Economic Expectations Overheating

       Not to rain on anyone's parade, but since being optimistic about the economy has become so trendy even Dr. Doom himself, Nouriel Roubini, has gotten in on the act, I say au contraire!  Not only has the 45% rally in the S&P since March been way overdone, I think people are far too positive about the economy recovering naturally as if 2008 was any garden-variety recession.  2008 was a massive shift that most likely will determine the course of economic and possibly political history for the next decade or two.  The only thing we can hope is that we aren't seeing the modern equivalent of this massive sucker rally of 1930.  If I can just throw around some alphabet soup for a minute, it seems that a lot of people are starting to factor in a V-shaped recovery in the credit and equity markets.  I continue to believe we will see a W-shaped recovery with further turmoil sometime in 2010.  This article will lay out several of the problems or issues which might contribute to a 'double dip', giving us another dose of false mania in the markets.  

1. Spending Money Just Ain't What it Used to Be- Although we have seen some stabilization in the contraction in consumer spending, the driver of the American economy, we will not see previous levels again for many years.  There are several reasons why Joe the Plumber won't be sporting his Louis and Gucci around the trailer park circa-2007.  Without such a bounce back in consumer spending it will be nearly impossible for a V-shaped recovery to take place. Conspicuous consumers have been shown to be debt-laden fakes during the past year, it just isn't as cool to be a high-roller (just check out the fascination the public has with limiting executive pay at firms across the country). The personal savings rate has rocketed up from negative to above 5% in the last year, which only barely puts it at a long-term sustainable level. Banks and other lending institutions have tightened their lending standards and even credit card companies are becoming more stingy. People can't draw equity out of their homes to take vacations like they used to. In addition to all this, many aging Baby Boomers and retirees saw their 401(k)s devastated by the collapse in equity prices, meaning they will have to spend far less and increase their contributions to savings. Watch Las Vegas as a barometer for glitzy spending: right now it is depressed.

2. Ain't No Jobs: Unemployment will continue to dog the economy and contribute to the lack of spending. Most economists predict that unemployment will top 10%, some are predicting 11 to 12% unemployment. The current job market is simply nowhere near the condition it needs to be in to facilitate a healthy recovery. Finance will continue to employ fewer Americans because the industry will pay less, have less firms, and be significantly more regulated. Housing will be a bust for at least five more years with the amount of inventory on the market (the industry created the most jobs over the past few years). A higher tax and regulatory environment will also contribute to lower employment levels. Its possible that America may begin to run a higher natural unemployment level as the economy becomes more European (slower growth, more social safety net, older population). Combined with low consumer spending, its possible that unemployment may take a leg higher and become a serious issue over the next year.

3. Uncle Sam's Debt Binge: Facilitated by strong Asian demand for U.S. Treasury debt, the U.S. has been running deficits and a growing national debt for most of the past decade. Currently at around 100% of GDP, the limits of the national debt are being seriously tested by the stimulus bills, TARP, contracting tax revenue, the proposed healthcare plan, and the looming monster of Social Security. Unfortunately, it appears that the Chinese, Japanese, and Russians are continuing to buy large amounts of our debt, keeping interest rates low and allowing us to feel completely comfortable in binging with government spending. Simultaneously, they are talking out the sides of their mouths about diversifying currency reserves away from the dollar. The social seismologist believes we will see a hybrid reserve currency of the dollar, euro, and chinese yuan over the next 40 years. Thus, dollar demand will decrease over the next few years. The value of the dollar is also being questioned by some pretty serious devaluation against every major currency over the past few months. It appears that when the economy recovers, nobody wants to own dollars. This will make the debt even harder to pay. Considering that no politician, Dem or Rep, is willing to talk about taxing anyone but the upper 2% of Americans, I have no idea where any significant revenue will come from, bar a major shift in the political landscape. Social Security problems are still a few years off, but if a few unlucky things go wrong, the U.S. might be staring default in the face sooner than expected.

4. The Myth of China: China has grown by leaps and bounds over the past decade. It has been a testament to a strong free market working within a planned economy. To be sure, we have seen nothing short of a myth out East, but we saw equally impressive and genuine stories during the Tech and Housing bubbles here in the United States. Bubbles always start out as genuine valuation stories. But after almost a decade of 8%-10% growth, its past due a cool-down. Some things don't occur in nature. That kind of growth doesn't happen without serious fallout on the other side. Its interesting that as exports have collapsed (the primary driver of the Chinese economy), the state has report growth above the 6% level. Lets just say that accounting isn't necessarily a strong point for an autocratic state. Another indicator of economic growth in China, electricity demand, has fallen. Massive job losses in Guangdong and Shenzen have caused unrest among the unemployed. Racial and class tensions drove the number of violent political incidents in China higher last year. Most of the stimulus China executed last year was in the form of bank loans from state banks. Credit standards plummeted and most experts have said lending has been worse than in the U.S. during the past few years. Most Chinese experts say that the economy has to grow above the 6% level in order to prevent social unrest. The Chinese political system relies on a implicit compromise: you don't question the authorities if they provide strong economic growth and jobs. Without the growth, China's educated and Westernized population might be quick to turn on their autocratic rulers. You can be sure that political turmoil in China will sap the strength out of markets across the globe.  

Separating the Wheat from the Chaff in the Republican Party

       Lately the Republican Party has been struggling like Helen Keller on acid.  After getting taken out back electorally, they subsequently watched two of their most promising presidential candidates Gov Mark Sanford and Gov Sarah Palin flame out.  Rush Limbaugh has ascended to the role of most influential voice in the GOP, a sure sign they're on track to remembered as a modern day Whig Party.  Even Dick Cheney waded back into the waters, only to be embarrassed by stories of his telling the CIA to hide an intelligence program from Congress.  Demographic trends seem determined to consign the GOP to the dustbin, at least in its present form.  The explosion of the Latino population won't benefit a party whose emphatic cries against illegal immigration bordered on xenophobia and racism at times.  Their lemming-like opposition of Justice Sotomayor's nomination certainly won't help.  In addition, America is less and less a Christian nation which will make the party's religious base shrink relative to the overall population (as well as make abortion and gay marriage less relevant issues).  The country's population distribution is becoming more urban as our rural areas decay in many places (GOP relies on extensive rural support).  Finally (yeah, they're really fucked aren't they?), we are seeing a massive immigration from the rust belt into the South and Southeast, ensuring that many safely Republican districts and states in the south will become increasingly liberal as they are filled with northern and midwestern transplants.  

       All of these things are bad news. If the Republican National Committee sold 20 year bonds, its fair to say they'd be paying a fairly high interest rate.  Essentially there are two options here: another party somehow forms and creates a second pole to the Democrats as the Republicans fall.  In my opinion this party would most likely be fiscally conservative, looking for a smaller government but with the understanding that government has a role in the economy.  This new party would be socially liberal (conservative hyper-issues like abortion and gay marriage won't get any traction by 2020).  It would emphasize efficient and effective government and would bring a host of twenty first issues to the table (radical changes in Social Security? a reconsideration of America's massive defense budget and role as world police? massive engagement with the UN?).  It would essentially be Libertarian in orientation.  Seeds of this new party might exist in the Blue Dog Democrats who will receive increasing play as a party within the Democratic party.  

       The second option for the Republicans is a massive reorganization of their ideology and party.  It possible that the Republicans become more socially liberal to accommodate the demographic shift in this direction.  Nevertheless, I find this an unlikely proposition because of the need to maintain their religious right wing base in order to be relevant on the national stage.  Perhaps a slow leftward shift on social issues will take place.  In addition, the Republicans need to understand that the state does have a role in the market place.  The market is inefficient and any basic economics course dictates that government should intervene to correct for some of the market failures in an economy.  In addition, Republican tax and budget policy has solely been concerned with cutting taxes on the higher brackets over the past decades.  Not only is this a pathetic excuse for a platform (they transposed a phrase for posters into an ideology), it isn't what the vast majority of Americans are looking for in changes to tax policy and the budget.  Most Republicans are overly dogmatic and unwilling to give ground on the core platform, inevitable making the party difficult to change.  The Economist had a great article on Eric Cantor and Paul Ryan in the House possibly leading a resurgence within the party.  The GOP needs to shut the Limbaugh-Cheney-Coulter-Gingrich axis up and let the Cantor-Colin Powell-Meghan McCain-Mike Bloomberg axis run the show.  

The Ayatollah's Ticking Time Bomb

      This weekend I caught up on the new season of Entourage and as usual, the boys didn't disappoint.  Subsequently, a trusted advisor and I became engaged in the intellectual exercise of determining what dictator's entourage partied hardest.  Stalin and Hitler are obvious failures; the former was constantly killing off his buddies and the latter was probably just a belligerent buzz kill.  Mao didn't attract enough women with that oversized mole.  If The Last King of Scotland was accurate Idi Amin might have been decent, but the paranoia was a bit much.  Kim Jong Il came under consideration, mainly because of the Swedish prostitutes and air-delivered lobsters, but the social seismologist can't be seen with any man in 10 centimeter platform shoes.  Ultimately, the prize should go to a Latin American like Fulgencio Batista, if only because of the Latin women and easy access to cocaine.  

       One definitively boring entourage would be the Ayatollah Khomeini's.  Veiled women and a ban on alcohol don't make for good parties.  Perhaps because of the perpetual sausage fest, the Iranian regime has been blowing off steam in the form of an aspiring nuclear program. Unfortunately, Iran just got a lot more dangerous for everyone after what looked like a potential electoral victory for a reformist candidate turned into a near revolution. Until now Khomeini's successor, Khamanei (promotions were obviously based on similarity of name) and President Ahmadinejad have been forced to placate what is a far more liberal public because of Iran's limited democratic system.  They were generously freed from that constraint after they negated any claim to democratic legitimacy.  Fraudalent election or not (and it was), the brutal repression the conservatives in the Revolutionary Guard and Basij militia dealt out shows they are prepared to use any means in ensuring conservative leadership for the Islamic Republic.  Rig one election, the next one is sure to be a fraud.  The Guardian Council, the body which determines whether a candidate is eligible to run or not, will now carefully weed out anyone who might become another Moussavi.  The reform movement has gone from the verge of running the country to marginalization. 

      Because internal politics in Iran are more a series of bureaucratic maneuvers than anything resembling a democracy, its important to understand the inner workings of the government.  Before, the reformists (led by guys like former presidents Mohammed Khatami and Hashemi Rafsanjani) acted as a kind of check on the abrasive foreign policy of Ahmadinejad and co.  Despite the upper hand of conservatives, the presence of reformists throughout government ensured that Ahmadinejad's actions didn't quite match his speeches in venom.  Khamanei always leaned conservative but came out explicitly in support of the conservative wing and has allowed decisive action against what should be understood as the more responsible faction.  Khamanei is no longer the facilitator of compromise he was supposed to be; conservatives are firmly in charge and there's no one to to placate.  The reform movement can't fall back on public protest since violence is now a standard conclusion to public gatherings. 

Besides the fact that a vital check on conservative power in Iran has been removed,  the fact that popular dissension continues to simmer in back alleys and on rooftops at night means that a clash with Israel or the West is more valuable than ever.  Authoritarians love an excuse to crush dissent in the name of unity.  Reform would clearly be the last thing on every Iranian's mind in the event of an attack on the country's nuclear facilities.  Reformists and conservatives disagree on a lot of things, but they do agree on Iran's right to possess nuclear facilities for civilian energy purposes, which is the current excuse for the program.  The reformists would quietly be put down while the moral immediacy of their cause would be lost in the flood of nationalist sentiment after such an attack.

       This shift in Iran's internal dynamics has significantly increased the danger of a meltdown in the Middle East.  Its our goal at the SS to analyze subtle shifts in an effort to foresee the massive fallout that sometimes ensues.  The trigger remains an Israeli strike on Iran's nuclear facilities.  The main thing standing in front of such a strike was the American diplomatic effort, which now appears to be canceled after the CIA engineered those street protests via Twitter.  The crackdown means Iranian conservatives dictate a far more reckless policy without heed to popular concern or reformist question. Today we hear from the Revolutionary Guard that Iran will attack Israel's nuclear facilities if they are attacked, ensuring that if Israel attempts a strike there will be some level of warfare between the two.  With hardliner Benjamin Netanyahu recently taking office as Prime Minister in Israel, it appears the perfect storm is brewing.  It's basically a guarantee that Israel won't allow Iran within a year of building an atomic weapon before it takes matters into its own hands.  Looks like we're left to wait and see...

Congress tries to balance the four humors of Healthcare

Doesn't look like Sgt. Jim Crowley of the Cambridge PD will be hiring Prof Obama as his civil rights defense lawyer, but here are the most important lines from Barry's press conference tonight:

"In addition to making sure that this plan doesn't add to the deficit in the short term, the bill I sign must also slow the growth of health-care costs in the long run. Our proposals would change incentives so that doctors and nurses are free to give patients the best care, just not the most expensive care. That's why the nation's largest organizations representing doctors and nurses have embraced our plan."

and later on...

"I won't sign a bill that doesn't reduce health-care inflation so that families as well as government are saving money. I'm not going to sign a bill that I don't think will work."

The most important question in the healthcare reform debate: whether costs for medical procedures and care can be reduced.  The long-term inflation of all medical care is the true problem in American healthcare; writing a bill which addresses every issue but is Medieval medicine: a pseudo fix which might just kill the patient. If incentives can't be changed to get better quality instead of higher quantity and price from the medical system, more insurance coverage will mean higher costs and will make the reform impossible to pay for.  It will also contribute further to the destruction of Medicare and\or the federal deficit in the long run.  So far the CBO seems to be indicating costs won't be reduced and the Mayo Clinic (who has successfully controlled costs by giving their doctors salaries instead of paying them by the operation) has come out against the plan for this reason.   Perverse incentives are what have caused insurance premiums to double over the past ten years and costs to spiral out of control.  Its encouraging to see that the Dems know this is a major problem, its not encouraging that they don't have a comprehensive fix.  So far, its been about 'more information for patients', 'better coordination within the medical system' and other things legislation can't fix.  No one honestly thinks that creating online sources (WebMD?) will have everyone just pick that cheaper and more effective treatment they're doctor hid from them, suddenly slashing long-term Medicare costs.  But hey, not a bad idea for a new jobs program: mandate all adults to be certified MDs.  

The Wax Man and Markey Show

       Waxman-Markey was always going to be a controversial bill.  Our opinion hear at the SS is that carbon emissions must be reduced via an effective global emissions regime.  While some might debate the science behind global warming, its prudent to move forward with precautionary measures give the astronomical increase in green house gas levels over the last century.  Though we believe a carbon tax would be a far simpler and more effective way of reducing emissions, cap-and-trade is an acceptable substitute provided we get it right.  

       The focal point of carbon policy in the U.S. should be federal subsidies\funding for the construction of a nuclear power-based utility system, a la France.  Wind and solar are far too expensive, unreliable, and inconsistent to be used in the near to medium term future on the massive grid scale necessary.  Nuclear power is safe, tested, releases no emissions, simply needs a storage place for the spent fuel rods, and produces energy like Barney Frank on cocaine.  Safety concerns are valid, but similar to worrying about accountants' paper cuts when debating new taxes.  So the first problem is that there is no decisive focus on nuclear energy. Nuclear is the only realistic solution for our utility emissions in the next 20 years.  If I hear a Democrat from West Virginia talk about "clean coal" technology and sequestration again I'm going to have an aneurysm due to an overdose of misinformation and lunacy.  

       The second issue is that there is nothing in the bill that involves the Chinese and Indians. Some have said the bill alone will be used as collateral in international climate change negotiations coming up.  However its done, its crucial that the we get the developing world to agree to a plan capping their per-capita emissions at a similar level to ours in the long-term.  Without an agreement (especially from China who now uses more coal than we do) we're using a bucket to bail out a sinking battleship.  Both countries will be loth to make any commitments.  In the opinion of the SS, the only way to strike a compromise is for Americans (with very high per-capita emissions levels) to essentially compensate the developing world (very low per-capital emissions levels) for not consuming at the same level they do.  Otherwise, China\India will most certainly ascend to the American level over the next two decades, making Waxman-Markey twelve hundred sheets of economically damaging toilet paper.  The best way to do this would be to provide nuclear technology to these countries at a price that would be competitive with building coal fired plants.  This would be a difficult (read: politically impossible and expensive) feat, but is probably the karmic price we pay for spending a hundred years consuming hundreds of times more energy than our Third World counterparts.  It would also streamline with the development of an international nuclear energy bank meant to ensure access to peaceful nuclear technology to all countries (but hey, one thing at a time).  Massive social bargains such as these are simple public policy and may be necessary to prevent the Amazon from advancing on Washington in fifty years.  

Obama's Halo Fades at High Speed

       The past week has shown evidence of some cracks in the 'Obama as Godhead' theory.  Ole Barry has done a near perfect job thus far, masterfully handling the PR of the bank stress tests, passing a monstrous fiscal stimulus package, moving swiftly to shut down Gitmo and end torture, and picking a very qualified Latina Sup Court justice. His crowning achievement at this stage: dominating four Somali pirates on a fiberglass life boat surrounded by a massive fleet of U.S. Navy battle ships (note: he didn't actually fire the shots).  With his NAACP speech last night, he's further solidified the end of the era of the two stooges of racial politics in America: the very Reverend Jesse Jackson and Al Sharpton.  Give the guy credit, there's no doubt that Obama has been a highly effective and in many ways, visionary, president during his first 6 months.

       Yet there's no doubt that he is stagnating.  It was inevitable, even the nastiest win streaks come to an end, and the administration was bound to fall short of expectations or produce a snafu eventually.  The president is forthright and exceedingly honest (in the political sense): he doesn't try to play games with the American people, something that alone will get you far in politics (both Clinton and Bush played farcical games with the public).  And you'd be a fool not to call his agenda revolutionary, though perhaps slightly misguided at times.  His primary fault is ambition.  Especially in regards to time, as he's trying to move monumental climate change and health care legislation through Congress at the speed of a Mag LEV train.  In addition, I fear a storm might be developing in regards to Iran.  Over the next three days I'll do a write up on each of these three issues where I think Obama is starting to lose his edge.

       Though I experience extreme pangs of dislike for Republican Party Chair-blackman Michael Steele (mainly because he's not down with the hood) I think his speech accusing Obama of experimenting on the economy with healthcare reform is unusually on point.  Disregarding the kindergarten level rhetoric and complete lack of policy details in Steele's speech, it is true that Obama's October deadline is not only absurd when talking about a $trillion  bill meant to revolutionize a sixth of the American economy, its uncharacteristically stupid of him.  The second 'Great Communicator' should understand that healthcare reform is a debate that should play out in public over a period of time.  Such a complicated and multifaceted issue can't be finished by October, at least not responsibly.  And it won't.  The same goes for cap-and-trade. Haste makes a shitty bill that won't solve our problems, and they are certainly pressing.  

       Obama is losing political capital playing NASCAR on Capitol Hill.  He also has been serially embarrassed by the CBO.  A major story I think the Republicans and the press are dropping is the lack of stimulus coming out of the $787 billion Obama recently signed.  It was horribly designed, especially because most of the money will be spent over the next few years on pet projects that do little to stimulate.  Only 24% of the spending will take place by the end of 2009.  We seem to be experiencing a turn around in economic data, not attributable to the stimulus in any way.  The sad part is that some fools are calling for a 2nd stimulus (I wouldn't completely rule it out but let's wait and see, this thing could be over in 6 months).  Obama should consider canceling some of the spending outlined in the bill, especially since long-term national debt will be the next economic shitshow.  Its a sad day when we have to take macroeconomic stimulus lessons from the Chinese.  Here is a great article from Robert Samuelson on the stimulus. 

       I'll drop some posts on the two super bills over the next few days.  

Harry Poter

       At midnight teenage wizards and witches will fill every movie theater in the land to watch the latest silver screen portrayal of Harry Potter and friends.  I feel a certain sense of isolation not participating in the mania surrounding the release, even if it is a smug sense of superiority watching adults don robes, fake beards, and wands.  I've been told by members of Potter's posse (my term for the pervasive groupie following he possesses in the muggle world) that the draw of the series is the intricacy of the plot, the difficulty to distinguish between the good and evil characters, and the dramatic chaos associated with Harry's running battle with He Who Shall Not Be Named even on this blog.  

     We here at the Social Seismologist are in the business of always looking around the next corner, thus I'm happy to preemptively announce Warner Bros' next super blockbuster: The Cartelista Next Door.  It features up and coming sex symbol Felipe Calderón as a tough Mexican cop battling the brutal and wealthy drug cartels.  Cartelista possesses many of the same plot twists, betrayals, and evil that delight Potter's posse, the only difference is that this time the American viewer isn't just eating popcorn and enjoying the onscreen antics.  In sharp contrast, the fans are the root cause for the violence that shocks and disturbs and ensures an Oscar for Cartelista.  The drug cartels need customers, and most of their demand comes from old Uncle Sam up north, where plenty of pot heads will undoubtedly be at tonight's Harry premiere.  Whether we want to admit it to our kids or not, America has a very high rate of illicit drug use.  Perhaps to some degree Cartelista is a wake up call.

     The rampant crime and violent gangs associated with Prohibition here in the United States have been the subject of many films.  Yet for the most part, their reality is a distant memory.  This isn't true for Mexico, where the effect of our Prohibition of Marijuana and other drugs has produced criminal anarchy and disgusting violence seemingly ripped straight from the headlines of a 1920's Chicago newspaper.  If marijuana was legal, Americans could produce it here at home, generate billions in tax revenue, pay off California's raging debt so we could stop hearing about those bumbling idiots, produce an entirely new industry with little competition worldwide and thus many new jobs, and most importantly, make a meaningful contribution to dampening demand for drugs from Mexico and reducing violence.  After all, a U.S. corporation like Phillip Morris could industrially produce marijuana and distribute it at a fraction of the cost of the Gulf cartel.  What happens? The Gulf cartel goes out of business and Joe the Plumber gets a new job.  And none of this mentions common sense, which dictates that I should be able to engage in any activity within the confines of my home as long as it doesn't disturb others (i.e. I can get drunk as long as I don't drive).  It should\would get done if our politicians were brave enough.  MAYBE it WILL.

     But I digress.  My final piece of inside movie knowledge pertains to a revolutionary Warner Bros concept which allows the audience to choose one of two alternative endings to Cartelista,  just like the Goosebumps books.  In the first, a president named Cheech Obonga is elected in the U.S. and weed is legalized,  ending a need for drug cartels and allowing Felipe Calderón to triumphantly capture Mexico's Al Capone (although American youth remain angry that they now now need an ID to buy both weed AND alcohol.)  The second ending is a sequel-beggar featuring 'El Lobo' Guzmán as the wily drug lord who destroys Mexico in the flames of violence and presides over a Somalia with Taco Bell just a short drive south from here.  Remember, you pick the ending... but the powers that be will definitely make money from a sequel.