the seasonal gasoline price rising earlier than usual during an election year, and with the economy just as shaky as ever, Weisenthal, like so many others, has become an instant expert on the oil markets.

In Here's The REAL Reason Gasoline Prices Have Been Surging In The US, Joe tries to convince us that good old Supply & Demand are pushing up oil prices, which pushes up gasoline prices. The picture is mixed, but Weisenthal's arguments are generally weak. So we must look elsewhere if we want to know why Brent has surged to over $125 per barrel.

Let's go through Joe's arguments using his graphs. I want to start out on a positive note. I agree with this—

But whenever the discussion turns to gas and oil, logic tends to die, and people start coming up with all kinds of bizarre explanations for what's going on — explanations such as the Bernanke's money printing, Obama's domestic energy policy, Obama's foreign policy, speculators, price gougers, and so on.

So we thought it would be a good time to just clear up some misconceptions, and explain what's really driving the price.

I also think it's a good time to clear up some misconceptions, including Joe's. He starts off by quoting BarCap's Miswin Mahesh and Amrita Sen along with a year-over-year demand graph and a graph of shut-in oil.

... Despite what looked like a rather well-supplied prompt market, the weakness in time spreads has abated. While the spate of cold weather in Europe has helped to normalise balances, in our view, it has really been the uptick in Asian oil demand that has helped to absorb the extra OPEC volumes.

Indeed, we believe that Asian and FSU [former Soviet Union] oil demand are growing at a faster pace than markets are currently pricing in.

That's what Mahesh and Sen believe. There's not much evidence to support it.

While US and European demand remains very weak, and as a result, the overall state of global oil demand may be nothing to write home about, equally, it is not declining, contrary to market expectations.

That's right, the state of global oil demand is nothing to write home about.

Further, while OPEC may be producing close to 31 mb/d, the high level of supply losses on the non-OPEC front have intensified. Output from Sudan, Syria and Yemen at a combined total of almost 1.2 mb/d has been compromised, while non-geopolitically based outages in the form of technical issues are also on the rise. As a result, while the extra OPEC volumes would have otherwise been a surplus at the margin, it has now become a necessity to simply maintain the status quo.

The Sudan (in the south) has stopped producing 350,000 barrels per day. The Sudan is a China supplier. See here and here.

If we believe the numbers for Yemen and Syria—before sanctions, Syria was exporting 140,000 barrels-per-day—the total amount of shut-in oil in those countries plus the Sudan amounts to about 850 thousand barrels-per-day, not 1.2 million as Mahesh and Sen claim. But Yemen is producing at just about half of its 250,000 barrel-per-day capacity, so the total for shut-in oil is more like 600,000 barrels-per-day, most of which comes from south Sudan.

More importantly, the first graph above does not show a rebound in global oil demand. In fact, demand growth was generally weak throughout most of 2011. The January uptick, which amounts to about 300,000 barrels-per-day year-over-year, is basically nothing. If we were looking at U.S. demand, that would be noise in the data. Mahesh and Sen are correct in noting that oil demand in Europe and the United States is very weak. China's demand growth (year-over-year) has slowed considerably.

If we look at Weisenthal's inventories graph, the case for tight global supply appears to get stronger, but it only appears that way.

It's not as though OECD oil demand, which mainly comes from Japan, the U.S. and Europe, has been surging lately, which might account for the drawdown in inventories if we lived in a world unlike the one we now inhabit. In fact, all these OECD economies are very weak, with Europe showing marked deterioration. The inventory level is less than 75 million barrels below the 5-year average, which is roughly equal to one day's global supply.

I could go on and on here, but I think you get the idea. The picture is mixed as I said above—that Sudan oil is shut-in—but Weisenthal's argument that Supply & Demand are driving the recent rise in the Brent price doesn't hold water. Joe finally gets to the heart of the matter in this lone sentence, which is meant to be dismissive.

Add in some kind of "fear" premium due to a possible war with Iran, and it's just not that hard to see why the price of a barrel of oil has surged like this.

Actually, so-called Iran fears and speculation in the trading pits based on these alleged fears appear to be the main reasons why Brent costs 15 dollars more than it did a month ago. Otherwise, I suspect the price would be drifting down as it was before this Iran brouhaha acquired a life of its own. And it seems to me that it is highly suspicious that just when the oil price threatened to fall below $100 per barrel because of weakening global demand, all of a sudden there was yet another bogus reason to inflate it.

Here are links to the last eight Saturday Oil Reports. Later.

Saturday Oil Report -- February 18, 2012
Saturday Oil Report -- February 4, 2012
Saturday Oil Report -- January, 21 2012
Saturday Oil Report -- January 7, 2012
Saturday Oil Report -- December 17, 2011
Saturday Oil Report -- December 3, 2011
Saturday Oil Report -- November 19, 2011
Saturday Oil Report -- November 5, 2011

The Back-up Plan

Regular readers know that DOTE is not a source of hope and inspiration about humankind's prospects in the 21st century. Subjects discussed include the 6th mass extinction, peak crude oil, anthropogenic climate change, the ongoing destruction of life in the oceans, and all sorts of irrational, destructive, but ultimately unalterable human behaviors. Looking at the grim, undeniable facts and trends, some observers (including me) anticipate all manner of annihilation and death as this century grinds on. So I'm sure you will be glad to know (as I was) that there is a Back-up Plan just in case the worst does indeed come to pass.

I discovered the plan in Project Icarus: Laying the Plans for Interstellar Travel at the website of the Atlantic. Free-lance writer Ross Andersen interviewed Andreas Tziolas, who is "drafting a blueprint for a mission to a nearby star." It is a 100-year mission. I'll quote the relevant bits.

Andersen — A lot of reasons have been offered for why this project, this general project of going to the stars, is important for humanity. Some have said that in the long term the project is necessary as a means of "backing up the biosphere," that we need to find another planet in order to ensure that humans survive future extinction events on earth. Others point to the potential for scientific knowledge, especially in the areas of cosmology or astrobiology. And then there's the idea that deep space is a kind of proving ground for humanity, that it provides the ultimate test of our intellectual and creative capacities. In your eyes, what is the most compelling reason we ought to pursue this?

Tziolas — This could be a very long conversation. At Project Icarus we keep adding new reasons and new motivations for going interstellar, as we call it. First is obviously the survival of humankind. If humanity is capable of achieving interstellar flight but does not pursue it, does not pursue a program of seeding other planets and other solar systems, then really we risk receiving a Darwin Award as a civilization.

If you can save yourself, but you don't, for whatever reason — how can you justify that?

When you're working on a sensitive document on your computer, the first thing you do is back it up. You make a copy of it, you email it to yourself, you put it in your dropbox, and your flash drive — sometimes all these things at once. Why do we pay this obsessive attention to backing up a document, which we can reproduce, when we pay no attention to backing up our civilization? There is no greater endeavor than ensuring the survival of humankind.

You also want to push technological boundaries. If you don't have one of these huge problems to solve, that's hard, really hard, then you won't motivate yourself to solve it. If the human population had never risen past one billion people, everyone would live very comfortably, spread out, there might not be high rises, transportation would be different  the whole civilization would be different. The unique problems that come with high — populations have given rise to these technologies, to these ways of living. Similarly, had we never decided to go into space, our civilization would be very different. We wouldn't have cell phones, we wouldn't have satellite systems, and we wouldn't have this type of computational power. We would have been fine, but we would be stuck at a certain level of technological advancement.

In order to achieve interstellar flight, you would have to develop very clean and renewable energy technologies, because for the crew, the ecosystem that you launch with is the ecosystem you're going to have for at least a hundred years. With our current projections, we can't get this kind of journey under a hundred years.

So in developing the technologies that enable interstellar flight, you could serendipitously develop the technologies that could help clean up the Earth, and power it with cheap energy. If you look toward the year 2100, and assume that the 100 Year Starship Study has been prolific, and that Project Icarus has been prolific, at a minimum we'd have break-even fusion, which would give us abundant clean energy for millennia. No more fossil fuels.

We'd also have developed nanotechnology to the point where any type of technology that you have right now, anything technology-based, will be able to function the same way it does now, but it won't have any kind of footprint, it will only be a square centimeter in size. Some people have characterized that as "nano-magic," because everything around you will appear magical. You wouldn't be able to see the structures doing it, but there would be light coming out of the walls, screens that are suspended that you can move around any surface, sensors everywhere -- everything would be extremely efficient...

What are the main considerations involved in choosing a destination star?

Tziolas — Well we're somewhat limited by the timescale we've chosen. We want this to be a hundred year mission, and that puts our maximum range at fifteen light years, using the best estimates about fusion technology. Right now we're designing around Alpha Centauri because it's the easiest, and because it's a double star we expect it to be very interesting scientifically. However, if a terrestrial planet is discovered and it has a few oceans and it's within 22 light years instead of our maximum of 15, we would button down and make that our mission. Habitability is the prime consideration.

Interesting. I'm surprised it's that and not extraterrestrial life, but then I suppose they overlap.

Tziolas — If there were two planets: one of them is teeming with life, but it's not habitable because it's methane or sulfur based life, and the other is an Eden with an oxygen-nitrogen atmosphere and only eighty percent our gravity, so everyone would be a superman, and they're in opposite directions, where would we go if you had to pick one? To us, proliferating the human race must always come first. We would go to the Eden and not think twice about it.

The mind literally reels at all the different responses one could make upon reading about the Back-up Plan, but I do not consider shooting fish in a barrel to be sport. It's just so unfair. One also must take into account the sincere but delusional beliefs of Andreas Tziolas and others participating in Project Icarus.

I will only note that it comes as no surprise that Tziolas extols the fabulous virtues of the wonderful technologies—nuclear fusion and nano-magic if the project is prolific—which will flow from this intersteller mission, just as "mysterious" vapors once filled the cave in which the Oracle of Delphi helped the ancient Greeks and Romans made life and death decisions.

When ancient Greeks and Romans had to make decisions, they consulted the gods by drawing lots, casting dice, interpreting dreams and analyzing such signs as sneezes, thunderbolts and flying birds. But for matters of the utmost importance, they sought to hear the words of the gods in the mouths of oracles.

Paradoxically, in male dominated classical Greece the most influential voice, the Delphic oracle, belonged to a woman. The oracular temple was perched on the south slope of Mount Parnassus, surrounded by high cliffs, about 75 miles west of Athens. Getting to Delphi required either a long trek across the mountains or a sea voyage to the north shore of the Gulf of Corinth.

However difficult the journey, thousands of visitors sought guidance from the holy woman, called the Pythia, who spoke on behalf of the gods... According to sources, the Pythia was inspired by mysterious vapors, though these accounts have been largely ignored by modern researchers. Now, however, a team of archaeologists and geologists have proved that the Temple of Apollo sat directly above fault lines that likely released intoxicating carbon based gases into the adytum. Was this the oracle's secret?

I would say that Humanity's Fate is a matter of utmost importance, worthy of the Oracle. The story told here says that technology will save us, and the ambitious goal of traveling to a near-by star not called the Sun will help us achieve that goal. So saith the Oracle Andreas Tziolas, speaking for the Technology Gods. As I mentioned in the introduction, changing its behavior is not an option for Homo sapiens.  That's off the table. Technology is thus the only way out. This is the conventional wisdom of our misnamed species.

Should everything go wrong, and every day it's certainly looking more and more like it will, it is good to know there's a Back-up Plan. Frankly, that's a huge relief.

I was worried there for a little while, but I'm not worried anymore!

Bonus Video — Make It So

 

Remedy du Jour -- February 25, 2012

I discovered jazz at the University of Chicago in the early 1970s when jazz-rock "fusion" was all the rage. Electric piano was in, traditional sounds out. Leading the way were Miles Davis, Joe Zawinul, Wayne Shorter, Miraslav Vitous and many, many other great musicians too numerous to list here. I loved this music and still do. I don't think there's been enough of it over the years. This "genre" was relatively short-lived. Maybe it had to be that way, I don't know. Today I present an all-too-brief fusion sampler of music from that time. There's not much to look at today, just a lot to listen to. This music has lots of long build-ups and theme changes, so if you're going to listen, listen all the way through.

• Boogie Woogie Waltz (Weather Report, from their 3rd album Sweetnighter, 1973)
• Also Sprach Zarathrustra (Deodato, from Prelude, 1972)
• In A Silent Way/It's About That Time/In A Silent Way (part 2, Miles Davis, from In A Silent Way, 1969)
• Pharaoh's Dance (part 1, Miles Davis, from Bitches Brew, 1970)

 

 

 

 

A Sharp Deterioration In The Job Market

The Bureau of Labor Statistics loves complexity. Their reports use lots of categories and adjustments to give us an "accurate" picture of the job market in the United States. Or so we are told. And after they've pigeonholed those surveyed, and after they've adjusted the hell out of everything, they come up with a magic number, the U3 "official" unemployment rate. That rate currently stands at 8.3%, which recently provided a pretext for politicians, economists and media blowhards to tell us how well we're doing.

When Gallup polls Americans to get a snapshot of the jobs market, they do not use a lot of categories. They do not make a lot of adjustments. They ask Americans some simple questions and publish the results.

The U.S. government in early March will report its February unemployment rate. That rate will be based on mid-month conditions. Therefore, Gallup's mid-month unemployment reading, based on data collected through the 15^th of the month, normally provides a good basis on which to estimate the direction of the government's unemployment rate for the month. In mid-January, Gallup results suggested the unemployment rate would decline, consistent with the government's positive January jobs report of Feb. 3.

Seasonal forces typically cause unadjusted unemployment rates to increase at this time of year. In this regard, some of the sharp increase Gallup finds in unemployment and underemployment may result from seasonal factors.

Although the government seasonally adjusts the U.S. unemployment rate, and the workforce participation rate could decline — both of which could drive down its unemployment rate — it still seems likely that the BLS will report an increase in the seasonally adjusted U.S. unemployment rate for February.

Regardless of what the government reports, Gallup's unemployment and underemployment measures show a sharp deterioration in job market conditions since mid-January. This is consistent with a similar decline in Gallup's Job Creation Index to +13 in the second week of February, from +16 for January. It is also consistent with an economy that continues to struggle with modest growth, particularly as gas prices surge. Further, it suggests that it is premature to assume the condition of the economy will not remain a major issue for Americans both financially and politically in 2012.

No one in the media reports Gallup's results. Politicians do not quote them. Economists ignore them. Yet here they are for all to see, as conspicuous as the nose on your face.

The unemployment rate is 9%. Underemployment, which includes those working part-time who want full-time work, stands at 19%, or nearly 1 in 5 Americans who are 18 or older.

Only a few bloggers report this stuff. Very few. We should not trust the government in this matter or any other.  So much of what the government says is self-serving propaganda. Thus if you care about the state of the world you live in, it is incumbent upon you to seek out different sources of information and to make decisions as to their trustworthiness.

I think Gallup's numbers are in the ball park. Their picture of the jobs market is as good as we're going to get. The Bureau of Labor Statistics uses smoke & mirrors to pull the wool over the eyes of The People. They have no credibility. I no longer take them seriously. And neither should you.

So How Corrupt Is Washington, Anyway?

The American economy increasingly serves only a narrow part of society, and America’s national politics has failed to put the country back on track through honest, open, and transparent problem solving. Too many of America’s elites-among the super-rich, the CEOs, and many of my colleagues in academia-have abandoned a commitment to social responsibility. They chase wealth and power, the rest of society be damned.
   — Jeffrey Sachs

Henry Blodget put the question in the title to now-reformed lobbyist Jack Abramhoff in Ex-Lobbyist Jack Abramoff: Here’s How to Clean Up Washington Corruption (video below). In his introduction Henry goes on to describe what goes on as legalized bribery. Abramhoff's response?

I think that's exactly right... [I crossed lines] you didn't need to cross. You can be completely contemptible, frankly, within the system, and be completely legal, and that's part of the problem in Washington.

Washington is pretty damn corrupt, but that's not the most amazing thing going on here in the United States. What is truly astonishing is that "serious" people who are taken seriously by other "serious" people propose policy solutions and push various political agendas without ever acknowledging this simple fact of contemporary life.

In other words, there's a whole lotta pretending going on.

Writing in Forbes, Nathan Lewis believes that The Crisis of Capitalism Is a Lack of Capitalism. In an interview with Bill Moyers, David Stockman calls what we have today Crony Capitalism, which is not really Capitalism because the markets have been distorted beyond all recognition.

Today, following the long-established principles of capitalism seems like it is a game for suckers. Capitalism is a tough game. Competition is fierce. The risk of failure is high. The profits, as noted, are often low. No wonder the successful are so highly regarded. American Airlines, General Motors, and Kodak provided useful goods and services for decades, on a grand scale, and provided prosperous employment for hundreds of thousands of employees. Nevertheless, they didn’t quite meet capitalism’s difficult standards.

Theft is a much easier game. The risk is low. The profits are high. There is no competition. You don’t even need employees. You just pay off the Congressman, and stick the money in your pocket.

This is not confined only to the financial industry. The entities that are thriving today are those that enjoy some sort of government favor. Defense contractors and the war industry. The education and healthcare cartels. Government employees and their absurd compensation plans. Competition is low. Profit margins are high. And why do we keep having wars with countries with lots of oil (or heroin)? You know why.

Yes, we know why. We can't even get a reasonable fix on what a barrel of oil should cost. If the markets are distorted, and have been for years, who can figure out what's really going? Only those on the inside, that's who. It's the same story in the equity markets, or any other market for that matter.

So how corrupt is Washington, anyway? Watch the video to find out.

 

Acidifying The World's Oceans

Every once in awhile I like to catch up on how our ongoing destruction of life in the oceans is progressing. If some recent results are anything to go by, things are humming right along. I haven't looked at acidification of the oceans since August, 2010, when I posted The "Other" Carbon Problem — Ocean Acidification, so it's time to take up this happy subject once again. The news comes out of the University of Hawaii, where researchers have found unprecedented, man-made trends in oceans acidity.

Nearly one-third of CO2 emissions due to human activities enters the world’s oceans. By reacting with seawater, CO2 increases the water’s acidity, which may significantly reduce the calcification rate of such marine organisms as corals and mollusks, resulting in the potential loss of ecosystems. The extent to which human activities have raised the surface level of acidity, however, has been difficult to detect on regional scales because it varies naturally from one season and one year to the next, and between regions, and direct observations go back only 30 years.

The study was published in the January 22, 2012 online issue of Nature Climate Change.

The team of climate modelers, marine conservationists, ocean chemists, biologists and ecologists, led by Tobias Friedrich and Axel Timmermann at the International Pacific Research Center at the University of Hawai‘i at Mānoa, came to their conclusions by using Earth system models that simulate climate and ocean conditions 21,000 years back in time, to the Last Glacial Maximum, and forward in time to the end of the 21st century.

In their models, they studied changes in the saturation level of aragonite (a form of calcium carbonate) typically used to measure ocean acidification. As acidity of seawater rises, the saturation level of aragonite drops. Their models captured the current observed seasonal and annual variations in this quantity in several key coral reef regions.

Today’s levels of aragonite saturation in these locations have already dropped five times below the pre-industrial range of natural variability. For example, if the yearly cycle in aragonite saturation varied between 4.7 and 4.8, it varies now between 4.2 and 4.3, which – based on another recent study – may translate into a decrease in overall calcification rates of corals and other aragonite shell-forming organisms by 15%. Given the continued human use of fossil fuels, the saturation levels will drop further, potentially reducing calcification rates of some marine organisms by more than 40% of their pre-industrial values within the next 90 years.

Living organisms need time to adjust to acidification of the oceans. Unfortunately, the man-made rate of change in ocean acidity is happening far too swiftly to allow those adjustments to occur.

“In some regions, the man-made rate of change in ocean acidity since the Industrial Revolution is a hundred times greater than the natural rate of change between the Last Glacial Maximum and pre-industrial times,” emphasized Friedrich. “When Earth started to warm 17,000 years ago, terminating the last glacial period, atmospheric CO2 levels rose from 190 parts per million (ppm) to 280 ppm over 6,000 years. Marine ecosystems had ample time to adjust. Now, for a similar rise in CO2 concentration to the present level of 392 ppm, the adjustment time is reduced to only 100 – 200 years.”

As I was reading this press release, it seemed important to note that the "models" these researchers used are only as reliable as the assumptions that go into them.

Figure left — Simulated surface aragonite saturation (top) and atmospheric CO2 concentration in ppm (bottom).

On a global scale, coral reefs are currently found in places where open-ocean aragonite saturation reaches levels of 3.5 or higher. Such conditions exist today in about 50% of the ocean – mostly in the tropics. By end of the 21st century this fraction is projected to be less than 5%. The Hawaiian Islands, which sit just on the northern edge of the tropics, will be one of the first to feel the impact...

“Our results suggest that severe reductions are likely to occur in coral reef diversity, structural complexity and resilience by the middle of this century,” said co-author Timmermann.

Regarding CO₂ emissions and their absorption into the oceans, these Hawaii researchers have extrapolated "business-as-usual" (BAU) for the rest of the 21st century. If you don't believe BAU can continue for another 90 years, or even another 40 years, you need to take such dire predictions with a grain of salt. That said, whatever the outcome, I don't doubt that rapid acidification will do great damage to all life in the sea which uses calcium carbonate to build skeletons and hard shells.

I think of acidification as the coup de grâce for marine life in so far as it comes on top of rampant over-fishing and seafloor bottom-trawling. Thus I was puzzled to read this result from the recent Nereus Predicting The Future Oceans conference held at the University Of British Columbia.

Adding ocean acidification and deoxygenation into the mix of climate change predictions may turn “winner” regions of fisheries and biodiversity into “losers,” according to research released today by University of British Columbia researchers.

Previous projections have suggested the effects of warmer water temperature would result in fish moving pole-ward and deeper towards cooler waters – and an increase of fish catch potential of as much as 30 per cent in the North Atlantic by 2050.

Warmer oceans would herd the fish into deeper, cooler waters, which would make them easier to catch. The projected increase in the North Atlantic was 30% by 2050. I wondered what they meant by this. This sounded a little "fishy" to me.  Did they mean a projected increase from 17 wild-caught fish to 23 fish?

Accounting for effects of de-oxygenation and ocean acidification, however, some regions may see a 20-35 per cent reduction in maximum catch potential by 2050 (relative to 2005) – depending on the individual species’ sensitivity to ocean acidification.

Oh, I see. Instead of there being 17 wild fish to catch in the North Atlantic in 2050, there will be only 11 fish.

That's bad news!

Bonus Video — A Sea Change (trailer)

 

That Darned Output Gap!

Paul Krugman and a horde of other mainstream economists are very upset by something St. Louis Fed president James Bullard said in a breakfast talk to the Union League Club of Chicago on February 6, 2012. Here is the offensive passage.

A better interpretation of the behavior of U.S. real GDP over the last five years may be that the economy was disrupted by a permanent, one-time shock to wealth. In particular, the perceived value of U.S. real estate fell substantially with the 30 percent decline in housing prices after 2006. This shaved trillions of dollars off of the wealth of the nation. Since housing prices are not expected to rebound to the previous peak anytime soon, that wealth is simply gone for now. This has lowered consumption and output, and lower levels of production have caused a significant disruption in U.S. labor markets.

If you're wondering what all the fuss is about, you're right to wonder. What Bullard said strikes me and Tim Iacono and many others as just plain common sense. But contemporary economics is not about common sense. What we non-economists don't understand is potential output.

From Neil Irvin's Why it doesn't feel like a recovery. That steadily rising black line is potential output. Sometimes we are above the line (light blue), sometimes, like now, we are way below the line (pink). It's not entirely clear to me how it is even possible to be above a line which is supposed to represent our "potential" output, but never mind. That first light blue patch must signify the excesses of the Tech Bubble, and that tiny blue patch later on surely signifies the huge excesses of the Housing Bubble. As regular readers know, I often refer to the Bubble Era (1995-2007).

Thus it seems clear in the graph that artificial asset price inflation during the Housing Bubble was merely showing us the way to what we could be doing output-wise right now, but are not. If that strikes you as absurd, you are not an economist. Paul Krugman instructs us further about Bullard's sins against orthodoxy in Bubbles and Economic Potential.

Wow. I often encounter the fallacy of confusing supply with demand, where people say, “spending was boosted by the bubble, so the GDP you see then was greater than potential”; this is a misunderstanding because potential GDP is a measure of how much the economy can produce, not of how much people want to spend. But Bullard goes even further, seeming to say that a drop in asset prices is itself a destruction of output capacity. What?

... OK, first things first. Capital gains are not counted in GDP. The direct effect of a bursting bubble on measured output is zero. Nor, by the way, is a fall in asset prices counted as a decline in the capital stock, which is in principle measured in physical terms. So what are these guys talking about?

Maybe the idea is that the burst bubble reduces demand, and hence leads to lower production. But at that point you’re into a Keynesian world of deficient demand, and you should be talking about ways to close the gap, not accepting it as a fact of life.

Let’s think this through. Imagine that you have a bunch of farmers, whose land is for some reason the object of a speculative bubble. So for a while farmland prices go through the roof. Then those prices slump. Why should this impair the ability of the farmers to keep growing corn? (OK, you can talk about possible impairment of credit channels and stuff, but again this should be something to focus on fixing, not a source of fatalism.)

And guess what — this isn’t a hypothetical example. Here’s the history of US farmland prices:

And here’s the history of US farm output during the 70s bubble and aftermath:

Source

Do you see a permanent reduction in farm production when the bubble burst? I don’t. By the way, if you’re wondering about that dip in 1983, it was about a terrible drought, which is the kind of thing that can reduce potential output.

Did you notice what was absent from Krugman's discussion and tidy little farm prices example? Perhaps you missed it, so let me fill you in. The economic factors not mentioned were easy credit and private debt levels. He also failed to mention stagnant real income for the bottom 80% of Americans over the last 30 years. Many Americans were living debt-financed lives. A lot of the current mortgage debt was incurred to make up for missing income by buying and selling houses during the bubble. Americans took advantage of this get rich quick scheme, using their soon-to-be illusory "equity" in housing to buy more and more stuff, which raised output.

But potential is potential and it doesn't matter to Paul Krugman how we got here. Our job now is to get back to where we were during the Housing Bubble.

Well, you might say, but farmers don’t buy a large fraction of farm output, whereas homeowners buy a large fraction of overall US output. Bzzzt! You’re talking demand-side economics again, and making, whether you know it or not, the case for monetary and fiscal stimulus.

At a basic level, this is all kind of terrifying. If top financial officials and credentialed economists can’t even avoid getting confused about the difference between asset prices and productive capacity, what hope is there for rational policy discussion?

Yes, it is terrifying, what Krugman is describing here. What hope is there of having a rational discussion? 

Unfortunately, it is not terrifying in the sense Krugman intended. He wants to invoke the same debt trap that got us here to boost the economy back to potential, as if the Housing Bubble never occurred and all that private debt does not exist.

And that, my friends, is truly terrifying.