Wednesday, November 30, 2011

Is Holding Treasury Auctions on 39 Separate Days During The 1st Quarter Risky Business?

The bid failure at the debt auction in Germany on November 23rd demonstrates that there are limits to the demand even for "safe" government debt. So far, demand has remained strong at the debt auctions held by the U.S. Treasury. However, the increasing frequency of Treasury debt auctions increases the risk that at some point the U.S. could also face demand softening for its sovereign debt. The Treasury is tentatively scheduled to hold bill, note, or bond auctions on 39 separate days during the first quarter. The frequency of the debt auctions is in large part due to the need to issue $541 billion in marketable securities in order to fund the rapidly growing U.S. debt. The debt is already $15 trillion and the failure of the Deficit Super Committee has made it crystal clear that Congress has no intention of holding the deficit below $1 trillion in 2012.

There is barely an open day on the schedule that does not include Treasury auctions. Given that auctions are only held on non-holiday Monday through Thursday, the 39 days on which debt auctions are scheduled only leaves 8 open days on the schedule. The January debt auction schedule is so crowded that January 5th is the only non-holiday Monday-Thursday during the month on which a debt auction is not scheduled. There are only 2 open days on the schedule in February (15th and 29th), and 5 open days in March (1st, 7th, 8th, 15th, 21st).

Holding Treasury auctions on 39 out of the 47 non-holiday Monday-Thursdays during the first quarter of 2012 means that on more days than not the U.S could suffer from a bid failure. While it may be a bit premature to warn "buyers beware", the capability of the U.S to sell sovereign debt at record low rates will not last forever.

Tuesday, November 29, 2011

Republican Politicians Are Confusing Antipathy For Obama with Support For No New Taxes

The Republican party has a golden opportunity to take the Presidency and both houses of Congress in 2012. However, the GOP  may boot away this opportunity by misreading the results of the 2010 midterm elections. The success of Republicans in 2010 was due to: 1) voter anger at having Obamacare forced upon them; and 2) the weak economy. The Republican agenda was not the driver of the electoral success. As has been shown in the Wisconsin and Ohio, states in which Republicans took control of the governorship and the legislature, the Republican agenda is not terribly compelling to voters in the middle of the political spectrum.

In particular, the insistence of many Republicans on "tax purity" will hurt the party during the general election campaign. Not only is there widespread populist support for a "millionaires" tax, opposing it opens up the party to claims of being controlled by the rich and Wall Street. The GOP has gone so overboard for tax purity, that there is even some discussion that the endorsement of Mitt Romney by Charlie Bass in New Hampshire may not be helpful because he is not a tax purist.

While a tax purity message makes for a good sound bite, it is lousy deficit math. It is tough to envision how the deficit can be eliminated  if defense spending is untouchable and taxes are off the table. There is no question that imposing tax increases during a recession will make it even more challenging for the economy to recover. However, cutting entitlements will also have a negative impact upon the economy as recipients will have less money to spend. It is perverse to only focus on the negative impact on the economy of increasing taxes while ignoring the impact of entitlement cuts.

As painful as it will be to cut the trillion dollar deficit during a recession, not doing so will lead to a depression.  The southern European nations have already demonstrated that bond buyers will not fund an unending string of deficits once it grows to level that is unpayable without turning on the printing presses. Even with record low rates for funding our national debt, the interest payments are already eating up 10% of U.S. revenue. If bond buyers begin to demand a risk premium for buying U.S debt, it could lead to a vicious cycle of bigger deficits and higher interest rates.

Given the disparate mix of voters the Republican party needs to attract in order to win the general election, including social conservatives and libertarians, the only path to electoral success is to focus on being the party that opposes Obama's unpopular policies. Embracing tax purity is good primary politics but may turn out to be costly for numerous Republican candidates on general election day

Monday, November 28, 2011

Do 2012 Economic Forecasts for U.S. Foolishly Discount High Cost of Oil?

The U.S. economy is predicted to grow by 2.0% in 2012 by the OECD and numerous economists. However, these forecasts may be overly optimistic if the price of oil remains at $100 per barrel. Given the likely softening of demand for U.S made products from Europe and reduced employment by municipal and state government, growth in the U.S. economy probably can only occur if the average price of oil drops back below $80.

The cost of oil has a huge impact on almost all facets of the U.S. economy. Food costs are directly impacted by the price of fertilizer and transportation. Oil is still used by 6.3 million U.S. households for heating.  Any business that has travel or shipping costs is impacted by transportation costs. Over 6,000 products are made from petroleum, including all plastic products. And of course, every household's budget is impacted by transportation costs. Given that the U.S. consumes over 17 billion barrels of oil annually year, the difference between $80 and $100 oil is the equivalent of a $340 billion tax on the economy, and the price of gasoline  has a huge impact on consumers sense of economic well being

Given all the other headwinds faced by the U.S. economy, if oil stays at $100 a barrel in 2012 or goes even higher it is unlikely that the U.S economy will meet the 2% growth projections of many economists. The U.S. stock market has declined the two times oil spiked over $80, both in 2008 and again in July and August of this year. It may very well do so again in the first quarter of 2012 if oil stays around $100 per barrel.

Sunday, November 27, 2011

Does Democracy Still Work in the Age of Entitlements?

Politicians in Europe, Japan and the U.S. seem intent on committing economic suicide.  They are quick to dole out benefits, but won't raise taxes to pay for them. This profligacy has already doomed the Greek economy, and Europe, Japan and the U.S. are barrelling down the path to economic ruin. The international banking system is in danger of collapsing if the value of sovereign debt holdings deteriorate either due to defaults or money printing. If governments decide to solve their budget deficit problems by turning on the printing presses, interest rates will go up, and the value of the sovereign debt held by the banks will plummet. In Europe alone, 20 of the top banks are already teetering on the edge of collapse due to too much exposure to sovereign debt of Portugal, Italy, Ireland, and Greece.

With all the attention focused on the debt crisis in Europe, it is easy to overlook the fact that the U.S. and Japan would be in equally bad shape if not for artificially low interest rates on their sovereign debt. Japan in spending 22% if their federal budget on interest payments, despite the fact that the interest rate on the 10 year note is only 1%. In the U.S., 7% of the budget and 10% of receipts in 2012 will be spent on interest payment on the $15 trillion debt, despite the fact that the interest rate on the 10 year note is only 2%. Neither country is prepared for the huge increases in expenses that will be incurred due to aging baby boomers.

The chart below compiled by The Guardian illustrates the size of the debt and deficits in the world's leading democracies.

In this age of entitlements, there is a paucity of politicians that dare to back plans for eliminating deficits. Ultimately, the fault must rest with the voters for supporting candidates that will not honestly deal with the deficit crisis. Thus, politicians continue to provide entitlements to current voters, while piling on unsustainable levels of debt that they were seemingly leaving for future generations to deal with. Unfortunately, the profligacy has gotten so out of hand that the debt crisis is already starting to explode, even before the aging of the baby boomer generation exacerbates the problem. The problems caused by running huge deficits is going to impact the baby boomers retirement accounts and medical benefits, not just those of their children and grandchildren.

There are few signs that voters around the world are willing to wake up and vote for candidates that will address the need to eliminate deficits. Voters are neither willing to give up their entitlements nor pay enough in taxes to fund them. Thus, voters in he world's leading democracies  will ultimately bring the age of entitlements to an end via an economic collapse unless they wake up quickly. It may take a depression to teach voters that massive  deficit spending is unsustainable

 In the U.S., there is only one candidate for President proposing to eliminate the deficit, Ron Paul. Among the other candidates, the plans of Mitt Romney and Jon Huntsman would slow down the growth of the U.S debt, but would only push back the collapse of the economy due to unsustainable levels of debt back a few years. The other Republican candidates plans for cutting the deficit feature more demagoguery than details. And if Barack Obama is re-elected, he is likely to continue running up unsustainable trillion dollar annual deficits.

Among U.S. Congressional candidates, there are few attempting to appeal to voters with rational plans to cut the deficit. The Republican field of candidates is dominated by those that stubbornly refuse to raise taxes. The Democratic field of candidates is dominated by those that stubbornly refuse to make needed cuts to entitlements. Neither party seems likely to come up with a realistic solution to the deficit crisis even if they succeed in sweeping all three branches of government. And as the failure of the Deficit Super Committee proved, the dysfunctional split Congress can not even come up with a solution to eliminate one tenth of the deficit. Other than Ron Paul, who is unelectable, U.S. voters only choices in 2012 are politicians that are going to lead them right off the cliff into an economic abyss.

At least for now, democracy is failing. Democracy may even become endangered in some countries if voters continue to elect politicians that will not address the problems of the massive amount of sovereign debt. In order for democracy to work, the voters will have to stop electing politicians that spend more than their countries can raise in taxes.

Related Article

Did Ross Perot Prove That American Voters Can Actually Do Budget Deficit Math?

Tuesday, November 22, 2011

Is Shutting Down Nukes Economic Suicide?

The fact that nuclear power plants are dangerous is not news. However, despite the many drawbacks of nuclear power, it provided over 13 percent of the world's electricity production in 2010. There were 15 countries that utilized on nuclear energy to supply at least one-quarter of their electricity in 2010.

While the economics of building a new nuclear power plant is a subject of much debate, there is no question that the nuclear facilities that are up and running provide an economical source of energy with minimal contribution to global warming. Further, the environmentalists that advocate replacing nuclear power with wind and solar are ridiculously naive. Despite many of the best locations already being in use after two  decades of development, wind energy only accounts for about 3% of world wide electricity generation. Regardless of all the other difficulties and expense with building out wind and solar, just getting approval for the power lines can take years, if not decades.

Taking nuclear power off the grid results in increased consumption of coal and oil. Japan is now buying six times as much oil to fuel electrical plants as it was before the Fukushima disaster due to their shutting down  nuclear power plants. Even the Germans, who get about a quarter of their electricity from nuclear energy, have realized that shutting all down their nuclear plants is not feasible for at least a decade. (They shut down 7 of their 18 operating nuclear power plants in 2011 and are building coal and oil fired power plants to replace them). It makes that fact that there is strong popular support in France for shutting down their nuclear plants seem ludicrous given the fact that France generates 74% of its electricity from nuclear power. Replacing the power generated by nuclear plants damages a country's balance of trade and increases their emissions of greenhouse gases. In what may be the ultimate irony, if Germany really does go ahead and close down all their nuclear facilities by 2022, the most likely source for replacing the electricity is from nuclear power plants in Russia..

Oil supplies are already tight and OPEC  may decide to cut oil output at its Dec. 14 meeting in Vienna. Given that Iraq's Oil Minister Abdul-Kareem Luaibi has indicated that he expects oil prices to trade between $100 and $120 a barrel in 2012, replacing nuclear with oil for electricity generation is expensive and likely to become even more pricey.

The correlation between GDP and energy consumption indicates that if shutting down nuclear plants reduce total electricity output, the consequences for a country's economy could be horribly negative. Over at the Oil Drum, they show that there is a tight relationship between energy production and GDP. The easiest method of managing declining energy production is to outsource energy intensive manufacturing to other countries, but obviously that has negative impact on employment. Thus, if the GDP and energy correlation holds, economic expansion can not occur if energy production is curtailed.

Japan has already shut down 43 of its 54 nuclear reactors. According to the Japanese government, fuel prices could increase by nearly $40 billion a year—$312 per person, and $770 per household. Further, the export driven economy will suffer dramatically as the high costs of energy put the country's manufacturers at a cost disadvantage and may drive them out of the country.

In 2012, Japan may prove whether shutting down nuclear power is economic suicide. Time will tell whether Japan goes ahead with shutting down their last 11 operating nuclear plants, and if so whether the economy can muddle through it.

Monday, November 21, 2011

Is the Stock Market Reacting to the Grover Norquist Interview on 60 Minutes?

The dysfunctional U.S. Congress is hurting stock market prices again this morning. Politicians on the right are stubbornly holding to an uncompromising position on "no new taxes". Many politicians on the left are stubbornly holding to an uncompromising "no cuts" position. The expected failure of the Deficit Super Committee to come up with a deal demonstrates the depth of the divide. Thus, U.S. voters are stuck with a government that seemingly values slogans over solutions. The U.S debt will continue to grow by about $4 billion per day as the increasing unpopular Congress kicks the can down the road without coming up with deficit cutting compromises.

In a 60 Minutes interview broadcast on Sunday evening, Grover Norquist  last night stated "The Republicans won't raise your taxes. We haven't had a Republican vote for an income tax increase since 1990.". 
The interview made explicitly clear the locked in nature of the "no new taxes" pledge of most Republican legislators and presidential candidates. And as Norquist explained, any Republican primary candidate that dares to flaunt the "no new taxes" orthodoxy will be in for a tough fight due to incurring his wrath.

The "no new taxes" message is a good way to appeal to Republican primary voters. However, a refusal to compromise on any taxes at all, particularly those that target "the rich", is bad politics for a general election. The U.S. is highly likely to get another divided government in 2012 because of the Republican party's adherence to Norquist's orthodoxy. It is challenging to imagine how a divided government can take the steps necessary to shrink the deficit. Also, another crisis could be looming as the U.S may hit the debt ceiling cap prior to the November 2012 general election.

Thus, the losses in the stock market this morning may be due to more that just the expected failure of the Deficit Super Committee to reach a deal. It may also be due to increased awareness of how unlikely the Grover Norquist driven Republican party is to agree to reasonable deficit cutting compromises that include tax increases. And of course on the other side of the failure to compromise is the 36 million member AARP  aggressively demanding "no cuts".

Friday, November 18, 2011

How Will Deficit Super Committee Impact Next Week's $99 Billion Treasury Note Auctions?

On November 21, 22 , and 23 the U.S. Treasury is auctioning $99 billion of notes to fund the U.S. debt. A debt auction on the day (or days) when uncertainty about the Committee's deliberations will be at its height strikes me as particularly inopportune timing.

The low expectation surrounding  the outcome of the Super Committee could limit the reaction of the bond market to a stalemate. However, there is certainly the potential that a failure to come to an agreement will  drive down the price of U.S notes and bonds. The outcome Super Committee negotiations may have its biggest impact on the last of the 3 auctions on the 23rd, the day after the deadline and also the auction with notes featuring the longest maturities (7 years).

The price activity in the bond market has a direct impact on bidding at the Treasury auctions, and the Treasury auction results have a big immediate impact on the bond market. However, the fluctuations in the bond market do not impact the U.S. deficit (with the exception of the small portion of the debt that is funded with TIPs bonds). However, the prices reached at the bond auctions lock in the rate the Treasury has to pay in interest rates. Thus, the results of the Treasury auctions next week will have an impact on the deficit for the next few years. Each 0.1% move in the interest rate required to auction off the notes next week changes the annual interest cost by $100 million. So the results of the Super Committee's deliberations will have an immediate impact on the size of the deficit in 2011 based on the reaction of the buyers participating in the Treasury auction.

Thursday, November 17, 2011

Why The AAA Rating of U.S. Debt Is In Jeopardy

Over at Creditwritedowns, Edward Harrison posted a chart taken from a recent article in Die Welt showing the indebtedness of the U.S and the other nations with AAA rated sovereign debt. Glancing at the numbers shows that the U.S. has both the worst debt and deficit ratio to GDP of any nation that has maintained a AAA rating. This data clearly illustrates why the AAA rating of the U.S. is in danger. As the ratio of debt to GDP increases, so does the risk to bond holders. 

For reference, the downgrade of U.S debt by one of the ratings agencies, Standard & Poors, had no impact on interest rates, so a downgrade by itself  will not result in higher yields being required to sell U.S. issued debt.  Despite the S & P downgrade, U.S debt is still considered AAA because it still maintains that rating from other ratings agencies. But if they all downgrade the U.S. debt, the AAA rating will be lost. A failure by the Deficit Super Committee to come up with a plan to reduce the deficit could lead the other rating agencies to reconsider whether the U.S. debt really deserves a AAA rating.  

Unfortunately, a continued stalemate by the Deficit Super Committee could have serious consequences for the cost of funding U.S debt if their inaction leads to: 1) the AAA credit rating of the U.S. being downgraded; and 2) a loss of confidence in the perceived value of U.S issued debt. Given that $11 billion dollar of TIPS are being offered today and $99 billion in notes are being auctioned on 11/21-11/23, even a slight increase in the yield required to sell the bonds will cost U.S. taxpayers dearly. Just a 0.1% increase in the average yield would increase the annual interest payments on this debt by $10 million.

Wednesday, November 16, 2011

Is Punting On Keystone XL Pipeline Deal Propelling Oil Over $100 Per Barrel

The price of oil was trending upward prior to the November 11 announcement that a decision on the Keystone XL Pipeline would be delayed until after the 2012 election. Given the tight supply, increasing demand, and turmoil in the Mideast, the price of oil may very well have broken through the $100 per barrel barrier regardless of the Keystone XL decision. However, this decision symbolizes America's lack of will to reduce our dependence on imported oil.

The U.S. need to import 9 million barrels of oil per day to satisfy our energy requirements puts the economy at risk. Expensive oil impacts the U.S. economy in myriad ways. It is even arguable that the positive economic numbers in the 3rd quarter were largely due to the drop in the price of oil. A case can also be made that many of the rosy economic projections that have been published lately are badly flawed due to not giving sufficient weight to the negative impact of increasing oil prices.

Thus, although the Keystone XL decision may not be a factor in oil rising above $100 a barrel, it is endemic of the type of policy decisions on energy that puts the U.S. economy at risk. As new supplies of oil become increasingly expensive to access and worldwide demand goes up, there is likely to be long term upward momentum for continued increases in the price of oil. The huge and dependable ongoing demand for imported oil from the U.S. is one of the pillars providing support for the high prices.

The ultimate irony of the decision to delay a decision on the Keystone XL Pipeline is that not building out this project has environmental drawbacks, as outlined in a Grist article. In a worst case scenario, it could actually end up leading some utilities to replace expensive oil with cheap, dirty coal.

Tuesday, November 15, 2011

The Wild Card In Federal Budget Projections - Every Note Auction Could Land On Double Zero

I have a doubling system that that leads to making money at the roulette table nine times out of ten. However, despite the fact that this system makes a gambler utilizing it a winner 90% of the time, the casino's love my system. The reason casinos love doubling systems is because when they fail, the losses are catastrophic. So despite the fact that my doubling systems wins 9 times out of 10, the more often it is used, the more money the casino's ultimately make. Thus, even though a gambler that utilizes this system knows they are going to make money most of the time, they also have to be aware that going to the table too many times guarantees a bad outcome.

It may be a weak analogy, but every U.S note and bond auction reminds me of a gambler that goes to the roulette table one too many times.  Sooner or later, the result is going to be catastrophic. Every Treasury auction required to raise funds to fill the trillion dollar deficit hole and to refinance the maturing notes and bonds from the $15 trillion debt increases the probability of a failed auction by a tiny bit. Given that there are now typically four or five note or bond auctions every month, it seems like the U.S. Treasury is making an awful lot of trips to the table.

So far, my fears have been totally unfounded. I had to go back and double check the results of the yield curve from the most recent Treasury auction as upon first glance the interest rates seemed impossibly low. As of 11/15 the 10 year notes are only yielding 2.06% and the 30 year bonds are only yielding 3.1%:

Daily Treasury Yield Curve Rates   


Based on the results of recent Treasury auctions, is is probably premature to fear that the note auctions on 11/21, 11./22, 11/23 will signal the start of an upward spiral in interest rates. The average yield on total U.S. debt has been decreasing while at the same time, the Treasury Department has been able to lengthen the average maturity of U.S debt during 2011. Thus, at least in the short term, the risk of a fiscal crisis is minimal. However, I am not sure the same can be said about the auctions two and three years down the road.

The huge risk to the U.S. economy comes into play in a couple of years if investors and sovereign governments start demanding better returns in order to fund the huge and growing deficit. The Congressional Budget Office (CBO's) is projecting that interest rate on the 10 year Treasury note will be 5.5% during 2015 through 2020. Even at 5.5% interest rates and with rosy projection about unemployment and GDP growth, the CBO is projecting that that the nominal cost of interest payment to fund the debt will triple by 2020. However, if the CBO's optimistic projections for 2012-2014 of 6.5% unemployment and 4.4% growth in GDP fail to come to pass and interest rates required to attract buyers for at debt auctions go significantly higher than 5.5%. then the exponentially growing U.S. debt burden will spiral into a fiscal crisis.

What interest rate will be required to fund the U.S. debt in 2015?

If it is today's rate of  about 2.0%, the U.S. economy will be fine
If it is the CBO's projected rate of 5.5% the U.S economy can probably muddle through
If it is a 7% rate, similar to the cost to Italian's to sell their 10 year notes, the U.S. may experience a fiscal crisis and quite likely head into an economic depression
If it is above 10%, as it was in the late 70's and early '80's the results will be catastrophic for the U.S. economy 


Making accurate projections about the size of U.S. budget deficit over the next few years and its impact on the economy requires getting the interest rates required to fund the debt right. If the optimistic assumptions of the CBO about the world's willingness to continue funding our profligate spending turn out to be wrong, the U.S. is headed for an economic calamity. 

An upward spiral in interest rates could begin at any one of the increasing frequent Treasury auctions. The risk grows dramatically in the next few years as the size of the debt burden gets ever larger. 

Monday, November 14, 2011

Occupy The Boardroom is Naming Names

I am not sure quite how to react to the tactic of  of naming the names of the board members of the "too big to fail" banks. Frankly, publishing publicly available information and suggesting that these individuals be buried with e-mail seems fairly innocuous. However, given the anarchistic fringe  of the Occupy movement, and the popularity of a video that advocates a French style revolution (over 100,000 views), this website somehow seems a bit sinister. I am probably overreacting in regard to this content that suggests an action that is significantly less intrusive than setting up an unauthorized, unsanitary campground, but it does to have the potential to lead to unintended consequenses

Another aspect of the website that is worthy of attention is its summary of a message that succinctly captures the populist anger held by a broad range of U.S voters.

"Make your voice heard by the Wall Street elites who wrecked the economy and made the rest of us pay. Click on someone below and tell them a story that you think they should listen to. Just got a college degree and nothing to show for it? Just got evicted while your banker gets bonuses? Share your special story with someone who ought to know."

It seems to me that those favoring fiscal sanity should consider if it is appropriate to tap into the above populist message in order to gain support for measures to bring the trillion dollar U.S. annual deficit under control. While it is ridiculously over simplistic to blame the Great Recession on Wall Street elites, the question of whether targeting this group is pandering to the mob or just smart politics is worth asking.

Should Deficit Hawks Favoring No Tax Hikes Be Paying Attention to Labor Strikes in Greece?

The economic question of whether the U.S. can close the trillion dollar annual deficit without tax increases is a subject of contentious debate. But I think an equally important question is whether it is politically feasible to try and close the deficit without tax increases. The perception of social injustice is already an issue that resonates with many independent voters. Just because main street Americans and the legions of unemployed are not camping with the aimless anarchists of the Occupy movement, it does not mean that their anger over the current state of the economy is not simmering. This anger is diffused somewhat because Democrats control the Presidency and the Senate. However, pushing through plans that cut entitlements without tax increases will stir up resentment that the average Americans is paying a heavy price at the expense of the "rich". Thus, although a spending reduction message plays well to the Republican base, it may alienate the independent voters needed to win elections and pass deficit cutting legislation.

Greece will be racked by another debilitating round of strikes this week. Their already weak economy will  slow even more and their budget deficit will grow even larger. Admittedly, a comparison between Greece and the U.S. is a bit like comparing apples to oranges. As ugly as is the U.S deficit problem, it is still solvable. The Greek debt crisis is likely only solvable via a default on their national debt. Their  economy is in a shambles, corruption is rampant, and there is tremendous nationalistic anger about austerity measures that are being forced upon them by outsiders from other Eurozone nations. However, it may not be totally far fetched to assume that some of the strikes and turmoil in Greece could spread to the U.S. A perception that senior citizens and blue collar workers are being "robbed" of entitlements could spark an ugly reaction. The aimlessness of the Occupy movement is one of its primary weaknesses. However, a deficit reduction plan that significantly reduces entitlements without any tax increases could ignite dramatically larger protests and ramp up property damage and violence.

The following is a summary of the "no new taxes" message. (via Senator Chuck Grassley's website). It offers the appeal of:  1) being easy to understand; and 2) being virtually painless for the 53% of households that pay incomes taxes. However, as you read this "no new taxes" message, ask yourself how this will play out with independent voters and the unemployed. Is it really a winning message?

Fiscal discipline and economic growth need to be the top priorities for deficit and debt reduction. Unchecked government spending will further threaten economic opportunity with higher debt and higher taxes. It’d be one thing if tax increases actually were used to reduce the deficit, but that’s not what happens. Since World War II, every new dollar in tax increases has resulted in Congress’ spending $1.17. Raising taxes has been a license for Congress to spend even more. And, every dollar spent by Congress is a dollar taken out of the economy, and higher taxes leave fewer resources for the private sector to make investments, expand production, and create sustainable jobs.

As I noted in a previous post, "back in the '90's, Canada proved that it is possible to get a huge budget deficit under control. Their solution is instructive. The Canadian ratio of budget cuts to increased taxes was 6 or 7 to 1. The Canadian experience provides support for a position that should be much more palatable to voters than a plan that exclusively targets spending cuts. Further, it has the added merit of actually having worked."

Thus, whether or not the strikes and labor unrest in Greece over budget cuts is applicable to the U.S., it should raise at least a bit of concern among those who support a balanced budget without tax increases. 

Sunday, November 13, 2011

Did Ross Perot Prove That American Voters Can Actually Do Budget Deficit Math?

On main street, Wall Street, and the occupy camps alike, it seems that Americans are oblivious to the risks inherent in running up trillion dollar annual deficits. There seems to be an almost child like faith that investors and foreign governments will continue to buy up U.S debt. Time will tell how much longer the U.S. will be able to fund it's burgeoning debt with bonds and notes that only average about a 3% interest rate. Obviously, we can fund today's $14.9 trillion dollar debt. However, as even the Congressional Budget Office noted in a July 2010  brief, the U.S. is not immune to risk of a fiscal crisis caused by Federal debt.

Given the lack of concern from most U.S. voters about the growing debt, it is remarkable to recall that back in June, 1992, Ross Perot led the presidential popularity polls with support from 39% of respondents (versus 31% for Bush and 25% for Clinton). While part of Perot's appeal was his populist anti-establishment message, his core platform was the need for an end to U.S deficit spending. In hindsight, it seems almost hard to believe that one of his campaign infomercials drew 10.5 million viewers for a message that was loaded with economic statistics.

The U.S. debt crisis is far more severe in 2011 than it was in 1992. There should be a lesson for U.S politicians from the popularity gained by Ross Perot. His use of charts to explain the dangers of the growing U.S. debt made the deficit math easy to understand.  And once U.S. voters understood the problem and the fact that Perot stood to address it, he gained widespread support from both conservatives and liberals. Given the incredible missteps of Perot's campaign, including dropping out of the race and then jumping back in, it seems shocking that he still ultimately received 19% of the vote on election day.

Solving the U.S. debt problem is going to be politically painful. Hopefully, the cause of fiscal conservatism will find another advocate that is as effective at garnering support for tough policy choices as Perot. Politicians should keep in mind that Perot proved that being honest with American voters about the debt crisis can be an effective campaign tactic.

Friday, November 11, 2011

Punting On Energy Projects Guarantees Stagflation

Demand for U.S. products from Europe is going to slow down to due the debt crisis. The high price of oil is serving as a drag on the U.,S. economy. The U.S. debt is increasing by $3 billion a day. Given these three headwinds, the job market seems likely to stay bleak. The dotcom boom fueled job creation in the late '90's. The housing boom fueled the job creation in the middle of the last decade. This leads to the question of "where is U.S. job growth going to come from in 2012?"

There is only one obvious area of opportunity to ramp up job creation in the U.S., and that is by unleashing domestic energy related projects. A U.S. drive for energy independence offers the best opportunity for getting hiring and the U.S economy back on track

While delaying a decision on the Keystone XL Pipeline by itself is not fatal to the U.S. economy, the hostility of the current administration to energy projects that are economically viable without subsidies is a huge drag on job creation.

The European debt crisis had led to funds flowing to U.S debt auctions. The rates the U.S. is paying to fund our debt is staying remarkably low. This is keeping the cost of funding the $14.9 trillion debt down to only about 10% of receipts. However, while the interest rates on U.S. issued debt has remained low, demand has been a bit soft at a couple of recent auction. It is only a matter of time before the need to fund the rapidly expanding debt leads buyers to demand better returns. This becomes a vicious cycle, higher rates increases the cost of funding the deficit, which requires ever larger actions, and a cycle of higher rate. Thus, the growing deficit ensures that ultimately interest rates will be higher. This is almost certain to cause inflation and a declining value for the U.S. dollar.

The combination of this soon to be upon us debt fueled inflation and not enough new jobs leaves the U.S. on a path toward of devastating stagflation, with both high unemployment and rising inflation.

The risk of the U.S. becoming as much of an economic basket case as Greece has already become is very real. Thus, the delay of a decision on the Keystone XL Pipeline epitomizes why the current job market is such a disaster and why the economic situation is likely to get worse.

Thursday, November 10, 2011

Do Libertarians Really Want To Trust Wall Street Bankers and Wild Cat Drillers

The U.S. suffers from too much red tape and too many regulatory burdens. Restoring economic growth requires freeing up business from the burdensome regulations that are restricting them. However, Wall Street bankers have proved that even with oversight they will take dangerous risks with other peoples' money via dicey loans, too much leverage, and flawed hedging strategies. And as BP's Gulf oil spill proved, oil and gas drillers can do enormous damage even when regulated.

Hydraulic fracturing (fracking) is one of the few drivers of the U.S. economy during 2011 and offers huge potential for growth. Replacing imported oil with domestically produced natural gas benefits both the economy and the environment. While there are cases in which fracking has polluted drinking water, the risks to water supplies from fracking have been wildly overblown. However, the disposal of the contaminated water, sand and chemicals used to blast natural gas out of deeply buried deposits of rock shale is a contentious issue. I strongly support quick implementation of regulations and inspections that ensure drillers do not leaving behind cesspools of polluted water or pollute water wells. Ramping up domestic gas production without doing irreparable damage to the environment requires reasonable regulations. Supporting a goal of ensuring that gas drillers take suitable precautions and clean up their waste water and chemicals is almost  unassailable. .

Is it really appropriate to trust Wall Street bankers to avoid taking excessive risks by freeing them up from regulatory supervision? While the criminal actions of Bernie Madoff and commingling of client funds by Jon Corzine get the headlines, the appetite of Wall Street bankers for excessive risk in a hunt for outsized profits needs to be held in check. It sometimes seems that they learned nothing from the 2008 collapse of Bear Stearns and Lehman Brothers. Wall Street bankers continue to use leverage to goose up earnings leaving them at risk of losing their total capital base many times over. They fail to adequately account for the counter party risk of their hedging with CDS's if there is no solvent party to pay them off. As pointed out in a Business Week article, just a single segment of the CDS market, the debt on the sovereign debt of Southern European nations, has put a number of the "too big to fail" banks at risk.

Further, while freeing up Walls Street bankers from over burdensome regulations such as Dodd-Frank is in the national interest, appearing to kowtow to the financial industry is terrible politics. The following rant from  The Big Picture sums up the attitude of a huge segment of U.S. voters.

OWS also might not have come to pass had financial institutions, in particular, not forgotten who bailed them out a mere three years ago and returned so quickly, and with such belligerence, to their bad behavior and bonus-happy ways. A bit of humility would have gone a long way with the American people, but none was forthcoming. As with all of corporate America, the needs of the shareholders, followed closely by the needs of the corporate executives, trumped any need to be decent corporate citizens. The “heads we win, tails you lose” mindset is still very much with us.

In addition to the need for selected segments of the economy to be regulated, there also is a role for the Federal government in restoring growth to the U.S. While the infatuation of the Obama administration with solar energy has been well documented (solar energy is not scalable enough to meet a meaningful percentage of U.S. energy needs), there is an energy technology with tremendous potential for playing a major role in reducing carbon emissions at a cost that may be competitive with coal. If your reaction is similar to mine, upon digging into Thorium reactor technology, initially you will be skeptical that the claims are way to good to be true. However, I have yet to find an expert to debunk them. If the potential for Thorium reactors is anywhere near the claims of its backers, it is crazy that the U.S. government is allocating so much spending to solar and nothing on Thorium reactors. Thorium reactors may offer a good example of an area where the U.S, government can play a pro-active role in enhancing the economy.


In general, U.S. voters have a strong libertarian bent. Playing the libertarian card is good economics and good politics. However, libertarian principals can be taken way too far when it comes to implementation. Smaller government with less regulation is a winning position. But the single digit popularity of the Libertarian Party demonstrates that American voters' appetite for reducing regulation has it limits. .

Wednesday, November 9, 2011

Illinois Legislator Sets New Standard For Kicking The Can Down the Road on Addressing Deficit Crisis

Illinois is broke. The state has $85 billion in unfunded pension plan liability. According to the Pew Center on the States, Illinois has the worst-funded state pensions in the nation. The deficit crisis is so desperate that one of the most powerful Democratic state legislators in the U.S., Mike Madigan, is supporting a bill to reduce the state's future pension liabilities. The pension overhaul plan, Illinois Senate Bill 512, was sent to the House of Representatives by a 5-4 vote by the Personnel & Pensions Committee yesterday (11/9/11), in part due to Madigan's support as well as the advocacy of the Illinois is Broke group.

Plans to get a handle on state and federal deficits put Democratic legislators in a box. On one hand, their core base of contributors vehemently oppose budget cutting measures. On the other, failing to address budget deficits will lead to financial calamity. The result is that they often "kick the can down the road' on tough decisions, ultimately allowing deficit holes to growing even larger and exacerbating the potential for a future crisis.

Illinois State Legislator Dan Bliss (D - 17th) has raised the bar on how to waffle on a tough deficit cutting measure. According to the Chicago Tribune, Bliss "noted actuaries had yet to calculate the worst case if the bill failed to work. He urged taking it up next spring, when he said he would vote for it if nothing better comes along". By taking this position, Bliss has avoided angering his core base of contributors, while also pacifying the fiscally conservative voters in his district with a straightforward opposition to the bill.

Unfortunately, a strategy of kicking the can down the road on deficits just creates a bigger mess for all those born in the U.S. after 1955. Does Bliss really think a new plan for addressing the Illinois pension crisis is going to magically appear in the spring?

The U.S. needs legislators that will attack the deficit crisis. There has already been too much waffling. We'll find out next November how the voters in the Illinois 17th State Representative District respond to the waffling by Dan Bliss.

(author's note - I'm a voter in the Illinois 17th district)

Tuesday, November 8, 2011

Beware of Little Old Ladies With Signs - Why The Tea Party Should Compromise on NO New Taxes

Congressman who are proposing to reduce the U.S. deficit with plans that do not include tax increases should view the video of a mob of senior citizens chasing former House and Ways Committee Chairman Dan Rostenkowsi down a Chicago street. This episode was certainly humbling for Rosty. However, the anger generated over his attempt to rein in Medicare costs may pale in comparison to the fury produced by the cuts required to make a dent in the U.S. budget deficit. In 2011, the U.S spent $3.6 trillion and only took in $2.3 trillion. Closing this $1.3 trillion gap is going to require drastic action. Heck, the deficit Super Committee is having difficulty just coming up with $1.2 trillion in deficit reductions spread over 10 years. The Deficit Supercommittee at best will only make a dent in the deficit. Even if they do reach an agreement, if it is politics as usual, the deficit reductions may be back ended toward the last half of the decade.

The Tea Party should realize that their electoral success in 2011 had as much to do with an electoral backlash against entrenched government as it did with a mandate to cut government spending. As the declining popularity poll numbers for Scott Walker in Wisconsin and for John Kasich in Ohio show, voters support is extremely fickle for tough measures required to solve the budget deficit mess. And given the size of the federal deficit, the only way to slash into it is to make deep cuts in social security, medicare, medicaid, and defense. Making any headway in cutting entitlements or defense is going to be incredibly contentious. Given that health care, pensions, and defense eat up 24%, 22%, and 25% of federal spending, even if all other government spending was eliminated, there still would not be enough savings to balance the budget. All other federal government spending combined only totals $1.05 trillion, only 80% of the size of the deficit.

Thus if Tea Party politicians are really serious about cutting into the deficit, cuts in entitlements are required. And these entitlement cuts are going to anger little old ladies as well as other segments of the population. Given how deep the cuts will be, it will almost certainly be impossible to garner support for these spending reductions without expanding the backing for them with populist tinged tax increases. The attitude of many voters was expressed by this letter writer to the Chicago Tribune, "I am so furious at the Republicans of Congress I could spit. Putting a knife to the throats of the seniors, the poor and the disabled by trying to preserve the tax cuts for the wealthy is abominable. They keep calling the wealthy the "job makers. They've had the tax cuts for years and where are the jobs?"

Frankly, I think that many of the Tea Party Congressman that will not bend on allowing some of the Bush era tax cuts to expire in a trade off for budget cuts are horribly misreading the will of voters. There is even political cover for allowing the Bush tax cuts to expire as "Not continuing a tax cut is not technically a tax increase," according to influential tax reformer Grover Norquist. When Norquist was asked if doing so it violates anti tax pledges, he said, "We wouldn't hold it that way." An argument could even be made that an absolute refusal to agree to a compromise that include tax increases makes it impossible to come up with a solution that can attract enough votes to gain legislative approval for deficit cuts. While "no new taxes" plays well the conservative base, it is not a position that can win legislative passage. Refusing to compromise on increasing taxes as a component of a deficit cutting plan may even exacerbate the problem, as U.S. debt worsens each day the politicians in Washington remain stalemated.

Back in the '90's, Canada proved that it is possible to get a huge budget deficit under control. Their solution is instructive. The Canadian ratio of budget cuts to increased taxes was 6 or 7 to 1. The Canadian experience provides support for a position that should be much more palatable to voters than a plan that exclusively targets spending cuts. Further, it has the added merit of actually having worked.

For the most part, American voters are unaware of how great the risk of severe economic decline is if the U.S. continues to run up huge deficits. Fiscal conservatives need to get far better at educating the American public about the coming economic catastrophe if the U.S. government continues to kick the can down the road. Americans will face an economic collapse that is as nasty or worse than the one the Greek people are living through. While the reporting on Greece is focused on politics, the Greek economy is so awful that many are in despair and the suicide rate is up 40%. At best, it will take the Greek economy years to recover.

It is critical to the future of the U.S. and all Americans born after 1955 that the deficit be curbed. And getting long term support from voters to make the meaningful reductions on the deficit will require compromises on raising taxes.

Monday, November 7, 2011

Public Sector Pension Reform Bill Has Made Surprising Headway In Dem Controlled Illinois Legislature

Illinois is so broke that some Democrat legislators may actually vote yes for a bill that cuts public sector pensions. It is unlikely that Illinois Senate Bill 512 will become law in the face of virulent union opposition in this heavily Democratic state, but the fact that an attempt at cutting pensions has not triggered knee jerk opposition from the Democratic controlled legislature is illuminating. The debt crisis in Illinois has become so dire that even some Democratic legislators seem to favor this bill for reducing state pension obligations.

I can only surmise that the paucity of publicity regarding the fight over this bill is due to few believing that it actually has a chance of passing both branches of the Illinois legislature and getting signed by the governor. There has been little reporting on SB 512 in the mainstream media. While there is lots of activity among opponents and supporters of the bill, attention has failed to bubble up as a hot issue among the general public. Taking the con side, labor unions in Illinois are sending out communiques to their members encouraging them to oppose the bill. On the pro side, the Illinois Is Broke Campaign is leading the fight. They have been running TV commercials promoting their cause. It is interesting to note that the commercials avoid specifically mentioning SB 512.

The Greek debt crisis offers an illustration of the dangers of fiscal irresponsibility. Given that even Illinois Democratic legislators are targeting the state's debt crisis by taking on the "third rail" issue of pension cutting, it demonstrates that the call for fiscal responsibility is gaining momentum. The progress that Illinois SB 512 has made is a milestone event that probably should be getting more mainstream media attention than it has to date.

Additional commentary on SB 512 is offered via Illinois Legislator Sets New Standard For Kicking The Can Down the Road on Addressing Deficit Crisis

Will Rumored Israeli Attack On Iran Lead to Spike In Price Of Gold and Oil

The price of gold is rallying this morning. With all the turmoil in Europe, there is plenty pf reason to be bullish about gold regardless of the increasing tensions in the Mideast. However, the rumors of a pending Israeli attack on Iranian nuclear facilities could be a contributing factor in pushing the price of the shiny metal higher.

According to a well known aphorism, "buy on the rumor and sell on the news". Based on this advice and all the rumors that are flying around, it would seem likely that the the price for gold and oil increase this week. The rumors are so widespread that they are even being reported on in Beijing. "Israeli Afoot to Attack Iran" is a lead story in Xinhuanet. It would not be surprising if demand from Chinese readers of this article has an strong impact on the price of gold.

An interesting aspect of the Chinese reporting on the likelihood of an attack is that they assume Israel would not attack without a U.S. go ahead. According to Xinhuanet, "still, regardless of whether Israel really intends to attack Iran, the final say would emanate from Washington. Hawkish as Israel's leaders may be, they would not attack Iran without U.S.permission." Frankly, I am not convinced that Israel would only attack Iran if doing so was sanctioned by the U.S. Given that the Obama administration's public posture is that sanctions are a viable path to deter Iran from pursuing nuclear weapons, Israel might act unilaterally. Whether the wishful thinking of the official U.S. position that sanctions could actually deter Iran is just posturing or not, the Israeli's realize that there are only two choices in regard to Iran's nuclear ambitions: 1) accept a nuclear armed Iran; or 2) destroy their capability to develop nuclear weapons. Are the Israel's really willing to give the U.S. President the authority to veto an action that they view to be critical to the survival of their nation.

However, for speculators, whether an attack is truly likely or not, only whether the rumors are likely to move the prices of gold and oil matters.

Iran's threats to close the Gulf of Hormuz are all the more reason for the U.S to aggressively pursue energy independence. And if the price of oil this week is headed higher, it might not be a bad idea to head to the gas station this morning and top off your tank at today's price.

Saturday, November 5, 2011

The Impact of Layoffs on Stock Prices - It Is All About the Spin

Compensation committee rewards to CEO's for downsizing work forces is one of the issues that fuels the anger over income inequality. Frankly, some of the bonuses awarded by compensation committees to executives after they have laid off 100's of employees seem inexplicable. Layoffs are typically a response to declining sales, not exactly an event that deserves to be rewarded. A question that seemingly should be asked more critically before bonuses are awarded after layoffs is whether shareholder value has truly been increased. Can a company that is so stagnant that it is eliminating employees offer much of an opportunity for outsized long term returns? Also, the damaging impact on employee morale and customer perception should probably be given additional weight in these considerations. Further, creating the impression that a corporation is blind to the issues of income inequality and corporate ethics may lead to terrible publicity.

In regard to the impact of layoffs on shareholder value, one commonly accepted myth that should be debunked is that layoff announcements lead to increased stock prices. Actually, the impact of a layoff announcement on the short term price movement is directly related to how the company spins the announcement. Numerous studies have indicated that the reaction of the markets depends upon whether the layoff announcement is considered to be: 1) a strategic reorganization; or 2) a defensive response to declining sales and lowered expectations for future demand. Thus, the positioning, or spin, put on a layoff announcement has a huge impact on short term stock price movement. According to Gunther Capelle-Blancard and Nicolas Couder:

"Markets will receive a positive signal when they consider that the firm is in good financial health and that the announcement is part of a wider reorganization program. The layoffs plan will then probably be interpreted as the proof that the firm is trying hard to become more efficient. This is referred to as the pure efficiency hypothesis (Lin and Rozeff, 1993).

Conversely, if the company is in a more delicate situation, the markets will probably receive a
negative signal because they will interpret this as the proof that the firm is facing real difficulties with lower growth and demand opportunities than anticipated (Worell, Davidson and Sharma, 1991). This is referred to as investment decline (Elayan and al., 1998) or demand decrease (Lin and Rozeff, 1993)."

Research debunks the generally accepted wisdom that layoffs are usually good for a company and its stock price because expenses will be reduced significantly and quickly.
As reported by Rethinking the Economy, "studies of 141 layoff announcements between 1979 and 1997 found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects. An examination of 1,445 downsizing announcements between 1990 and 1998 also reported that downsizing had a negative effect on stock-market returns, and the negative effects were larger the greater the extent of the downsizing. Yet another study comparing 300 layoff announcements in the United States and 73 in Japan found that in both countries, there were negative abnormal shareholder returns following the announcement."

Looking at the stock market results for the U.S. companies with the largest announced 2011 layoffs illustrates that the conventional wisdom on layoffs is faulty. The average stock price for both day after the layoff announcement and year to date are both down. However, it should be noted that the short term decline has been skewed by Merck's drop, as three of the five did get small next day bumps. Also, the 7% decline in prices is in large part due to overall market conditions, with the DJIA down about 5% since the late July layoff announcements of four of the five firms.

On a personal note, I adamantly oppose legislation that restricts that capability of U.S employers to layoff employees. However, I also believe than any executive that lays off large numbers of employees should have an ethical obligation to sit through a number of the termination meetings. It seems too easy and cold blooded for someone that continues to take home enormous compensation to sit in an ivory tower while devastating the lives of 100's of families simply by signing a piece of paper. They should personally be exposed to the pain they are causing. Laying off employees at the very least should lead to numerous sleepless nights for those doing the cutting.

Friday, November 4, 2011

Should Executive Compensation Be Tied To Job Creation?

On a visit to an Occupy encampment you will come across dilettantes who have come for the party like atmosphere, anarchists, and levelers. However, you will also come across some people that have been driven to the Occupy movement due to overwhelming frustration at the seeming hopelessness of their job hunting efforts. (Of course, I live in Illinois, and my advice to the unemployed would be to find a low unemployment rate state in which to go job hunting, but that is another story). While the OWS movement has been over hyped, the level of desperation of many of those searching for jobs suggest the potential for additional anarchistic actions in the future.

Sweeping the issues of income inequality and job creation under the carpet could come back to haunt corporate boardrooms. The potential for OWS to become dangerous was illustrated by Occupy Seattle's attempt at a Robespierre moment when they attempted a citizens arrest of Jamie Dimon.

Income inequality is an issue that seems unlikely to go away. Heck, even the two most highly visible targets of the protesters, Jamie Dimon and former Bush administration economic advisor Greg Mankiw, have expressed concern about income inequality.

According to Dimon, "America has become more inequitable in the last 10 or 20 years. That's a fact. I don't personally think that's a good thing." Ironically, the subject of the class that 8% of the Mankiw's Harvard students walked out on was income inequality.

If the job situation continues to deteriorate, corporate boardrooms could come under siege. The proposed millionaires tax and the attempt to seize Jamie Dimon could simply be the tip of the iceberg. Stirring up anger about corporate executive hauling in huge salaries while millions cannot find jobs is an incredibly powerful populist message.

Thus, tying executive compensation to job creation may be merited in order to: 1) defend the corporation from attacks; 2) serve as good public relations, 3) addresses the issue of income inequality, and 4) make a contribution to job growth that America must engender if we want to avoid someday becoming as broke as Greece.

Many will object to this proposal because rewarding job creation takes away from a primary focus on increasing shareholder value. However, in my opinion if America does not find a solution to the bubbling anger of frustrated job seekers, it is not that big a leap to assume that the one type of job that will experience growth is that of bodyguard. Tying executive compensation to job creation might even reduce the likelihood of highly paid executives having the bulls eyes of anarchists on their backs every time an article about their compensation is published.

Thursday, November 3, 2011

Is Energy Independence The Path To U.S Economic Growth?

The shipping lane in the Strait of Hormuz is only two miles wide. While 75% of the oil tankers passing through this chokepoint are headed to Asia, its closure would lead to a huge spike in the price of oil and damage the economies of all oil importing countries. As shown on the map, Iran sits astride the strait and could easily strike at shipping passing through it. Given the prospect that Israel might carry out military action against Iran, concerns are justified that Iran could close the Strait of Hormuz as a reaction to being attacked.

The vulnerability of a chokepoint that 17% of all worldwide traded oil passes through is just one reason that the U.S. would benefit from a focus on energy independence via replacing imported oil with domestic gas. Others include:

1) job creation
2) long term savings as the cost of imported oil continues to climb
3) reduced pollution due to replacing oil with natural gas
4) reduction in dollars flowing out of U.S.
5) enhanced security of energy supplies

While the phrase "drill baby, drill" sets off knee jerk antipathy for many, unfortunately it may be the only way out of our economic morass. Is the prospect of an ever worsening cycle of declining living standards more appealing? Is the prospect of huge cuts in social security benefits for anyone born after 1955 more appealing? Does the prospect of reducing pollution by replacing imported oil with domestic gas make the idea of "drill baby drill' less loathsome?

An oil industry commissioned study projects oil-and-gas development could add 1.1 million U.S. jobs over the next decade and bring in $36 billion in federal revenues by 2015. This is a job growth plan that makes some of the plans floating around that are based on increased government spending or revisions to the tax code seem rather mundane.

While the "peak oil" story has been knocked off the front page by the huge off shore finds of the last couple of years, we are almost certainly on the verge of "peak cheap oil". Oil is unlikely to fall below $70 a barrel for a prolonged period of time unless demand declines sharply. Given the world's population growth and the expanding demand for oil by Asian nations, increased dependence on expensive to extract oil seems assured. The cost of spending on energy is already eating up an increasingly large share of household budgets. Thus, taking advantage of the availability of domestically produced natural gas could benefit the economy by protecting U.S households from inflating energy costs and also give U.S manufacturers a competitive advantage.

Of note, the growth in natural gas production in the U.S has been in large part due to the Energy Policy Act of 2005 explicitly exempting fracking from the requirements of the Safe Drinking Water Act, the Clean Air Act, and the Clean Water Act. According to The Casey Research Energy Team, "the Halliburton Loophole, as it has become known, enables gas companies to pump millions of gallons of fracking fluid into old wells or to leave the fluid evaporating in open pools, without having to identify the chemicals in the fluid. Those chemicals include benzene, toluene, boric acid, xylene, diesel-range organics, methanol, formaldehyde, and ammonium bisulfite".

Finding reasonable compromises between protecting water supplies and reducing methane pollution with be critically important to: 1) expanding the use of natural gas; and 2) ensuring that switching consumption from oil to natural gas produces a net environmental benefit. Unfortunately, the timetable for the EPA's highly anticipated Final Hydraulic Fracturing Study Plan has the initial research results not being released until the end of 2012 and the final report not being released until 2014. If hard core environmentalist get their way and ban fracking, the consequences for the U.S. economy could be devastating.

For a more information on the subject of why Shale Gas Reserves Could Reignite U.S. Economy, check out the well written article on the subject by Paul Barrett.


Restoring U.S. job growth and avoiding an economic catastrophe by curbing the deficit will require numerous difficult hard to swallow trade offs. However, pushing hard for energy independence may be the most promising path to a booming economic future. The obstructive tactics of the hard core environmentalists that desire a future with reduced economic activity must be overcome.

Wednesday, November 2, 2011

Does Occupy Wall Street Propose to Guillotine the 1%?

Based on the increasing violent rhetoric from Occupy Wall Street, it is not fantastical to suggest that some of the more radical members of the movement could move in the direction of calling for violence against "the 1%". The OWS movement is expressing anger and resentment without a purpose. That is only a step away from anarchy. The following tweet is indicative of the more radical direction that a few OWS supporters are starting to veer off towards:

"This isn't a protest. We're not here for jobs. We're here for a damn revolution" Rodriguez, an #OccupyOakland regular tells me. #ows"

Is the resentment that is being inflamed against "the 1%" anywhere near the level of that toward the French aristocracy in 1789? Obviously not. However, it would be naive not to realize that OWS could turn violent. And the obvious target of that violence is "the 1%". It is almost the only direction that seemingly flows from the rhetoric of OWS.

Looking for a job opportunity? If the OWS movement evolves from an over hyped motley collection of aimless out of work anarchists and continues down the path toward violent radicalism, there could be booming demand for body guards in the not too distant future.

What We're Reading - Wednesday 11/2

The "Occupy" movement may have started in New York, but Occupy Oakland is on the verge of becoming the most influential of the U.S. based "Occupy" groups. Now that Occupy Oakland has become "action" oriented, it becomes a question of whether other groups across the country will enter into a competition to one up each other. Of course, on the lunacy scale, it is going to be pretty hard for a group from any other part of the country to out do the Bay Area.

Occupy Oakland's general strike call: 'Shut down the 1%'

It can be challenging to get a handle on why the European debt crisis matters to those living in the U.S. Gerald P. O'Driscoll Jr. provides a good explanation of

Why We Can't Escape the Eurocrisis

The attention grabbing message of a number of the GOP hopefuls is a flat tax plan. However, as much as the 53% that pays income taxes would love to benefit from a simplified tax code, is a flat tax really a viable election tool?

Can the GOP Deliver Flat-Tax Reform?

Tuesday, November 1, 2011

Is Italian Labor Minister's Warning On Terrorism Valid?

The situation in Europe is obviously terribly ugly now that a cabinet minister has issued a warning about this being a potential breeding ground for terrorism.

Italy’s labour minister Maurizio Sacconi was quoted as saying "We must stop creating tension over labour reform which could lead to a new wave of attacks. I am not afraid for myself because I have (armed) protection. I am afraid for the people who are not protected and could become a target of political violence that is not extinct in our country”.

It seems to me that the German's had better come to a realization that the Eurozone is doomed or they risk surpassing the U.S as the nation that Europeans most dislike. Austerity measures forced upon southern Europe by the German led "troika" will not solve the debt crisis.

Ambrose Evans-Pritchard offers commentary and translation of the article that was originally published in Italy by Il Sole

Living across the pond does not insulate Americans from European problems. The world has become so interconnected that European problems are almost sure to infect the U.S. The European recession makes it harder to ignite the U.S job market, and there can be no guarantees that the Occupy Wall Street movement will stay peaceful as frustration builds over its minimal impact on U.S. society.

Greeks In Despair Over State of Economy

Whether or not it was a good decision, the Greek lawmakers that followed the PASOK party line and voted for the latest austerity plan in order to qualify for the debt bailout showed some real courage. Voting in favor of this terribly unpopular measure in an environment of strikes and riots can not have been an easy decision. However, now their political leader and Prime Minister George Papandreou has literally cut the legs out from under them by calling for a national referendum on the latest austerity plan.

It is impossible to determine what the consequences of this action will be, but I don't think the crashing financial markets are over reacting to the mess that Papandreou has created. The Greek economy is in such difficult shape that the suicide rate is already up 40%. The new uncertainty caused by Papandreau about Greece's economic future is likely to make things even worse.

It seemed unlikely to me that anyone it the world could possibly do anything this week that was even more moronic than Jon Corzine, but Papandreou wins. For those of you that have not been following the MF Global debacle, Corzine made huge and wildly speculative bets that buying the sovereign debt of European countries would be a good investment.

It is not a huge surprise given the turmoil in Europe that investors have bid up the price of U.S. issued debt as they look for a safe haven. However, I have to wonder if that is not a case of leaping from the frying pan into the fire. Is the U.S debt really a safe haven given that a U.S debt crisis will be upon us sooner than most people think?

The Deficit Super Committee's November 22 Deadline Is Looming

For those politicians that prefer to duck responsibility for the budget deficit crisis, the Deficit Super Committee offers a case study in a how not to kick the can down the road. The fourth months of getting the deficit off the front page only provided temporary relief.

As background, this disparate group of 6 Democrats and 6 Republicans is quickly running up against the November 22 deadline to engineer a $1.5 trillion 10 year deficit reduction plan. The committee was created at the beginning of August as part of the compromise that greased the skids for the last minute deal to raise the debt limit.

My guess is that if the committee does come up with a plan, it will be filled with budget gimmicks and the vast majority of the proprosed savings will be backed ended toward the last few years of plan. It will be practically void of the type of unpopular policies required to make any real progress on cutting the deficit. The most optimistic case is probably no better than that the Deficit Super Committee releases a plan that does nothing more than kick the can down the road. However, no one should discount the possibility that there will be a stalemate between the six Democrats and six Republicans. Whatever the results of the committee's work, the result is unlikely to meet the wishful thinking of the U.S. bond buyers. However, I would not expect a plan that is disappointing to the financial markets to lead to a huge increase in interest rates required to fund the U.S. debt, as I cannot imagine anyone being more than mildly optimistic about the likelihood of the Committee coming up with any real solutions. However, for anyone that is considering refinancing debt (mortgage, etc), now might be a good time to move quickly.

Expect the media to ratchet up their coverage of the upcoming deadline. It is a countdown that can be turned into attention grabbing little news bites. However, don't expect the reporting to have much meat about real solutions to the debt crisis.