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Friday, February 27, 2009

Yoicks! Tallyho!

I was going to write a long post about preliminary Q4 GDP, but it is ancient history by now. Still, an annualized -6.2 is pretty rough. Because the imputations become less reliable during times of rapid change, the GDP revisions become much greater.

Still, the reason this is pretty irrelevant is that we now have a huge immediate crisis on our hands. BofA and Citi got a major head bonk and are reeling around with concussions, we can't sell mortgages to anyone but the government without a government guaranty, and we still haven't figured out how to actually produce a meaningful stimulus or shore up these two banks, which have together over 20% of the economy. Right now we're gutshot.

Beginning the second week of January, I spent three solid, hefty, factual, statistical filled weeks trying to construct a low bracket and a high bracket for potential US economic trajectories over about the next 15 months. All that work is completely useless now, because current events have shifted the economy out of any consonance with prior trends, which were showing the glimpses of recovery. After the last two weeks, a depression like event is unavoidable.

The major question now becomes how the voters deal with this, and whether the voters can get the Critters to act responsibly in a genuine crisis. Therefore, I think the questions Shrinkwrapped is asking in this post have more to do with our economic future than anything else. He has asked for comments and will hopefully post his own take on the questions later today:
Discuss among yourselves: Are Barack Obama's exaggerations and outright falsehoods the typical stock in trade misstatements of politicians, intentional lies, unintentional errors, or something novel to our political experience?
He's desperate now. He's trying group therapy. (Note - I see he did post the first part of his response.)

In the prior post, there were some very good comments. This from BarcodeGuy was particularly apt:
As this is going on, the bulk of society is being split into 3 groups:
1) Those that over-extended themselves and are insolvent or approaching insolvency. Maybe they're under water in their mortgage, maybe they lost their jobs, maybe they figured that their wages would increase so they could dig themselves out of debt. With the economy deteriorating, these folks are being forced to cut back to survive, in most cases either choosing or being forced into forclosure and re-location. Since they're broke, they aren't going to spend.
2) Those that did it right during the 10 years of credit insanity. They lived within their means. Maybe their house is paid off, maybe not, but they planned to be able to make it financially if someone in the family lost a job. These folks are looking at the economic news and maybe their investments and they're not buying anything, because they don't want to lose what they have. They're worried about moving into the insolvent category.
3) Those on the lower and upper ends of the income scale. Things aren't changing for them as much. The upper end has lost money, but it probably isn't going to change how they spend or how they live. The lower end is maybe suffering lost jobs and credit problems, but they basically don't have a lot of money to spend anyway, and in current economic conditions, they probably have less to spend.

So that's the economy. And Obama thinks he can fix it all, and accomplish his social agenda too? They're spending massive amounts of money to go back to the way it used to be, but I can't see them getting anywhere near it. Anyway you look at it, GDP is going to shrink big time - I figure somewhere in the 4.8% to 5.5% over the next 24 months.

I think we're toast. But what happens when we can't sell the debt any longer? Not from the big arrow, esoteric level but from the on the ground, day to day living perspective. They can't tax their way out of this. They're not going to be able to grow the GDP with the carbon regulations, higher taxes, and diluting capitalism with the banks and automakers and therefore discouraging private investment. I'm seeing default being the only option. What will we do when our dollars are worthless?
Good question. We will have to live off what we can produce, because we'll have a foreign exchange problem. Importing goods will be monumentally expensive. In short, we'll be veering toward Icelandic territory. But the US does produce quite a bit, especially food, and a weaker dollar would actually assist remaining manufacturing.

This is why the energy question is such a big issue. First, taxing energy as the current administration plans will create a large wave of inflation running through the domestic economy. It's equivalent to a value-added tax. Second, it will cut effective incomes across the board. Third, by refusing to invest in any of the ways in which we can produce energy at a reasonably competitive global price, it ends any hope of redressing our trade imbalance. It is not just the problem that we will be importing a bunch of energy rather than domestically producing it. It is also that by artificially raising energy prices, we weaken our manufacturers' ability to compete in the global market.

Since we are dependent on oil for transport, we will be horribly trammeled. By suspending the oil-shale leases (which would become very viable given the weaker dollar) and off-shore drilling, the current administration will keep us spending all our excess income to import oil.

If these policies are not changed, you don't need to worry about a 5% drop in GDP. You need to worry about a 10-15% drop in GDP over the next 15 years - approximately 1% a year. Think about it.

The nature of economics is that economies naturally rebalance. It is not a pleasant effect, but it is a stabilizing effect. If our effective incomes drop, importing goods becomes too expensive, and domestic manufacturing is stimulated. Plus, the weaker dollar allows our manufacturers to become more competitive on the world market.

The Obama administration's policies on energy thus add up to a longer sequence that repeats the horrendous missteps on banking of the last few weeks.

An emailed question from Joy (since Haloscan has real problems):
Here's a really stupid question.

How much would it cost for the government to pay off the unsecured consumer debt of every American?

Would it cost more than this bailout?
This doesn't seem like a stupid question to me. Let me verify some numbers.

Obama's policies are frightening. If he wants to tax fuels then he should tax imported oil at roughly $35 - 45 per barrel. But he must then open all forms of energy development in the US. That would spur energy development here among all fuels/energy including the green alternatives.

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