Gwen Ifill, the moderator for tonight’s Vice Presidential Debate, must be careful not to appear biased, what with her Obama book coming out in January.  I think she should just go ahead and ask the standard debate questions to Joe Biden, who can handle them in his sleep, having answered all of them at least 50 times already.  (Forty times while combing his hair in front of the mirror, and ten times in person.)  If he can avoid the use of the word “girlfriend” in any context he should be fine.  No problem for Ms. Ifill, either.

The questions for Governor Palin deserve much more attention.  Don’t want to appear as if the liberal media is picking on her.  Her recent series of disastrous interviews with Katie Couric can be explained only by one or more of the following disturbing possibilities:

• she did no preparation for the routine questions Couric asked her.  Not even a little.  Determined to be herself and nothing more.
• she prepared thoroughly, but became so unnerved during the interview that she literally forgot everything she had prepped.  All the catchphrases.  Al the soundbites.  Hell, all the facts!  Gone.
• she doesn’t know anything about George Bush, global warming, the Supreme Court, policy with Russia and Canada, or economics.  Not even enough to bat the ball back and forth with Katie a few times–no talking points.  She doesn’t read magazines.  Perhaps she reads fiction, or watches a lot of TV.  She seems to be as intellectually unaware as, well, as I am, but I’m not running for Vice President.
• she likes it when Katie Couric rolls her eyes and flutters her eyelashes in stunned disbelief.

In order to keep it “fair and balanced,” here are my suggestions for some questions to be directed to Governor Palin.  Start slow, and then build up to the real gritty stuff:

• Governor Palin, what is your favorite color?
• Governor Palin, where’s the best place to get a mooseburger in Juneau?
• Governor Palin, what are your kids’ favorite music videos?  Follow-up: favorite video games?
• Governor Palin, do you like the environment?
• Governor Palin, if President McCain had a heart attack, what would you do?
• Governor Palin, how do you feel about Bristol and you-know-who living in the basement of the Vice Presidential compound on Observatory Circle?  Will he be allowed to sit around and drink beer with the Secret Service detachment at the residence?  Can you get him a job at, like, Commerce?  Some GS-10 gig, maybe with an American Express card?
• Governor Palin, do you have any idea why Senator McCain didn’t select Condi Rice as his VP?  Or would she not have appealed sufficiently to the right wing “core” you folks seem to care so much about?
• Governor Palin, do you feel you’ve become a drag on the ticket, an embarassment that everyone wishes would just go away?  Did your classmates in high school view you as a pushy, hollow, ambitious, provocative, vindictive jock beauty queen with an attitude?  Just wondering.
• Governor Palin, as Vice President, would you continue to attend Back to School night at your kids’ schools?  It sure is a long flight from Alaska to Washington, D.C., isn’t it?  We know you always try to put your family first.  Does the Vice Presidential jet have cable?
• Governor Palin, how do you defend your use of political power to promote personal objectives, specifically as it relates to the hiring and firing of state and municipal employees?  Is patronage like the best thing ever, or what?

With Joe Biden’s help, that should get Ms. Ifill and Governor Palin through the 90 minutes.  It will keep Palin on firm ground, especially the hypothetical about President McCain’s coronary, which I’m sure she thinks about A LOT.  Perhaps that’s why she doesn’t appear to think about anything else.  A McCain-Palin victory in November would lower the odds of her becoming the first female president of the United States to one in roughly five.

Take that, you snobby bitches at Wasilla High School.  I got your magazine subscriptions right here.

In order to finance the upcoming various and sundry bailouts, the US Treasury will be selling bonds. Lots of treasury bonds. Economics 102 tells us that an increase in the supply of bonds will cause bond prices to fall and interest rates to rise. The net effect will be inflationary. The dollar will be heading lower against other currencies. The good news is that the trade deficit should shrink, at least at the margin.

Moral of the story: Invest in companies that provide ink and paper to the US Treasury.

Why isn’t inflation worse than the data indicate? The data says consumer inflation is running at around 6%; for consumers it feels more like 16%. Conditions that have been a drag on inflation this year include:

· Falling home prices, with an attendant negative wealth effect. Most second mortgages are being used as ATM machines, and more and more people are going underwater, an inch at a time. Like proverbial frogs in the warming pot. These people now may expect a bailout if push comes to shove and will probably keep on spending. At some point, they will be asked, or rather directed, to stop.

· The recent, brief correction in crude oil prices. ( The guy who knows as much about real global reserves as anyone thinks $500 oil is a given.) Notice how we gleefully fill our tanks to the max when gas drops by 10 cents a gallon.

· Epochal distress in the automobile and airline industries and the industries that support them. A sea change in the way Americans shop for cars, which has blindsided American manufacturers and supported the business models of the Asian giants. Even Toyota, Nissan and Honda got caught with some enormous SUVs and pickups.

· Rising domestic unemployment, with prospects for more. That old global economy thing again. No traction to raise prices in response to rising costs.

Credit card debt continues to rise at a 5.5% annual rate year to date, despite the tax rebate checks. The graph clearly shows the impact of the rebate checks in the spring. Consumers’ balance sheets are deteriorating, mostly due to the falling equity in their homes. The 2008 holiday shopping season is shaping up to be a bust.

[caption id="attachment_180" align="alignnone" width="500" caption="Source - Federal Reserve"][/caption]

At some point in the foreseeable future, housing prices will bottom. The de-leveraging will have run its course. The shape and face of the banking, airline and automobile industries will have changed forever, and there will be at least one additional trillion dollars in debt left on the American balance sheet. Interest rates will be higher, and the dollar will be worth less than it is today. It is at that point that one should expect inflation to take off, fueled by:

· Secularly rising oil and commodity prices across the globe.

· Partial recovery of housing prices in a market that is probably oversold.

· The expansionary effects of a $1 trillion federal deficit in fiscal 2009. Perhaps $1.2 trillion.

· A foreign exchange deficit in the neighborhood of $700-800 billion a year, by which we export growth and import inflation.

· A weak dollar, falling in response to the sheer weight of bonds on the market. The first faint shadow on the US treasury’s ability to make good on its obligations since the mid- 19^th century.

When should we expect this time to arrive? My guess is two years. The Fed will keep real interest rates negative for another 18 months, and then begin the process of raising rates. YOY inflation, which is currently running around 6%, may reach double digits by that time. And the meaning of that is this: As difficult as these times seem, they are likely to be viewed as salad days two years from now. When gasoline is $8 a gallon and mortgage rates are around 10%. When unemployment is 8%, and housing prices sit at 1999 levels. When the new president is running trillion dollar deficits.

And they call this the dismal science.

*  *  *

A separate disturbing thought concerns the parallels between our crisis du jour and that faced by the Japanese in 1990. There, twin bubbles, in real estate and the stock market, burst simultaneously. Major Japanese banks teetered on the brink of insolvency, and the Japanese government rushed in with life support funding for the banks. The sector underwent a decade of painful incremental reform, never quite ready, willing or able to bite the market capitalist bullet. Beyond that, it is clear that the Japanese equity market viewed below, which today sits at around a third of its 1990 levels, has suffered as a result. A real negative compounded rate of return in equities over 18 years.

The New York investment banks that reaped billions and allowed corporate finance to become a parlor game deserve their fate. They will claim they were unaware of the risk involved in the CMOs and CDOs.

Rubbish. They were aware that they were in the class of businesses regarded as “too big to fail,” and they were right. We thought at the time they were taking enormous risks, but they knew they were effectively working with a net. Secure in the knowledge that if someone were going to be left holding the bag, that someone would be the US taxpayer. They had lobbyists, y’see, that took care of all of this.

Speaking of collateralized obligations, they exist in consumer credit markets, too, and have received little attention. According to the Fed in September of 2008, 48% of credit card debt ($463 billion) has been collateralized, along with 13%, or $220 billion, of non-revolving debt. Grand total: $683 billion. Just as safe and secure as those good old CMOs were for the banks.

The graph illustrates the general problem with taxpayer-assisted bailouts that forestall the Darwinian consequences of bad, massively- leveraged bets in a corporate capitalist economy. This shows the Nikkei average since 1970. Had the Japanese allowed more carnage in their markets in 1990, it is likely that the slope down to the bottom would have taken less than 13 years, permitting more years for the economy to return to health, with the result being higher investment returns in the end.

[caption id="attachment_179" align="alignnone" width="400" caption="Nikkei Exchange closing averages, 1970 - present"][/caption]

Image via Wikipedia

Let’s check the laundry list of issues confronting the US economy:

o    a soft domestic economy, virtually flat, with inflation and unemployment both on the rise;

o    foreign trade deficits in the area of $700 billion a year;

o    federal deficits on the order of $400 billion a year and most def on their way up;

o    never mind the implied deficits in the “off-the-book” stuff, i.e., Social Security and Medicare;

o    global growth in the demand for natural resources, from oil to water;

o    crumbling global infrastructures everywhere but downtown Dubai City.

The mild form of stagflation currently in place in the United States is an example of an economy that is out of equilibrium.  (See Rock–Ben Bernanke–Hard Place)  There are scores of reasons as to how it got here, but it’s here.  Most of the reasons are political.

A Little Ideology, Please

Back in the mid-20th century, domestic political economics used to be pretty straightforward. Republicans were committed to fiscal balance, and would cut back on social programs in order to maintain order.  “Tax and Spend” Democrats would raise taxes in order to fund social programs.  The stereotypes took shape–the clear-eyed, dispassionate, conservative Republican versus the softheaded bleeding-heart liberal Democrat.

We Americans have an almost insatiable desire to be and to have the best of everything, from our cars and homes to our military. We like stuff “tricked out.” Things tend to become expensive quickly, but, hey, that’s how we roll.  We make a lot of money, and we buy nice stuff.  During the last half of the 20th century, this approach flourished in the U.S. military, prodded by Ronald Reagan.  Reagan spent the Soviets into the dirt, and put it all on a large American MasterCard. Now, it seems we are doing the same thing to ourselves.

Republican administrations have ruled for 20 of the past 28 years.  Federal deficits have skyrocketed during this period because Republicans have chosen to reduce income taxes and print government debt to finance all of these incredibly necessary programs.  In 2008, we are spending $10 billion a month just in Iraq, for a worthy cause I’m sure, but an absolute drain on the federal treasury.  George Bush took an economy that was generating $300 billion surpluses and turned it into one trending toward $500 billion deficits.  Both Obama and McCain seem capable of taking it to a trillion.

All of these bonds are piling up in warehouses overseas.  The fall in the value of the dollar since 2003 has made our currency and our economy vulnerable to assault in overseas markets.  The countries that hold U.S. government bonds and bills have watched the value of their dollar investments decline for five years, yet they continue to accumulate more dollars, by way of foreign trade and government bonds.  They are accumulating leverage.  It’s like what big companies do, when they sacrifice margin to gain market share.  Plus, American companies and real estate are cheap these days.  Everything’s on sale.

When Does The Fed Run Out Of Bullets?

Our growing national discomforts are symptoms of the fact that throughout history, powerful nations that become debtor nations become captive nations, and in most cases the quality of people’s lives decline.  The cost of money, hence the cost of living, in these situations continues to rise, until people are paying mob rates. Miss a payment and they send someone to break your legs.  With the bailout of Fannie and Freddie now on the books, the US federal deficit/liability/exposure now hovers around $15 trillion.

The chronic trade deficit is recessionary–it exports growth and imports inflation. Chronic, massive Federal deficits, however, should stimulate growth, yet the economy is moribund. Some of this is reduced spending by consumers, due in part to the negative wealth effect of falling home values.  Credit card balances are rising steadily.  The trade deficit and the Federal deficit seem to offset one another, when in fact their stagflationary effects on the economy are additive.

There’s No Free Lunch

How does the next administration go about reducing the amount of debt it sells each year, and instead move to begin paying off bonds and reduce the deficit and attendant leverage from overseas banks and governments?   By controlling spending?  Not likely!  By devising revenue-neutral programs that will encourage sustainable consumer behavior and encourage the development of alternative energy sources.  And by generating more tax revenue from high income individuals for whom the marginal utility of income is not as high as it is for the poor.  Very Keynesian.

Here’s a glance at a purely conceptual approximation of what it will take to fix Social Security.  The age at which people receive full benefits will continue to go up, in step with the increasing longevity of the population.  They will eventually raise or remove the cap on income/earnings, so that earners will pay SS tax on every dollar their earn. (If they make $500,000 a year, I feel sorry for them.)  And they will devise a means-testing formula, a combination of assets and income such that above a certain level you don’t receive a check.  No more sunbonnets for racehorses.  Then, sit back and hope people start having more babies.

Will The Last Keynesian Leaving The Building Please Turn Out The Lights

In a nutshell, the United States needs fiscal and monetary policies that will move the economy back toward equilibrium.  The major symptoms of the current macroeconomic disequilibrium are the foreign account deficit, the annual federal deficit, and the actual/implied increase in the national debt due to growing unfunded entitlement obligations.  Picture these planks in either candidate’s platform:

o    A commitment to balancing the federal budget during his first term.

o    A commitment to halving the foreign trade deficit during his first term.  And getting it to zero during a second term.  And doing it with sustainable green technologies.

o    A commitment to making Social Security actuarially sound in his first term.

o    A commitment to universal health coverage for all American citizens during his first term.

o    A commitment to spend less on the military and more on domestic infrastructure.

Such a platform would amount to political suicide for any candidate willing to offer it.  The implications, the “ways and means” it would take to approach such radical goals, the political costs, all would be enormous.  Social Security reform itself is known as the 3rd rail of American politics.  While Americans like the sound of fiscal prudence, we still want our lives tricked out.  And don’t raise our taxes.

It is an unhealthy economy that is not stimulated by a $400 billion federal deficit. It is an unhealthy political landscape that will not even allow discussing its repair.

The myth of “tax and spend Democrats” is, in fact, a myth. The myth of “dispassionate, fiscally responsible Republicans” transcends myth, having achieved jokedom. And, most amazingly, the myth that Republicans are better for the economy is (you guessed it) pure fiction.

There is some slop in these figures, due to macroeconomic lags and the partisan complicity of Congress. The balance of power between the White House and Congress has been roughly even over this period. One party has controlled both branches of government for about as long as they have been split. Republicans have controlled the White House for 32 of the 52 years included in the study. Otherwise, the figures speak for themselves.

We also correlated GNP growth by year during this same period to test the Republican claim that they are better at growing the economy than Democrats. These statistics are, unfortunately, just as rough. Yet the contrast is significant. During 32 years of 5 Republican administrations, measured in linked 2000 dollars, average annual GNP growth was 2.7%. During the 20 years of 3 Democratic administrations, average annual GNP growth was 4%, again measured in real dollars. So the Democrats were 50% more successful growing the economy during their terms, and did so without busting the budget every year.

Republicans who stand around today wringing their hands over the fact that our Treasury bonds are in the hands of foreign governments have only themselves to blame, in that the bulk of these bonds were issued to finance the fiscal irresponsibility of the 3 Republican presidents since 1980.

A headline crossed my desktop while I was working on this: “Federal Deficit Could Reach $800 Billion”. In this election year, the Democratic nominee must not allow John McCain to position himself as the business-friendly candidate, the guy for economic growth and fiscal discipline. That kind of thinking went out with Eisenhower.

August 6, 2008

Wall Street greeted yesterday’s Fed announcement as if it was a declaration of victory, when in fact the Fed is now officially handcuffed, locked at the rates in effect when the summer paralysis set in. Played “Fed Funds Musical Chairs” for months, and the music stopped at 2%. Now, they need to raise rates, need to lower rates, can’t fish, can’t cut bait. Too hot to spit, too wet to plow. Reduced to “observer” status. We’re not afraid to raise rates, we’ll raise them if we must, really we will. Sure you will.

Disequilibrium: Weirdness in Abundance

A financial world, where the Fed “should” raise rates in the face of significant inflationary evidence and “should” at the same time lower rates to help boost economic activity. The result of decades of easy money, lax regulation, fiscal irresponsibility, and a sudden new world energy order.

A political world, where Congress “should” be cutting the Federal deficit by reducing spending and “should” at the same time inject hundreds of billions of dollars to stimulate private economic activity. (Congress also “should” never think of raising taxes on anyone.)

An entitlement world, as Dave Barry once observed, where wealthy people use Social Security checks to buy sunbonnets for their racehorses.

A peak oil world, with John McCain leading a crowd of supporters chanting “DRILL! DRILL! DRILL!” Mocking Barack Obama for even mentioning conservation as part of the strategy for dealing with dwindling resources. A fossil promoting fossil fuels—seems almost cannibalistic.

Immovable Object vs. Irresistible Force

I’m thinking about comedian Steven Wright’s routine, putting his dehumidifier and his humidifier in a room, turning them on, shutting the door, and letting them slug it out. Oil-driven inflation vs. growing unemployment and the housing crisis.

Maybe $2 trillion, ultimately, lost downstream in the “pump and dump” subprime business. (That whistling sound you hear is synthetic homeowners’ equity leaving the residential real estate bubble.) The bottom is not yet in sight, and may reach 25-33% nationally, perhaps the largest aggregate negative wealth effect since the 1920’s. Others have described it as a disaster in slow motion.  People’s largest assets, melting before their eyes.

For some time, I have been concerned about inflation, led by high energy prices and growing global demand. Yesterday, oil dropped below $120 a barrel, a price “not seen since May 2^nd” and there was dancing in the streets. We forget that on May 2^nd we were hysterical, gnashing teeth, putting groceries on credit cards because all of our cash was going in the gas tank. (The recent decline in oil prices may simply be China having cut its use 30% by turning off Beijing for the Olympics. BTW, nice environment you’ve created there, Mr. Chairman.) Most of us used our tax rebate checks to pay toward credit card balances.

I’m starting to think that deflation may eventually win.

The statistical data the government uses to measure retail sales, which are currently described as “healthy,” do not reflect the substitutions that most median-income-and-below consumers have been making this year. Not just substituting paying credit for cash. I can’t find the data to support this one, but my instincts tell me that the following is representative of what’s been going on with these households. This is mostly guesswork on my part. That’s okay, it’s my blog.

2006%     _______Category    __________ 2008%  ___ ____hange

30                         Housing[1] 32                        +10%

15                         Utilities[2] 21                        +50%

7                            Gasoline                         15       +110%

13                         Food                               18           +35%

5                           Medical                           6             +20%

5                           Clothing                          5          ——-

10                         Entertainment[3] 2                      -80%

5                           Vacation                         1            -80%

5                           Cars                               3             -40%

5                           Savings                          -3               now negative

100                                                             100

$250,000    Home Value                              $175,000              -30%

So, although retail sales may be “holding up”, people’s balance sheets and standards of living are clearly declining. Data through May show consumer credit growing, despite the initial round of tax rebate checks in April and May. Data for the summer will include those checks. If credit card debt continues to grow despite the tax rebate checks, it is going to jump when they’re gone.

No matter what the Fed does or doesn’t do, people are feeling poor. They are angry at a Republican administration that has engaged in a brutally expensive war, in human and financial terms, and allowed lax regulation of markets that enriched their friends and drove world financial markets off a cliff. Independent voters seem likely to consider a young, smart, flawed, black liberal, willing to propose new ideas, over an honorable relic of the 20^th century ruling class that brought us Iraq, the subprime crises, and a trashed dollar. Our national security is now fully subject to the whims of your basic Arab oil sheiks, with growing negative leverage in the form of megabillion dollar trade and fiscal deficits. I can’t quite hear the music…

August 6, 2008

Wall Street greeted yesterday’s Fed announcement as if it was a declaration of victory, when in fact the Fed is now officially handcuffed, locked at the rates in effect when the summer paralysis set in. Played “Fed Funds Musical Chairs” for months, and the music stopped at 2%. Now, they need to raise rates, need to lower rates, can’t fish, can’t cut bait. Too hot to spit, too wet to plow. Reduced to “observer” status. We’re not afraid to raise rates, we’ll raise them if we must, really we will. Sure you will.

Disequilibrium: Weirdness in Abundance

A financial world, where the Fed “should” raise rates in the face of significant inflationary evidence and “should” at the same time lower rates to help boost economic activity. The result of decades of easy money, lax regulation, fiscal irresponsibility, and a sudden new world energy order.

A political world, where Congress “should” be cutting the Federal deficit by reducing spending and “should” at the same time inject hundreds of billions of dollars to stimulate private economic activity. (Congress also “should” never think of raising taxes on anyone.)

An entitlement world, as Dave Barry once observed, where wealthy people use Social Security checks to buy sunbonnets for their racehorses.

A peak oil world, with John McCain leading a crowd of supporters chanting “DRILL! DRILL! DRILL!” Mocking Barack Obama for even mentioning conservation as part of the strategy for dealing with dwindling resources. A fossil promoting fossil fuels—seems almost cannibalistic.

Immovable Object vs. Irresistible Force

I’m thinking about comedian Steven Wright’s routine, putting his dehumidifier and his humidifier in a room, turning them on, shutting the door, and letting them slug it out. Oil-driven inflation vs. growing unemployment and the housing crisis.

Maybe $2 trillion, ultimately, lost downstream in the “pump and dump” subprime business. (That whistling sound you hear is synthetic homeowners’ equity leaving the residential real estate bubble.) The bottom is not yet in sight, and may reach 25-33% nationally, perhaps the largest aggregate negative wealth effect since the 1920’s. Others have described it as a disaster in slow motion.  People’s largest assets, melting before their eyes.

For some time, I have been concerned about inflation, led by high energy prices and growing global demand. Yesterday, oil dropped below $120 a barrel, a price “not seen since May 2^nd” and there was dancing in the streets. We forget that on May 2^nd we were hysterical, gnashing teeth, putting groceries on credit cards because all of our cash was going in the gas tank. (The recent decline in oil prices may simply be China having cut its use 30% by turning off Beijing for the Olympics. BTW, nice environment you’ve created there, Mr. Chairman.) Most of us used our tax rebate checks to pay toward credit card balances.

I’m starting to think that deflation may eventually win.

The statistical data the government uses to measure retail sales, which are currently described as “healthy,” do not reflect the substitutions that most median-income-and-below consumers have been making this year. Not just substituting paying credit for cash. I can’t find the data to support this one, but my instincts tell me that the following is representative of what’s been going on with these households. This is mostly guesswork on my part. That’s okay, it’s my blog.

2006%     _______Category    __________ 2008%  ___ ____hange

30                         Housing[1] 32                        +10%

15                         Utilities[2] 21                        +50%

7                            Gasoline                         15       +110%

13                         Food                               18           +35%

5                           Medical                           6             +20%

5                           Clothing                          5          ——-

10                         Entertainment[3] 2                      -80%

5                           Vacation                         1            -80%

5                           Cars                               3             -40%

5                           Savings                          -3               now negative

100                                                             100

$250,000    Home Value                              $175,000              -30%

So, although retail sales may be “holding up”, people’s balance sheets and standards of living are clearly declining. Data through May show consumer credit growing, despite the initial round of tax rebate checks in April and May. Data for the summer will include those checks. If credit card debt continues to grow despite the tax rebate checks, it is going to jump when they’re gone.

No matter what the Fed does or doesn’t do, people are feeling poor. They are angry at a Republican administration that has engaged in a brutally expensive war, in human and financial terms, and allowed lax regulation of markets that enriched their friends and drove world financial markets off a cliff. Independent voters seem likely to consider a young, smart, flawed, black liberal, willing to propose new ideas, over an honorable relic of the 20^th century ruling class that brought us Iraq, the subprime crises, and a trashed dollar. Our national security is now fully subject to the whims of your basic Arab oil sheiks, with growing negative leverage in the form of megabillion dollar trade and fiscal deficits. I can’t quite hear the music…

Image via Wikipedia

I’m in the midst of reading the new book by Maude Barlow called Blue Covenant–The Global Water Crisis and the Coming Battle for the Right to Water.  It is a shocking and deeply disturbing picture of the State of the Planet.  The premise is that water will be to the 21st century what oil was to the 20th.  And, the key point to remember is that water is the only life-sustaining substance on earth for which there is no substitute.  When it becomes expensive or, worse yet, unavailable, there are no alternatives.

While I’m warming to my subject, I want to give you a few excerpts from the first 50 pages of this book.

“More children are killed by dirty water than by war, malaria, HIV/AIDS and traffic accidents combined…Every eight seconds, a child dies from drinking dirty water.”

“Unless we change our ways, by the year 2025, two-thirds of the world’s population will face water scarcity.”

“California has a twenty-year supply of freshwater left.  New Mexico has only a ten-year supply.  Arizona is out; it now imports all of its drinking water. Lake Powell, the man-made backup for the western water supply, has lost 60 percent of its water.”

[caption id="attachment_116" align="alignleft" width="95" caption="One toilet for 5400 people!"]

“One report cited a current example of an area in Mumbai, where one toilet serves 5,440 people.”

“In China, 80 percent of the major rivers are so degraded they no longer support aquatic life, and an astonishing 90 percent of all groundwater systems under the major cities are contaminated.”

“…2.1 million Indian children under the age of five die every year from dirty water.”

“In Canada, more than one trillion liters of untreated sewage is dumped into waterways each year, a volume that would cover the entire 7,800 kilometer length of the Trans-Canada Highway, six stories high…only about 2 percent of Latin America’s wastewater receives any treatment at all.”

“China has less water than Canada and forty times more people…The water table beneath Beijing has fallen nearly two hundred feet in the past twenty years, which has led some planners to warn that China may have to choose another city for its capital.”

“Up to 30,000 liters of water are used to produce one kilogram of cotton…it takes 1,700 liters of water to produce one liter of ethanol.”

“The World Wildlife Fund reports that only 21 of the world’s 177 longest rivers run unhindered to the sea.”

“Sixty years ago the Aral Sea was the world’s fourth largest lake;…it has lost more than 80 percent of its volume and what is left is salty brine…Lake Chad, once the sixth largest lake in the world…now all but gone.”

[caption id="attachment_115" align="alignright" width="228" caption="Aral Sea, March 2008"]

According to John Archer, “Desalination of the sea is not the answer to our water problems,  It is survival technology, a life support system, an admission of the extent of our failure.”

The global drinking water crisis has political, economic, moral and investment implications.  Look for more on this subject in the future.

• Wired: Aquifers and Rivers Are Running Dry
• Facing the Freshwater Crisis [Scientific American Magazine]
• Dilemma: What is my water footprint?
• Drain Canada dry?

Image via Wikipedia

Well, we sure dodged a bullet there, didn’t we?  Oil dropped $17 a barrel in a week, and now everything’s gonna be great!  Before you know it, gas will be back to $2.75, closed factories will be re-opening, and our homes will again be worth what they were two years ago.  Party on, Garth!

Wrong.  This party’s not over–it hasn’t even started yet.  The misperception is all about lags.

Much of the damage that has taken place in our economy–the result of surging oil prices and a bursting housing bubble–has occurred this year.   A blink of the eye, in economic terms.  And the economy is just now beginning to react.  So far this year, most U.S. businesses have experienced higher energy and fuel costs, and have mostly absorbed them.  Those that have delivery charges have raised them, without raising other prices.  However, most businesses haven’t done this, have seen their margins shrinking, and will be “adjusting” in the months to come.  What does this mean going forward?

We’ve seen dramatic recent increases in the PPI and CPI, while the “core” rates have remained rather subdued.  This will be changing later this year, as businesses find themselves no longer able to make ends meet with skinny margins.  They will have two choices–either raise prices, or begin laying people off.

For the huge number of companies that are sole proprietorships, or who employ one or two people, layoffs are impossible.  (If I’m self-employed, I’m not going to lay myself off, although I’ve been considering it.)  Other than going out of business, which a number are doing, raising prices is my only choice.  Companies with employees have already started cutting back, and can be expected to continue doing so, as higher oil prices start showing up in most of their “inputs”–materials, utilities and transportation costs.  With no real pricing leverage, watch for unemployment figures to begin creeping up, along with core inflation rates.

All of the ingredients for a significant recession are now in place, waiting for the Fed to remove its head from the sand and begin raising rates.  Add inflation, and you have stagflation.  And let’s not forget that the government’s economic indices systematically understate both inflation and unemployment; if they say things are okay, they’re bad.  If they say they’re bad, they’re really bad.

There is one big unknown lurking out there.  It’s the combination of inflationary pressures (caused by high energy, food and commodity prices) and deflationary pressures (caused by rising unemployment and the collapse of housing prices).  Reminds me of Steven Wright, the existential comic, who once claimed he was going to “put my humidifier and my dehumidifier in the same room, turn them on, close the door, and let them fight it out.” We shall see where this settles out but, regardless of which side wins, it’s not going to be pretty.

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• Inflation eats up paychecks
• Energy spikes U.S. inflation
• GM to Cut Jobs and Truck Production

[caption id="attachment_92" align="alignnone" width="300" caption="Here's where my tax rebate check went."][/caption]

President Bush, during his press conference on Tuesday, criticized the Asian governments that subsidize gasoline costs, rambling on about market distortions, blah blah blah.  Yet, he is in the midst of mailing $150 billion to US taxpayers, the so-called fiscal stimulus package that kept retail sales out of the hopper in June.  Where does he think people are spending these stimulus checks?  Is this guy completely out of touch or just lying?

[caption id="attachment_88" align="alignnone" width="165" caption="The U.S. economy is circling the bowl. Good luck, Barack!"][/caption]

Compared to June 2007, producer prices at the wholesale level are up 9.2%.  The Fed Funds rate sits at 2.25%.  Retail sales in June were up a paltry .1%, most of which was accounted for by high gasoline prices and Federal tax rebate checks.  GM is on its way to become Lancia, and scores of banks are set up to fall like dominos.  Here in Indiana, it’s 110 in the shade, and my air conditioner is ready to throw a rod.