If you don't like economic stimulus, what do you do about unemployment?

Just to be up front about this, I favor a WPA-type jobs program (also suggested by Paul Krugman). I would go further in saying that I think it should be for something like rebuilding our passenger rail system, something that will give us a big pay off and make sense when the future seems to hold increasing oil prices.

Now maybe you're concerned about the deficit, or just believe that government should not be involved in the economy except for expanding or contracting the money supply. I would argue that while the deficit is a very bad problem and that government intervention is generally bad, now is a time when we really have no choice. Now is one of those rare times when the government should be very active. The deficit concerns me more, but I feel that unless we want to write off our society and life as we know it, we have to do something.

I would be interested in hearing arguments/proposals for dealing with unemployment that do not involve stimulus spending. If Republicans end up controlling Congress in 2010, this is the problem they will be faced with.

If you don't think anything should be done about unemployment I'd like to hear how this will work. What will prevent a continued downward spiral of the economy as more and more consumers are unable to consume? And what about the people who are unemployed and now homeless on the streets. Doesn't our society have some duty to them? And if not, they at least would be a great source of disorder and social strain.

Reagan was right, but he did not get elected in 1932

Ronald Reagan won the 1980 Presidential Election by campaigning against government. After almost 50 years of uninterrupted government growth had created a bloated beauracracy, his argument that "government is not the solution to the problem, it is the problem" had traction. In 2008 Barack Obama was swept into office by a sudden populist desire for more government. When about 30 years of deregulation and hands-off federal policy culminated in a financial crisis that came very close to destroying the world economy, the American public wanted the government to remedy the situation. I generalize here because in both cases there were a significant number of the electorate who dissented from the majority opinion, but in a democracy the voice of the majority of the people does mean something. I suggest that in the United States, this is how our system works. It is ugly and imperfect, leaving many dissatisfied and angry, but we first veer to one extreme and then to the other, with no attempt to correct our course until things get bad enough to force action.

These lurching shifts are due to the way the parties in our two party system have chosen to define themselves, namely Republicans wish to limit government and Democrats wish to increase it. There is no thought in either party of tempering or altering these philosophies as the situation demands. While office holders may govern in a sensible way, they are not allowed to campaign honestly, their constituents demand strict adherence to the party doctrine. So for instance, President George W. Bush bailed out Bear Stearns and AIG, in total violation of party ideology, because it was necessary given the situation. However, a Republican could not run for office promising to do something like this.

I have startling news for you: the people on the other side are not idiots. They have good reasons for believing as they do; their beliefs hold a part of the truth. It's too bad they can't use the other part too. I say this about both Democrats and Republicans, conservatives and liberals.

So Reagan's 1980 policy was right for the time and situation, but it would not have worked in 1932, and he certainly could not have gotten elected then had he run the same campaign. There were problems created by Reagan's policies, as there were problem's created by New Deal policies, and no doubt will be by Obama's actions. But as I said, our system is ugly. It is necessary from time to time to change course, and this is how we do it. While you might not agree with these specific examples, I don't see how you can deny that the continual practice of either party's pure doctrine will eventually lead to catastrophe.

The Change That Is Coming

For the past several months our country has been having a fight (debate is definitely the wrong term and even argument is charitable) over whether we should change our health care system. In some ways this is a fight about change versus keeping things the same. Alongside the health care issue is the looming shadow of the economic breakdown that has been part of our national life for about a year now. There has been great disagreement about how to best deal with this crisis, but unlike health care, on economic matters everyone's objective has been how to keep things the same. Not the same as it is now, but the same as it was in 2006 or maybe the late 1990's. This is all that the Obama adminstration is trying to do with the stimulus and bailouts, they have no hidden plan to socialize the country, they would give anything just to get it back to what used to be normal. And those who oppose President Obama's approach still want the same thing as he, literally a return to "business as usual".

It is ironic then, that the area where there is so much consensus is the one place where there will be drastic change at odds with that consensus. This change cannot be avoided, only delayed, and even that for not much longer. As Jay Leno said recently, at some point we need an economy that actually makes something that people will buy. What will we make that can't be made cheaper somewhere else in the world? The proof of this is all around you whenever you go to the store. America is no longer in a position of strength in the world economy. What we do have going for us is the world wide dependency on the U.S. as a purchaser of goods. This cannot be changed over night without causing problems for the producing countries as well as for us. So it is really in no one's short term economic interest to stop loaning money to the United States; this gives us a window to transition to a national self-sufficiency that will now be necessary in this new economic order.

All of the above is true regardless of the possible economic and political scenarios that may play out. Say the economy recovers and we manage to pay down our national debt. What sort of jobs will people be doing? They won't be working in things connected with real estate and the financial industry. They won't be manufacturing things to export to other countries unless they're willing to work for maybe a tenth of what they have been used to. They may be manufacturing things for domestic consumption but only if those items are sold for a much higher price than what we are used to paying for imported goods, which means the market for these high priced items will be small. Suppose we elect a fiscally conservative president in 2012? This will make no difference to the sort of jobs that will be available to americans now and in the future.

We are going to have drastic change in the sort of work we do and our standard of living, and the only thing we can do is get ready for it. This is where good leadership can make a difference. We do have a limited time to prepare before this happens. A leader who is willing to talk about such a politically poisonous topic and be honest and yet encouraging can make the difference between preserving the structure of society or a chaotic collapse.

In defense of President Obama and government

This is a "Guest Opinion" submission to the Salem Statesman Journal; we'll see if they print it, and how many words they allow - I'm not sure if they've ever given me more than 200 words in the past. (Correction - letters to the editor are 200 words, I believe they have given me 400 words for an opinion. However, I'm wondering if we'll see any "Opinions" giving the other side on this issue).

Since the Statesman Journal recently gave around 400 words to Allan Erickson's attack on government in general and the Obama administration in particular, I hope they will give equal time to an opposing viewpoint.

I believe there is a role for government in our society, particularly in times of crisis such as the economic meltdown of the past year. If both the Bush and Obama administration had taken a laissez-faire approach during this time we would now be experiencing social chaos with homeless shelters overflowing and millions of people in bread lines. As Paul Krugman said, thanks to big government we have avoided a second Great Depression. If you read Krugman's column in the NY Times you will be familiar with the logic behind deficit spending by the government when private spending has dried up. This is exactly the situation now, the lack of available credit is having a powerful deflationary effect. Increasing unemployment is causing even people who are good credit-risks to lose their houses, driving the housing market further down and adding to the risk of bank failures. If unchecked, this continues a downward spiral of wages, business profits, and tax revenues.

The idea behind government stimulus spending in times like these is to stop the downward trend and create economic activity artificially until it can start happening unaided again. It has the added benefit of avoiding the social dislocation created by massive unemployment and homelessness. Even a "fake" job can keep someone in their house and put food on the table.

So President Bush took action to save the financial part of the economy and President Obama continued this and also passed the stimulus bill to save the every-day working part of the economy.

There is one problem with all this: you can only save an economy if there is something there to save. Unfortunately no one seems to have figured out that having 70 percent of our economy depend on consumerism won't work when the consumers can't borrow money anymore. This idea was ridiculous in the first place, but it worked for about 20 years. The stimulus spending has provided temporary relief, but when the economy does not respond (because this kind of economy can't exist anymore) we will be in trouble unless we have used our spending to transition to something else.

We should give President Obama credit for keeping things from getting a lot worse, but we should demand that he provide leadership for a new kind of economy that makes sense and provides for our needs.

CIT Update

CIT did obtain a loan from its bondholders after the government refused to step in. However, the terms of that loan make me think their prospects are bleak and that they are still very likely to declare bankruptcy. A Bloomberg headline said the interest rate on the loan was more than 25 times the LIBOR rate. From that story:

"“This is called Don Corleone financing,” Egan said, referring to the patriarch in the organized-crime family depicted in the 1972 film, “The Godfather.” “You can’t lose money on this deal.”

Outside of the “urban underworld,” Egan, 52, said he couldn’t recall seeing a loan backed by as much collateral that paid interest rates so high. “These terms would make a pawn- shop operator blush.”

Why I'm not worried about inflation

No matter how much money is printed it can't cause inflation if it's not in circulation, i.e. being spent by individuals and businesses. So as long as people keep losing their jobs and banks continue to issue very few loans, there's no way for available money to get out there where it can be used. Obviously the money supply isn't simply increased by the printing press, there are many things that can have the same effect: lower interest rates, making credit easier to get, etc.

When someone who is unemployed gets a job, suddenly they have more money to spend. When we are close to full employment you are more likely to get a pay raise, and again have more money to spend. In this job market you are likely to get a pay cut and be thankful that you still have a job, which means you have less money to spend. If you can get credit easily then you're more likely to buy a car or a house, etc. If a business can get credit and it knows that people are spending money because they can get credit then that business is more likely to expand, adding jobs, and putting more spending money in people's hands. But right now we see unemployment increasing and credit hard to come by. So I have no fear of inflation any time soon.

With one big caveat: inflation is no threat to our domestic economy, but the devalued dollar (a direct consequence of our soaring national debt and our increased money supply) has huge implications for our import trade. As you know we are dependent on imported oil in order for our society to function. And it seems that we have become dependent on imported food judging by the contents of the local supermarket, in spite of the fact that we could be producing our food locally. A devalued dollar will mean that at some point we won't be able to import oil and food, at least not in the quantities we are accustomed to. This will adversely impact our domestic economy by making it grind to a halt. This will then result in "inflation" in the sense that goods will become very scarce as production and imported goods greatly decrease. This inflation will occur regardless of the money supply, it will be based on unavailability of goods.

So I suggest that we go into debt now (increase the national debt) but that we use that money to become self-sufficient as a nation. Add public transit and train systems to reduce our dependence on oil. Encourage small local organic farmers who can raise food with very little petroleum input in the form of fertilizers, pesticides, and tractor fuel. Restore our manufacturing base so that we can produce the items we need in this country. This will take some time, but eventually will produce a healthy economy. At that point we can worry about inflation.

More on CIT Group

Referring back to yesterday's post about CIT Group facing collapse, CIT Group is important right now because it is one of the few sources of short-term credit for businesses. In spite of the government TARP assistance or even after returning the TARP money, banks are not making loans. Maybe they have rightly concluded that the potential clients are in fact poor risks in this economy. This is part of the reason why CIT is in trouble; their loan clients have been defaulting.

Even for very simplistic business models you can see how a restaurant, for instance, would need credit to pay for this month's supplies and maybe even employee salaries in order to be open for business and make money. I suppose they could save up a cash buffer first before starting (probably some economic arguments for why this is unlikely) but in the real world this is not the reality. So if CIT goes away, things like restaurants and retailers go out of business very quickly (I would guess within a month or so). This means many more people unemployed and further reduced revenues for cities, counties, and states; in short, continued severe economic contraction.

So Paul Krugman is right, at least in the strictly mechanical sense of how our economy works: we really do need more money quickly thrown into the system to keep this from happening. The Fed is powerless to do this since interest rates are already zero, so options like the government stimulus are about all we have. If the money is not provided, I guarantee that we will see the great economic contraction; it is like a law of physics applied to our economic system.

Where I part with Krugman is on whether it is desirable to keep the system going. If it is, then it doesn't matter if the stimulus money does anything useful or not. Keynes made this point blatantly when suggesting the benefits of burying bottles of coins in the ground so mining companies could dig them up, providing jobs and profits. The whole idea is that any kind economic activity and available credit will get the system moving again so it can return to its former task of doing useful work and providing value. Our problem, as I have pointed out before, is that our system was not doing useful work or providing value even before it seized up, and the changed global economic environment makes returning to that previous model impossible anyway.

Since a further stimulus seems politically impossible, we should expect economic contraction.

A third way would be to scrap the former economy and start designing a new one. We would still have the contraction, so people would have to be basically kept alive during this period by massive government direction and intervention. There is no way to avoid this anyway, before too long social services will start to be stressed to the breaking point by the large numbers of unemployed. But if we are intentional about it we could do useful work towards the new economy while meeting these needs.

Watershed week for financial system?

I'll take a page from Paul Krugman's book in not making a prediction here, just raising the question. About a year ago (I think in June 2008) Krugman hedged his forecast of a global economic catastrophe by presenting it in the form of a fictional column from one year in the future. It turned out that he was correct, but this sort of thing is hard to call because of the many ways to forestall the inevitable.

I have no doubt that things will get worse, not better, based on economic fundamentals, but the question is always "when?".

This morning on NPR's "Marketplace Morning Report" they pointed out that earnings reports for the financial institutions were coming out this week, and also ran an interesting story about CIT Group, a major player in the revolving credit market, that keeps places like Duncan Donuts running from month to month. The government was in talks with CIT Group over the weekend (sound familiar?) because of a feared run on their capital.

If the earnings reports reveal anything close to the truth then the illusion that we have a sound banking system should be shattered once and for all. The CIT group problem could have an immediate effect on the real economy, the part that people like you and I will notice.

Where's the value?

I would like to discuss the idea of value in an economy. The nature of an economy is to abstract value; the most direct abstraction is:

I give you 10 units each for your 10 turnips, you then give the shoemaker 100 units to repair your shoes, she turns around and spends 20 units for a dozen eggs, where a unit might be a penny, for instance. This is the way a simple village economy used to work a couple of hundred years ago. The money in these transactions is just a placeholder for value, whether the value of some produce or some skilled labor. Without this placeholder we would need to come to some sort of barter agreement for every such exchange, which may not be that bad an idea either, but the use of money seems to make these exchanges easier.

You could complicate the picture by adding in a credit element: the bank loans a ship captain 10,000 units to sail to another land and bring back spices. The ship captain must repay the 10,000 plus an additional 1500 units upon return or else forfeit his ship. The captain expects to be able to sell his cargo for 15,000 units, which leaves him with 3500 units profit after paying back the loan.

This still makes good sense, after all the captain has to hire a crew and buy items to trade for the spices. He does not have money on hand for this but does have the expertise to accomplish the trip. The bank has the money, but does not have the expertise.

Where we start getting into trouble is when it turns out that the bank has made 20 loans like this for a total of 200,000 units, and it only has 50,000 units in its vaults. Since it did not have the currency to pay out these loans, it issued notes that were deemed to be good for the face amount, these notes were honored by the vendors and people of the community as if they were cash. This is what we call "fractional reserve banking"; it is how our banking system works today.

Now why did it make sense for the bank to loan more money than it had? Because the odds of the bank getting paid back were judged to be very good.

I'm starting to get a sidetracked here, back to our subject. In the whole scenario above, you can see value being added by each of the participants, including the bank.

I believe our problem today is that we have taken the abstraction of money to an extreme, so that we abstract the sort of situation described above by placing bets on the bank, or on the captain. Then we abstract this by placing bets on the companies placing the first bets, and so on.

Most of the jobs in the developed world involve working for one of the companies placing many-times-removed bets, or providing a service to these companies. Is there any value added by placing bets on other economic activity? If not, then there is no value added by providing services to those placing the bets.

As they say, I believe, but cannot prove, that at some point pretty early in the cycle of betting, value is no longer added and that we are many orders of magnitude beyond that point today.

This is why I was glad to hear Robert Reich say that he doesn't think we will have either a quick or slow economic recovery, because the real question is what sort of economy will we transition to, since the economy we have known for the past 30 years or so is unsustainable?

I thought it was very telling when "This American Life" discussed a lawsuit brought by shareholders against Citigroup and mentioned that the shareholders' biggest complaint was why didn't Citi unload their worthless collateral debt obligations on some other hapless fool. If they had, everything would have been okay, both for the shareholders and even the world economy. Of course this ignores the fact that the counterparty in this trade is also part of the world economy. So ultimately the only way this sort of system can continue is for a "Deus ex machina" to throw money into the system from somewhere outside. We should say "value" here instead of "money", since we are quite capable of printing our own worthless money.

This is where we currently stand with our banks. They have not sold off their bad mortgages but instead are hoping house prices will come back up and make those mortgages worth something again. If only people would start buying houses, then everything would be okay! As Dmitry Orlov slyly puts it, we will be rescued by extra-terrestrials!

Are Alternative Energy Sources Realistic?

Jeff Vail talks about Energy Return On Energy Invested (EROEI) in a detailed post

http://www.jeffvail.net/

The basic idea is to account for the energy used to produce wind turbines, for instance, and determine if the energy they generate is more than the energy required to implement them (build, transport to location, and install). Obviously if it's equal or less than you shouldn't even be doing it. In fact, if it's not significantly more (by say a factor of 10) then maybe you'd be better off not doing it.

Vail points out that this calculation is very dependent on how wide you define the scope of implementing the technology. For instance, do you also need to add in the fuel needed to raise the rice to feed the worker that built the turbine blade? How about the infrastructure to educate and pay the engineer that designed it? He concludes that it is impossible to accurately account for this, and suggests a different approach, based on price of the technology in the market. He intends to evaluate Wind and Solar power using this methodology in upcoming posts.

The point to take home here is that if the energy alternatives we're considering do not have much of an EROEI ratio then we should not be wasting our time on them. If there is no alternative with a good EROEI then we should start figuring out how to get by on less energy. I think there are reasons why we should greatly lower our energy use even if a good alternative energy source exists; this is a topic for a different post.

Self Deception

If what we are doing is so good, how come we have to pretend it's something else?

This question could be asked about so many things: from stressless bank "stress tests", to collaboration with the health care industry for universal health coverage rather than a single payer (government) system, to spending 50 billion helping GM through bankruptcy and not wanting to talk about whether tax payers will ever get this money back.

Is it because you just can't say out loud that the decision was made for expediency in order to balance the interests of strong lobbying groups? (You could maybe apply this to several of the above).

Is it because the best long term strategy requires the taxpayers to take a hit, but we don't dare tell them?

Bill Moyers discussed the benefits of a single-payer health care system on a recent show and concluded that this was the only way to achieve large gains in efficiency and savings. But when people asked politicians why this was not on the table, they were told, "because it will never happen", and that we would be foolish to squander the opportunity for extended health coverage on a pipe dream like this.

Unfortunately there is such a thing as the "possible" and the "politically possible".

However, it would do us a lot of good to at least say what we're really doing, instead of lying to the group and to ourselves about it.

How about this: "We're giving 50 billion to GM because we need to have some manufacturing base in this country, and they are one of our few examples. You will never see this money again. In fact, they will probably start losing money again once they come out of bankruptcy, and at that time we will have to either let them go under for real, or give them more money."

I'm not particularly irate about the GM example, it just serves as a good demonstration of what I'm talking about. I'm much more concerned about the health care solution.

Bush closer to Cheney than expected

New York times columnist and "The News Hour" analyst David Brooks made the point recently that the Obama administration has essentially taken the same policy on Iraq and terrorism as the second half of the George W. Bush administration, when Dick Cheney's views were out of favor. I would pretty much buy into this, and I felt that Cheney's recent defense of torture tactics would not be supported by Bush now. However, George W. Bush gave some defense of these in a recent speech, saying that he believed they were legal at the time and that they made us safer.

Brooks also made the point that unlike Bush, President Obama gave a clear articulation of the reasons for his policy. While the policy changed in Bush's last few years, he did not emphasize this or build a case for it; instead he continued the approach of never admitting a mistake.

How do we know what's real?

Europe2020

http://www.europe2020.org

describes an epochal shift in the world economy, taking place before our eyes. During this time, the old economic indicators are unreliable, and what's worse, they have been doctored by large-scale intervention so that they say what we want to believe. Below from their May 15 post:

"Of course, everyone is free to think that a few points’ monthly variation of a particular economic or financial indicator, itself largely affected by the multiple interventions of public authorities and banks, carries much more value on the evolution of the current crisis than those stepping out of century-old referential frameworks. Everyone is also free to believe that those who anticipated neither the crisis nor its intensity are now in a position to know the precise date when it will end.

Our team advises them to go see (or see again) the movie Matrix [5] and to think about the consequences of manipulating the sensors and indicators of one’s perception of given environment. Indeed, as we will examine in detail in our special summer 2009 GEAB (N°36), the coming months could be entitled « Crisis Reloaded » [6]"

Musings on Capablanca vs. Alekhine and the nature of the universe

Jose Raul Capablanca was World Chess Champion from 1921 to 1927. During that time he was considered unbeatable in a match and dominated tournament play. Nevertheless, Alexander Alekhine defeated him in the Buenos Aires title contest by 6 wins, 3 losses and 25 draws. Alekhine, who had never won a game against Capablanca before, prepared extensively for the match, poring over Capablanca's games looking for a weakness. To his surprise he discovered that upon closer examination the seemingly strong moves of the champion overlooked certain possibilities. The challenger also altered his attacking style to a more patient, positional style more like Capablanca's.

So was Alekhine's victory a vindication of his baroque, inventive, chaotic play, and a refutation of Capablanca's simple, logical, positional buildup? Fischer said of Capablanca that he won his games by outmaneuvering his opponents in the middle game, so that the game was over when he simplified to end game, his opponents just didn't know it yet. Of Alekhine, Fischer said that his whole approach was wrong. Interestingly enough, Bobby Fischer combined the will to win of Alekhine with the classical simplicity of Capablanca.

Was Capablanca like Newtonian physics, true as far as it went, but lacking the deeper truth of chaotic quantum mechanics? Was Alekhine the Heisenberg Uncertainty Principal over the board?

After the match Alekhine admitted that he was honestly surprised that he won, and felt that he benefitted from overconfidence on Capablanca's part. In spite of a prior agreement, Capablanca was never given a rematch, and the two were bitter enemies until Capablanca's death, at which point Alekhine praised his former opponent.

Local real estate development mostly gone

This may not be a news flash, but I think it is a good reminder about the big change our economy has gone through, and the repercussions that we have just begun to see.

The Statesman/Journal ran a front page story today on the Salem City Council's proposal to cut back it's regular meeting schedule from once a week to two days a month. The reason: lack of "residential and commercial development issues". So clear evidence here that things have changed a lot, and an unintended revelation that our city's leadership has been spending half their time on real estate development. The other issues for next week's meeting are deciding how to spend some federal stimulus money, discussing cameras at red lights, and choosing a name for a fountain.

Salem has a population of about 150,000 according to wikipedia. I believe the state of Oregon is the largest employer in the area, with Salem Hospital also employing a significant number of people. After that, not much in the way of industry or large businesses. What will become of all the people who were involved in construction, real estate, and related services, and what will be the further impact on the local economy?

Policy of Growth not Sustainable

This is in response to and in support of David Ellis' thoughtful April 29 letter in the Statesman Journal "Population growth might be bad". I couldn't agree more, and I'd like to take it a step further, "Economic growth might be bad". I think in both cases it depends on where you're at in the spectrum of the physical limits of your environment. For the population issue experts concluded in the 1970's that we were nearing our planet's population limit, based on the fact that there are decades of lag time between an attempt to stop population growth and the realization of this goal. Here is the first conclusion of an abstract to "The Limits to Growth", a report to the Club of Rome (1972), "If the present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next one hundred years. The most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity."

The idea that economic growth might not be desirable is really just an extension of the population growth discussion. If you think about it, continual economic growth depends on a growing population both to supply more labor and to supply more consumers. Likewise, a continually growing population depends on economic growth to provide jobs. Since the population limit is upon us, it follows that we are also at the point where economic growth is no longer good. This is a generalization, as there are still some parts of the world that desperately need this growth, but the developed world does not.

So if we can't have an economy based on continual growth, what should we do? Bill McKibben explores this idea very responsibly in his recent "Deep Economy", and it is discussed in great detail in the classic "For the Common Good" by Daly and Cobb. I suggest that we think about a system where we only manufacture what we need. This means an end to marketing ploys aimed at getting people to buy new gadgets or more stuff. It really means the end of the economy as we have known it, and a totally different way of life. I don't think this can be accomplished solely by the free market.

A promising hidden agenda?

Charles Hugh Smith raises an intriguing possibility in an essay entitled "Obama's Secret Plan"

http://www.oftwominds.com/blogapr09

I quote:

"In which we speculate that perhaps Obama has a secret plan to discredit the investment banker cabal and thus undermine their vast political power and reach.

Many observers, partisans non-partisans alike, have been mystified by President Obama's continuation of the Bush/bankers/Treasury's "privatize bonuses, socialize risks" campaign of taxpayer-funded bank bailouts, phony slight-of-hand "transparency" and political support for blatantly bogus accounting of banks' profits, assets and losses."

My comment here: I count myself among those so mystified.
Mr. Smith goes on,

"Is there any strategy would might actually work? How about "give them enough rope to hang themselves"? President Dwight Eisenhower has long been dismissed as a do-nothing who "got lucky" in his two terms. Perhaps--but he was also a canny politico who didn't say much because he preferred to give his opponents plenty of stout rope. And sure enough, most of the time they promptly hanged themselves with their own excesses."

My further comment: I certainly believe President Obama capable of this level of subtlety, and I only hope it's true. Smith goes on to suggest that we should watch Paul Volcker as an indicator of whether or not there is more to this than meets the eye. He says that if Volcker resigns, then Obama actually believes in his current policy and has nothing up his sleeve. But if Volcker stays on, even in deep background as he is now, then we may be in for a big surprise.

More from Smith,

"What better way to discredit the bankers than to give them plenty of rope to complete their tarnished, fraudulent "plan to save Capitalism from itself"? How can they complain when their own bankrupt policies have been supported? ...

Make like you're doing the banker/Plutocracy's bidding in every possible way. And what will be the result?
A complete repudiation of the entire Bush/Treasury/banker bailout and "free pass" to further plundering. And when the public rises up in righteous fury, then you appear to bend, almost reluctantly, to "the public will."

Let's not forget the recent past

Try to remember, if you can, the first several years after 9/11/2001 and the political climate at that time. There were very few voices raised against things like the Bush doctrine of preemption, the plan to invade Iraq, and the use of torture. Anyone in the media daring to be critical of the Bush administration (and there weren't very many) was putting their career at risk. Paul Krugman was one of those few critics. I think what he says below is true - we failed a test of national character.

From Paul Krugman's blog, 4/24/2009:
"One addendum to today’s column: the truth, which I think everyone in the political/media establishments knows in their hearts, is that the nine months or so between the summer of 2002 and the beginning of the Iraq insurgency were a great national moral test — a test that most people in influential positions failed.

The Bush administration was obviously — yes, obviously — telling tall tales in order to promote the war it wanted: the constant insinuations of an Iraq-9/11 link, the hyping of discredited claims about a nuclear program, etc.. And the question was, should you stand up against that? Not many did — and those who did were treated as if they were crazy.

For me and many others that was a radicalizing experience; I’ll never trust “sensible” opinion again. But for those who stayed “sensible” through the test, it’s a moment they’d like to see forgotten. That, I believe, is the real reason so many want to let torture and everything else go down the memory hole.

Let’s hope that doesn’t happen."

High Marks for Obama So Far - Except on Economy

I don't mean this sarcastically, I sincerely believe that President Obama has done a very good job making important decisions and representing our country to the world. He has been everything I had hoped for, except in his handling of the economic crisis. I especially liked how he said that CIA agents who committed the legalized torture of waterboarding would not be prosecuted, but that the officials who decided this was legal might be. This should make future justice department lawyers and national security advisors think twice about returning to these practices.

If these were ordinary times, President Obama would be off to a great start. Unfortunately he has the privilege of dealing with an economic catastrophe that has been years in the making and that is different from anything we have seen before. His approach has been to try to restore the system; but this is not possible, as we have pointed out in previous posts. He has continued the bailout strategy begun by the Bush administration, when a clear-eyed reading of the situation should tell him and his economic advisors that this is just pouring money into a bottomless pit. It is clear that the economy as we knew it will fall apart without such bailouts, but it would be better to take it apart in a controlled manner instead of trying to prop it up. That economy is gone and bailouts only postpone the inevitable, and not for very long.

In fairness to Mr. Obama, he is a politician who has been elected President. You do not get a radical person elected to this office; instead they are a product of the general public will, which is not inclined to think very far outside the box. We should be glad that he does show some bold and revolutionary tendencies; his health care agenda, for example.

I believe Barack Obama does have the capacity to meet this extraordinary challenge, but it may take him a while to realize that something truly different and historic is called for. We need him to come to this place while he still has political capital and the public's trust.

Suggestion: controlled demolition of the financial system

Note: below goes against what George Ure is predicting, but Ure is saying what he thinks will actually happen based on the government policies chosen so far, while Ringoen is arguing for a different course of action. I agree with Ringoen's idea, but I would not be surprised if Ure's prediction turns out to be true. Ringoen's plan would be a drastic (and I think needed) change in government policy, a policy that extends back to the Bush administration and is being continued by the Obama administration.

This article by Gordon Ringoen

http://www.prudentbear.com/index.php/commentary/

makes some good points about the problem with the financial system being insolvency rather than lack of liquidity. Lack of liquidity would mean that all would be well if we could get financial activity back the way it was before things fell apart, but we know that isn't true because, as the article points out, for the last several years banks were operating a ponzi-based business model by making loans that they had no intention of keeping on their books. People were buying houses with borrowed money in order to to quickly resell them at profit, etc. But this business model is over, and we do not really want to return to it. As he puts it,

" If, in the unlikely scenario, they (the bailouts) do reflate the financial system, the bubble would still exist and huge amounts of additional credit would be needed to get the economy expanding again. The bubble would just be bigger for the next bust. The amount of credit required to perform this would surely bankrupt the country by making the U.S. dollar worthless and would chase away foreign investors and central banks who own 60% of our Treasurys. The total amount of bailouts necessary to reflate is unknowable but it is more that we can withstand."

Instead he says that the market needs to deflate to bring assets back into agreement with the real economy. I think this definitely means house prices and some other things as well.

Ringoen says that the choice is not between bailouts or systemic collapse, but suggests controlled system demolition as the right alternative. This is the difference between his argument and the mindless Limbaugh-Republican fake-populist tea party anti-bailout, anti-stimulus rhetoric. He at least acknowledges that there is no return to business as usual.

He suggests,

"Instead of giving non-discriminating bailouts, the government could let these insolvent financial institutions fail and then make direct grants or loans, where necessary, to avert total collapse. It could be considered a controlled demolition. Though painful, it would reduce the total cost to the government, and most importantly, would destroy uneconomic claims necessary to bring the real economy and the financial system back to balance."

Ringoen is also in favor of stimulus spending to put people back to work in value-creating jobs. I think we have to take the unemployed into account whatever we do. Unemployment is likely to increase, and the first duty of government and community is to take care of those who are not able to take care of themselves.

George Ure shows why a policy of inflation should be expected

From his blog today: http://www.urbansurvival.com/week.htm

"Now, here's what absolutely must happen at a policy level in order to kick the country out of deflation - and this window won't be open too long: A policy decision will be made at the highest levels - and you may not even hear about it being made - that what America needs to survive is a good dose of inflation. Look at the PPI data trend - the last line in the table and it should scare the hell out of you:

(table follows)

March finished goods dropping 1.2% means an annualized rate of deflation of 15.4%.

Pop Quiz Time!

Name one large country whose government has just bet several trillion dollars of future taxpayer generated revenue (and ask what a 15.4% collapse in revenues will do to financial stability/viability of said country): ____________

See how inflation is now the only option?"

They are prepared for sustainable self-sufficiency, but for all the wrong reasons

And now to what I really wanted to talk about today: the Amish! I have frequently been intrigued by the fact that living right among us are communities of people who still know how to do everything for themselves and if necessary could get by quite nicely without modern infrastructure and technology. Although they are not totally detached from our economy (they use the gas/diesel engines sparingly and take advantage of modern medicine and sell things to non-Amish consumers), I believe that they would have no problem adapting if these things went away. I use the term "Amish" as a label for all sorts of religiously motivated simple-living farm communities; there are different varieties of these with differing religious beliefs and rules for living. But as a whole they represent an extreme contrast to the world most of us live in.

I was especially impressed by M.I.T. grad student Eric Brende's book, "Better Off: Flipping the Switch on Technology". Brende lives among this sort of community for 18 months, without electricity and many other things I take for granted. He comes away convinced that his life was not lacking during this period and may have been qualitatively better. He also describes the physical effort involved in a positive way and is surprised that it's not back-breaking bone-weary work. After learning more about these people he observes that about half of their crop is dedicated to providing feed for their horses, yet horses are not absolutely necessary to this lifestyle. Farming could be done by hand without that much more effort (and the total land farmed would be reduced if not providing for the horses). He concludes that a person could live like this by working only half the time, and would have the other half free for study, reflection, or other interests. It seems that the horse is the Amish equivalent of our car - they just like to have them so they can drive that buggy to church on Sunday!

This brings me to the "for all the wrong reasons" part: I did some more reading and discovered that the driving force behind the Amish lifestyle is not a desire for sustainability or even complete self-sufficiency. Instead it is the determination to keep their community intact and to keep their faith pure. This is accomplished through strict religious control and peer pressure, and by minimizing influence from the outside world. As a Christian you might think that I would agree with the idea of maintain purity in faith. My answer is that I don't wish to be someone who thinks they have all the answers and won't listen to other ideas, and I think this is wrong and unhealthy for a Christian community. We should not be afraid of the truth and we should not believe that we understand it perfectly.

Back to the Amish: cars, for instance, are prohibited because they would lead to working outside the community, would become status symbols disrupting the social order, and easy travel would bring more outside influence. Motorized tractors with rubber tires are not allowed because they could be driven into town, which would eventually lead to cars. However, horse drawn motors used to power farming operations are okay.

I am interested in these people because I think they can show us a way to a simple yet rewarding life. But can we accomplish this without their rigid social and religious control? Probably not, but when it comes to living this way because we have no other choice, they will be a great resource to learn from.

One thing that we need to learn from them is to think about long term outcomes. They give great thought and debate to making any changes that would possibly result in a change to their way of life. If there's a chance for this outcome, they simply don't do it.

I know you and I don't want someone making all our decisions for us, this is the standard argument against central planning and I think there is a lot of truth in it. But if we have no planning and restrictions at all, we end up where we are today.

Kunstler says it well

Below from Jim Kunstler's post this morning, I couldn't agree more. What really surprises me is that President Obama seems to have fallen for this idea of a recovery. Obviously if it were true this would be very helpful for what he is trying to accomplish; but this is really magical and wishful thinking. You can only believe this by closing your eyes to our economic status today and to how we got here.

http://www.kunstler.com/

"It's a curious symptom of the consensus trance zombifying the American public and its auditors in the media that something like a "recovery" is now deemed to be underway. And, as events compel me to repeat in this space, it begs the question: recovery to what? To Wall Street booking stupendous profits by laundering "risk" out of bad loans with new issues of tranche-o-matic securitized paper? This I doubt, since there isn't a pension fund left from San Jose to Bratislava that would touch this stuff with a stick, even if it could be turned out in collector's editions of boxed sets. Does it mean that American "consumers" (so-called) are awaited momentarily in the flat-screen TV sales parlors with their credit cards fanned-out like poker hands, ready for "action?" Not too likely with massive non-performance out in cardholder-land, and half the nation's electronics inventory wending its way onto Craig's List. Are we expecting more asteroid belts of new suburbs carved in the loamy outlands of Dallas and Minneapolis, complete with new highway strips of Big Box shopping and Chuck E. Cheeses? Go to banking's intensive care unit and inquire (if you can) among the flat-lining production home-builders and the real estate investment trusts on life support when they expect to rev up the heavy equipment."

Note on yesterdays sports store bankruptcy

I didn't make the connection yesterday because the name has changed a little, but the sporting goods store that's going bankrupt is G.I. Joe's - a fixture in the northwest since I can remember.

Local sporting goods chain goes bankrupt

In todays Salem Statesman Journal, a front page story announcing that a local northwest chain, Joe's Sports, Outdoor, and More, is likely to go bankrupt. Joe's had been in business for 57 years and employs around 1,500 people who will presumably lose their jobs. One store advised holders of gift cards to redeem them today since after that they would not be honored.

Soros on the dollar

CNBC, reporting on a recent George Soros talk

http://www.cnbc.com/id/30069223/

"Soros also said the U.S. dollar is under selling pressure and may eventually be replaced as a world reserve currency, possibly by the IMF's Special Drawing Rights, a synthetic currency basket comprised of dollars, euros, yen and sterling.

"I think the dollar is now under question and I think the system will need to be reformed, so that the United States will be subject to the same discipline as is imposed on other countries," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992. "Being the main issuer of international currency, we have been exempt and we have abused that because we have effectively consumed 6.5 percent more than we have produced. That is now coming to an end."

China recently proposed greater use of Special Drawing Rights, possibly as an eventual global reserve currency. "In the long run, having an international accounting unit rather than the dollar may, in fact, be to our advantage so we can't splurge—you know, it felt very good for 25 years but now we are paying a very heavy price," Soros said."

Who takes the housing hit?

This is the central question; the answer will directly affect the lives of many and will shape our society far into the future. As I suggested yesterday, we can help each other, but when someone loses their job and can't make their house payment helping them come up with the cash is beyond the ability of most of us. It could be done by taking up a collection if there were small numbers of these cases, but what if this happens to 25 percent of the population? At this point there are several alternatives:

1. the homeowner loses the house (the homeowner takes the hit, this is what normally happens.)

2. the government helps the homeowner make the payments in some way, either through some sort of loan or by giving the homeowner a job (the government/taxpayer takes the hit.)

3. the homeowner is allowed to stay in their house even though they can't make the payments, maybe with some provision that they resume payments when they are employed (the bank takes the hit).

The first possibility creates great problems if it happens to very many people at once. If a large number of people suddenly have no place to live, we must immediately find somewhere for them to stay. The most efficient way would be to just keep them where they are, which choices 2 and 3 accomplish.

The second alternative solves the homeless homeowner problem but will fairly quickly cause the U.S. to default on it's national debt because of the large sums borrowed for this purpose.

The third choice is the most direct, simply let the homeowner keep their house. This will destroy our banking and lending systems, probably requiring a permanent nationalization of these, and will create the immediate perverse incentive for people to stop making their house payments while having long term destructive effects on any economy because it casts doubt on the validity of all future contracts and transactions.

From a political standpoint, I think the second choice is the only possibility.

I would argue for the third choice, in spite of the economic fallout. I think it has the benefit of transparency since you directly do what you intend to accomplish. I also think the economic consequences could be mitigated in a future society that emphasized fairness and opportunity for everyone. I believe people have a much greater capacity to cooperate for the common good than we give them credit for.

Who is my neighbor?

Okay, the title refers to a trick question the religious leaders asked Jesus related to the command to "love your neighbor"; he answered with the parable of the Good Samaritan.

There are some other things I was thinking about posting today (did you know that if you got together with your neighbors and figured out how to live more efficiently by pooling resources and buying less stuff that this would be bad for the economy? What kind of a system is that?) but I think in view of the troubles ahead this is more important.

Over the next year, perhaps as early as this summer many of our neighbors are going to be in trouble because they have lost their jobs. Or maybe you will lose your job. I don't expect this to happen to me this year because I work for the state and so it takes a little longer for this sort of thing to occur, but it could happen to me next year.

Those of us who still have jobs need to take care of our neighbors who don't. There is enough food and shelter in this country for everyone, we just need to share it. The government will try to help people out but I think the size of the problem will overwhelm their efforts, so everyone of us needs to look around us and see what we can do to help.

Why a global currency?

This was the first thing that Europe2020 called for in their open letter to the G20 participants. Paul Krugman's latest column shows one of the reasons why this is necessary.

http://www.nytimes.com/2009/04/03/opinion/03krugman.html

Krugman doesn't actually think it is needed, he describes why China wants it, and then concludes that China shouldn't expect the world to bail it out of its investment mistakes. The investment mistake he refers to is China's massive buying of U.S. treasuries (T-Bills). Now China fears a sudden drop in the dollar (likely because of the greatly increasing U.S. debt), yet it can't sell it's dollar holdings because this would also cause that sudden drop before it could sell very much of this asset. What Krugman doesn't mention here (although he's talked about it before) is that the U.S. needs China to not only keep holding these treasuries but also to keep buying them. This is how we are expecting to finance things like the stimulus plan and various bailouts that keep coming up. (I'm not saying we should be doing this, I'm just pointing out what has been official policy in the Bush administration and now the Obama administration).

It may be true that China shouldn't expect to be bailed out of this predicament, except we're now trying to bail out others to prevent a system collapse. I think China's situation qualifies as having great systemic risk. Think about this: maybe they can't sell the treasuries without getting virtually nothing for them, but if the dollar drops significantly than they won't be worth much anyway. With this in mind, they have value as economic leverage at the bargaining table, since if China sold them or merely stopped buying them the dollar would plunge. Also, I think you know that the U.S. depends on China for a lot of goods and food. So I'm saying I don't think we can ignore their problem, because it's our problem too.

A side note: Jeff Vail talks about how China is currently dealing with this problem by using its US Treasuries to buy hard U.S. assets, and suggests this is a good work-around for as long as it lasts.

http://www.jeffvail.net/
March 30,2009 post

The G20 Summit did not implement a basket of currencies as a global currency; Europe2020 then says that we should expect a decade or more of global economic depression and political turmoil. Krugman agrees about the economic part, he ends his column:

"The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run."

G20 Summit Results

Below from Paul Krugman's blog:

"Credit where credit (line) is due: the G20 outcome was better than I expected, with something substantive and important emerging — namely, much bigger funding for international financial institutions (IFIs), plus expanded trade credit. This will help smaller, currency-crisis countries a lot.

A turning point? No. But realistically, most big-time international meetings produce nothing; this did something significant."
----
My own opinion: unfortunately I think we needed a turning point.

You be the expert!

That noted economist Penn Jillette (the talking half of the Penn and Teller magic show) has some interesting thoughts about Obama's approach to the economic crisis:
http://www.cnn.com/2009/POLITICS/04/01/jillette.skid/index.html

Penn describes many counter-intuitive actions that produce unexpectedly good results, and then raises the question about the benefits of the counter-intuitive act of spending your way out of debt. He concludes with the reminder that while counter-intuitive phenomena exist, the general rule is that the intuitive action is the correct one.

While I would argue that by Keynesian analysis deficit spending is not counter-intuitive in a recession because it replaces the demand that has been lost from the economy (this is intuitive) and assumes that a recovered economy will pay back the debt, I applaud Mr. Jillette's weighing in on this important issue and support his right to do so. I also add that I don't think we're in a classic Keynesian stimulus situation because that approach depends on having a sound economy before the recession, which is not true now.

But the important thing to notice is that we are in uncharted economic territory here and in many ways Penn Jillette's opinion is just as valuable as the next guy's.

G20 Summit: global currency, nationalize banks, IMF review of US, UK, Switzerland

Europe 2020 http://www.europe2020.org cites the above three actions as urgently necessary in an open letter to the upcoming G20 Summit participants. They have correctly forecast the unfolding events of the world financial crisis for several years now, and they believe that the world will have a decade or more of economic decline and political chaos unless these three actions are underway by this summer. The last of the three, the assessment of the U.S., United Kingdom, and Swiss economies by the International Monetary Fund seems the least likely to happen. Speaking for my own country only, can you imagine the blow that would be delivered to the national psyche by this event? It seems unimaginable from a domestic political point of view.

So let's keep an eye on the outcome of the April 2nd G20 meetings.

Our Sham Economy - by Krugman and Kunstler

See Jim Kunstler's latest posting

http://www.kunstler.com

"Under a Flourescent Moon"

and Nobel-winning Paul Krugman's NY Times article from last week

http://www.nytimes.com/2009/03/23/opinion/23krugman.html

Both these guys are saying the same thing (that a massive wealth has been lost from the U.S. economy and there is no way to avoid the repercussions), although Kunstler fleshes it out and makes it sound even scarier with a more rabid tone. I add this observation: this is not a case where we have lost the wealth and a counterparty has gained it, instead it's more like somebody who places a bet when they don't have the money to cover it. This wealth has disappeared from the world system (it actually never existed). All the worldwide economic activity that took place based on this wealth will now unravel.

Health Care, Energy, and Education

President Obama listed these as his top priorities in a press conference yesterday. I couldn't agree more, particular for the first two. Providing health care for every citizen is the duty of a civilized country. Beyond that it will allow great innovation in the private sector (how's that, you free market types) because suddenly the average Joe on the street won't have to work for a giant corporation just so his kids can go to the doctor. The promise of health care for all must also come with the warning that there are limits to what we can provide; any workable plan has to stay within its budget. But the basic idea of making this available to all is a huge leap forward for this country, and if Obama can accomplish it he will have done something that other presidents have not been able to do.

By choosing energy as a priority President Obama has correctly identified the Achilles' Heel of our society and economy. Unfortunately his focus is on finding new sources of energy and perpetuating the car as the main means of transportation. This is a mistake and I hope his administration realizes this quickly. What we should be doing is finding ways to conserve energy and move away from the car, replacing it with public transportation and social models that require less commuting. We should also begin scaling back our lives to greatly decrease our energy consumption.

Education is always a good idea and should be available to all, regardless of income. I don't think it will have the same importance going into the future as it has had in the past, because I don't think we can continue being an ever higher tech industrial society, due to limitations on energy.

How about we just do nothing?

So if the stimulus is a bad idea because there is no sound economy to return to, what happens if we just do nothing? Well a Keynesian infusion of government spending was proposed because the economy is no longer functioning; if we do nothing then we must expect the economy to continue in a disfunctional state and for this to get worse. Obviously this is also bad. The only other alternative that I've heard proposed is some sort of tax cuts, which I view as a much weaker version of the stimulus since they don't have nearly the same money multiplying effect. So tax cuts are pretty much the same as doing nothing. If we do nothing then at best case we're looking at 10 years or more of Great-Depression-like conditions, and at worst case a Soviet Union-style collapse. But I don't think the stimulus will save us because we do not have a sound economy to revive. At best case the stimulus may give us a couple of years of recovery until the price of oil goes back up again and then we'll be right back where we are now, at worst the stimulus may have no or little effect and will hasten the likelihood of the U.S. defaulting on its national debt. To be fair to President Obama, at least he's trying to do something to change the situation, and he's using an approach that would have worked in the past, but won't work now. We need a much more radical solution, and even if he comes to this conclusion he will have his work cut out for him convincing the american public.

What we need is an orderly transition into a new economy, one that takes into account the reality of steadily more expensive oil and the fact that we have maxed out the carrying capacity of the planet. This is not some utopian dream; if we can't make ourselves think like this then we will pay the price very soon as our environment continues to degrade and provides for less and less of our needs.

The sort of new economy we need will have a very large place for the small farmer, and will use a lot less energy. This is all very possible and could be a very good life for all of us, just different than what we're used to.

Less Can Be More

Let's be clear about this, an honest assessment of the future in this country calls for a significant decrease in our standard of living. This is because we have paid for our current extravagance with fake money from the housing bubble and with a retail economy based on cheap oil.

However, we still have enough resources for everyone to have a very good life, if we get sensible about how we use them.

First, forget about owning a car and driving all over the place, or about flying places for vacation. Also, there's no use or need for so many of us to be dressed in nice clothes sitting in a cubicle all day.

One of the first things that has to change is we have to become a lot more involved in raising food, maybe personally, or maybe by creating an economy that encourages more small farms. This isn't necessarily bad, I'd rather spend a day working out in the garden (even hard work, which it frequently is) than inside a cubicle. And with some of the ideas being developed in sustainable agriculture, farming doesn't require nearly as much weeding as in the traditional method.

National health insurance must be a top priority, I applaud President Obama for focusing on this. As you frequently hear, we are the only developed industrial country that does not have this. While our economy winds down and more and more people lose their jobs, this issue becomes even more important, since we have depended on employers to provide healthcare. Suddenly many more people will be uninsured.

If you've never read Scott and Helen Nearing's "The Good Life", this book describes an extreme example of the benefits of simplicity and self-sufficiency. Not everyone will want to take it to this level, but we've gone a long ways in the other direction as a society and we would greatly benefit from a return to the land.

Stimulate Demand for What?

Classical Keynesian economics says that when the public stops spending, creating a shortage of demand, the government should step in with massive public spending to get economic activity circulating again. As Paul Krugman demonstrates in his example of the baby-sitting co-op, hoarding behavior brings an economy to a halt but the expansion of money in circulation restores the system. To apply this to our economy, often times this can be accomplished by the Fed reducing the interest rate, making money easier to borrow. Right now the interest rate is effectively at zero, so we don't have this option. But if the government spends money, this can also have the same restorative effect.

Here's my question: the examples of the baby sitting co-op and of public works projects during the great depression were both cases where the underlying economy made some kind of sense. In the baby sitting co-op couples are trading baby sitting service, something that they all need. During the depression farmers were growing food and industry could create washing machines or electric power lines. Farmers wanted electricity and washing machines and were willing to trade food for them. Since the companies themselves did not need grain and eggs, they needed a functioning economy to make this exchange possible. But what about when you have an economy like today, which until recently was based on being able to sell a house for more than you bought it for, or being able to get food or a manufactured product at a cheap price in a foreign country and sell it in the U.S. for a little bit more after transporting it here using cheap oil?

Now demand is falling in our economy, but does it do us any good to restore it when we should not expect the housing market to return to the unsustainable pattern of the last few years, and when our import based retail economy is pretty much just another version of Newman and Kramer using the mail truck to drive bottles to Michigan where they got 5 cents more (surely you've seen this Seinfeld episode)?

When Do You Break the Bad News?

President Obama has been in office for less than two months and already he has many plans in motion and is projecting an image of confidence in the middle of an extremely shaky economic situation. Also, his plans assume and depend on an eventual recovery of the economy. The nature of this recovery has not been defined but it seems like it is assumed to be a return to previous "normal" levels. Does this mean 2006 levels for various indicators, the housing market, etc.? I'm not sure, but I'm pretty sure it doesn't mean a significant reduction in standard of living, or a drastic change in lifestyle.

However, it sure seems like we must expect a much lower level of consumption and personal spending, because the money that was driving all of this (the housing bubble) never really existed.

So the President's plans are going to meet an economic reality that is much worse than he and everyone else is expecting, although I give him a lot of credit for really trying to be realistic about his budget and numbers. The problem is, he happens to have arrived at a moment in history when a big change is required, and people aren't prepared to think this way.

So either he knows this and for political reasons can't say it yet, or he doesn't know this and will be blind-sided by it.

What Should the Recovery Look Like?

The idea seems to be out there that if all goes well, in a year or two or maybe five we should see the DOW return to above 10,000, housing prices should gain back some of the 30 percent of value they have lost, unemployment should be below 5 percent and people should start buying cars, houses, and stuff again just like before.

This at least implicitly assumes that the terrible situation we see now is happening because our economy is merely out of adjustment and with the apropriate corrective measures it should be humming right along again. John Maynard Keynes said something similar about the Great Depression - comparing it to an automobile he said that we were having "magneto problems" but that the basic engine was sound. Now some 70 years later I don't think that we can say this anymore. The basic system is not sound, in fact it is rotten to the core and is a sham confidence ponzi game that has been going on for at least the last 30 years due to money created through credit or the last 60 years due to the widespread availability of cheap oil.

So for years we have been living with this dislocation and enjoying ourselves, but now reality is intruding.

Some have pointed this out in a limited way. Paul Krugman mentioned the other day that the problem with all the plans for helping the banks is that no one seems to realize that the bad assets are actually bad. Instead they expect to get value for them at some point, somehow, so that these losses won't have to be put on the balance sheets.

But the problem is more than just bad mortgages and credit default swaps. 70 percent of the US economy is based on consumerism: buying and selling stuff to each other. This does not create value, and is not the basis for a sound economy.

So a realistic assessment of what the recovery should look like might be:

- full employment at 20 hours a week
- everyone has somewhere to live (shelter)
- everyone has food
- everyone has health care
- everyone can get where they need to go by public transportation
-local agriculture is the norm rather than giant agribusinesses, and everyone has access to community garden land

Our Goal Now Should Be the Basic Necessities

As Dmitry Orlov puts it in his hilarious address to a San Francisco audience

http://cluborlov.blogspot.com

"What should their (Congress and the Obama administration) realistic new objectives be? Well, here they are: food, shelter, transportation, and security. Their task is to find a way to provide all of these necessities on an emergency basis, in absence of a functioning economy, with commerce at a standstill, with little or no access to imports, and to make them available to a population that is largely penniless."

The Anti-Keynesians

Many on the right are arguing for a "do nothing and let the economy fix itself" approach to the current situation. Ignoring for a moment the Bear Stearns rescue, the AIG bailout, the Fannie and Freddie bailouts, and the $750 billion bank bailout we could examine this argument solely on it's merits, without considering the fairness of helping Wall Street but not helping people who have lost their jobs. We could put aside thoughts of the political and social consequences of that unfairness.

Martin Hutchinson makes this case better than most http://www.prudentbear.com

When he says, "the Mellon approach would have given us a pretty terrifying fourth quarter of 2008, but in the long run it would have been worth it," I probably agree, although I think it would have been more terrifying than what he is imagining. Henry Paulson and Ben Bernanke also saw a greater danger or they never would have acted so against their free-market principles. They wanted to avoid the destruction of the global economy, while I welcome this, at least in principle. We need to figure out how to live closer to reality and to the natural world, with much simpler lifestyles. Of course the chaos involved in such a calamity might bring great suffering, and so it would be better to figure out an orderly way to make this transition.

I don't think people who make the "do nothing" argument really know what sort of world they are asking for. They see this crisis as just another downturn in the business cycle.

Wanted: New Economic System

The folks at Europe2020 http://www.europe2020.org are predicting dire things ahead for the U.S. and world economy and society:

"According to LEAP/E2020, there is only one very small launch window left to prevent this scenario from shaping up: the next four months, before summer 2009. Practically speaking, the April 2009 G20 Summit is probably the last chance to put on the right tracks the forces at play, i.e. before the sequence of UK and then US defaults begin [2]. Failing which, they will lose their capacity to control events [3], including those in their own countries for many of them; and the world will enter this phase of geopolitical dislocation like a “drunken boat”. At the end of this phase of geopolitical dislocation, the world will look more like Europe in 1913 rather than our world in 2007."

They point out that President Obama and other world leaders are treating the current crisis as a problem to the system which can be fixed, rather than as a failure of the system, and that only a radical redesign will succeed.

We Don't Really Want Change

NPR ran a story on "All Things Considered" yesterday about the growing use of low-power constantly-operating devices in the home such as digital picture frames. It seems we have a problem because as these things get cheaper and cheaper more people use them and therefore we need to build more power plants to supply this increased need for electricity.

They never even raised the question about whether it might be a good idea to try to get people not to use them.

I think if you look at the available supply of energy and the current effect our lifestyle is having on the environment you have to conclude that we're already at the point where we need to cut back significantly on our power usage, not expand it.

The same thing is true for our dependence on cars for transportation. There are much more efficient ways to move people around: trains and public transit, if we only had them. This is what we should be spending stimulus dollars on, not the highway system.

These are examples of the sort of change we need, but no one is even talking about it. As James Kunstler said, there are less than 100 people in the country who agree with him. I think he's wrong, I think there's at least 1000. Pitiful, isn't it?

A Simple Explanation of "the Economy"

George Ure keeps laying it on the line:

"Think about this...Where does interest come from in a sound money system? Say there is $20 in the whole world and you have it all. I am flat-ass broke. I borrow $10 at 20% interest all due in one year.

Spin the clock forward one year. You still have your other $10-spot. I have gotten back that $10 and am ready to pay you. But, since I also have to pay you $2 of interest, just where the hell do you suppose that comes from?

Answer: We 'make it up'. Someone off stage prints it up and throws it in.

Except, of course, the making up is incredibly convoluted in an abracadabra sort of way."

The Lazy Way to Save the Planet

From George Ure's blog today (http://urbansurvival.com/week.htm):

"If you want to solve most of the world's growing list of environmental issues, here's a dandy - simple solution: Have everyone start working 3-days a week. All of a sudden, greenhouse gases, energy depletion, and all kinds of other problems become manageable. Focus on the stuff that matters: gardening, reading, personal relationships...forget the dollar mania! Let crooked banks fail - the country made it through the crisis in the past, and we will again."

I think he's on to something, seriously.

Response to State Rep. Brian Boquist's Opinion Piece Against the Economic Stimulus

Note: I submitted this to the Salem Statesman-Journal as a guest opinion; they have published some of mine before but didn't take this one. Maybe they have too much of a backlog right now. Anyway, I'm posting it here.

"Brian Boquist Impressive, But Ignores Free Market's Recent Demise"

Sunday's Opinion by Brian Boquist showed him to be a thoughtful, reasonable person, at once making a strong case against expanding government debt while also advocating cooperation with some of President Obama's ideas. Boquist fears both the growing deficit and the negative side-effects of government intervention. He is correct in pointing out these dangers, but he fails to address the fact that it was the free-market Bush administration that started down this path with the Bear Stearns rescue, the AIG and Fannie/Freddie bailout and the $650 billion TARP bailout. In fact the economic collapse of the past few months has done much to discredit a pure free-market approach among thinkers and policy makers. As George Bush said, he put aside his economic principles when faced with what advisor's told him would be a collapse worse than the Great Depression. There is much political support for the sort of massive stimulus Obama and the Democrats are proposing precisely because there is little confidence that the system will fix itself. It so happens that there is another school of economic thought advanced by John Maynard Keynes advising the government to engage in massive spending in these sort of situations. This was tried during the Great Depression and critics say that it failed and that this proves the idea has no merit; supporters say that Roosevelt did not spend enough when he tried it, and that it was his eagerness to return to a balanced budget that kept the stimulus from working. A noted Keynesian is recent noble laureate Paul Krugman, who argues that the current $850 billion plan is also too small. Some may find fault with the details of the pending stimulus plan, rightly pointing out that it includes a lot of democrat pet projects and ideology. David Brooks' Sunday column warned that trying to do everything at once just weakens what could be good programs if they were done right with more thought and planning. He suggests that it would be better to just accomplish economic stimulus more directly by something like a payroll tax cut. I confess that I voted for Obama and don't see anything wrong with the winner of an election taking an opportunity to advance his agenda in this situation if it still accomplishes the overall objective. After all, the Bush approach to Hurricane Katrina relief had lots of small business and pro-business incentives. But we're talking about a lot of money here, and I too would like to see this debt used most efficiently. My choice would be to spend it on improving public transit and rebuilding passenger rail service. I think Brian Boquist's best advice was his humorously intended suggestion about planting a garden and learning to cook from scratch. In fact, "learning to cook from scratch" is a good analogy to how we all should begin to extricate ourselves from this economic system. It's very possible that the stimulus won't work and that the perils of greater national debt will come back to haunt us. We would be better off finding ways to live without money, since needing money requires us to depend on this system. This may sound like crazy talk, but if enough houses go into foreclosure it seems possible to me that people may be allowed to just stay in their houses. In this case the defaulting homeowners have become "too big to fail". If you have shelter and can raise your own food, you're pretty close to being able to live without money. This is how the people in the Soviet Union dealt with their economic collapse in the 1990's.