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Thursday, October 29, 2009

GDP, Titanic, Desk Chairs

See, nothing changed on the carrying wave. Nothing. See this prior post, and look at the updated graph for Q3. Just click on it, and meet your doom.

Gross private domestic investment is still sitting at 11% of GDP. The import/export contribution worsened a bit.

The combination of declining real disposable incomes, declining tax receipts, and trying to squeeze growth out of government spending and personal spending is an exercise in futility. It can only work short term, and the more the government borrows the more you are stealing from future growth. We will borrow that money now cheaply and be paying ever-escalating interest on it.

Figures here. GPDI at 11% of GDP. Government spending at 20.7%. Both of these did not change from Q2. PCE rose from 70.7% to 71.0%. Net exports worsened a bit, moving from -2.4% to -2.7%, equivalent to Q1.

That's a whole fat lot of nothing. This is what Who Struck John meant when he was talking about sideways until next year, then down again. This is the sideways.

It would be time to rationally panic and start consider doing something, or learning Japanese so we can find out how they do it. We are already being carry-traded; the next step is for world growth to resume and for all our industries to start exporting investment. If we want to stop that, we need to cut corporate tax rates!!!

Did you mean "Deck Chairs" for your title?
I was THINKING "financial desk chairs", but maybe that title wasn't as grimly and obviously funny as I thought?

Anyway, this is a real KITA.

I can't believe we are still at 11.
Ah, gotcha. I was thinking more of 'rearranging deck chairs on the Titanic'.
Ever see Spinal Tap? 11 was a GOOD thing!
I just hope next year, 9 isn't the new 11.

So here’s my bit of insanity for a solution. Of course, it would be EXTREMELY painful in the short run, but beneficial to the United States in the longer run. I am a realist, so I know that the probability of any of these occurring approaches zero since the benefits don’t accrue to Wall Street and GS individually but to the United States collectively.

My three easy pieces:

1) Tariffs – Yes, I know that everyone will start screaming “Smoot-Hawley”, but tariffs selectively applied would raise tax revenue and possibly invigorate domestic manufacturing. I think that the lessons from S-H are misunderstood to the world today(from a current US POV): in GD1, the US was the major exporter so retaliatory tariffs following the implementation of S-H hurt the US. (As an aside, there were substantial tariffs in place prior to S-H; S-H increased existing tariffs). Tariffs today will hurt China much more than the US. China’s willingness to export and our willingness to import will destroy the US as a viable economic power; I don’t see why the US needs to continue to be a party to its own demise. Another way to consider tariffs is forced currency revaluation; if China will not break the USD:Yuan peg and revalue their currency, we’ll do it for them via tariffs.

2) Alternative energy – From a resources POV, there isn’t much that the US needs from the ROW with the exception of liquid petroleum. Utilize the $$ from the tariffs to fund / develop domestic sources of energy. I think that Pickens had a reasonable transition plan using natural gas. I’m not a engineer, but we’ve known how to convert coal to liquids for 100 years so I don’t think there is a technical problem. There are economic and political issues with the transition, but not technical. Energy self sufficiency (and the technological development along with it) would substantially reduce trade imbalances and help the US.

3) Stand down the empire – how does the US benefit from deploying large numbers of troops (150k+) in Europe, Japan, and South Korea? It’s been 50+ years since troops were deployed; time to bring them home. We do gain some from the empire (dollar as the reserve currency, for one), but the benefits have declined over time and appear to be a burden rather than a benefit today.

All we lack is will and leadership (sadly, sorely lacking in both). So that’s my plan –comments appreciated. And thanks for the awesome analysis every week.

Ed S.

I'll address point (2). The Pickens Plan should really be called "Pickens' Plan for Pickin' Your Wallet." Wind power is highly variable. You can't spin steam power plants (coal or nuclear) up or down fast, so you need some form of power you can change quickly to balance the uneven power flow from wind power. In the Pacific Northwest, we are fortunate enough to have a large amount of hydropower that can be used to balance current production (though the capacity to balance further wind power additions is limited). In the rest of the country, you'll largely have to use peaker plants to balance the load -- peaker plants, incidentally, that use NATURAL GAS for fuel. The very same natural gas that the Pickens Plan would divert to the transportation sector. The result, as predictable as the sunrise, will be a massive increase in natural gas prices. Since Pickens is heavily invested in wind power and natural gas, guess who profits?

Solar, to the extent that is it more predictable, will be usable once the costs come down. Unfortunately, we aren't there yet. I refer you to Coyote's post on the economics of solar here.
"It would be time to rationally panic and start consider doing something, or learning Japanese so we can find out how they do it."

The thought of seemingly doing a lot to no end whatsoever while the economy settles into Zen-like stillness certainly feels "hopiatic". The inevitable withdrawal symptoms are, ofcourse, another matter entirely.
But I seriously wonder about the rest of the world "decoupling". Given the extent of the troubles in the major economies, and with no one knowing what exactly's going on in China, I very much doubt there'll be divergent paths. These troubles seem to be global, with everyone in hock together.
That said, I'd appreciate your thoughts on the globality (is that a legit.word?), or otherwise, of this mess.
Ed - I'll pick up some of that tomorrow. But whatever we do, we must realize that we are competing in a global economy and that to export, we must have competitive energy pricing for manufacturing.

CF - No, I haven't seen Spinal Tap. As for 11 being a good thing, are you sure? Last time was 1930.... I do not remember that personally but according to all reports it was a problem.

Jesse - yes, I did intend to suggest deck chairs and imply that financial desks were just moving the money around as the ship was sinking.

Saloner - I'll pick up with my global once I finish this domestic run, but early indications are not that encouraging. India is the best, but signs of trouble and worry are developing.

Singapore's incomes are dropping, and September industrial production dropped over 7%. No, we're not out of this yet, nor can the US expect to be saved by a sudden tsunami of orders from ROW.

China is a joke. They've got internal deflation and a rip-roaring economy? Please. They have the right to laugh when Geithner claims we're not monetizing, and we have the right to laugh at their economic stats.
MoM, Who,

Thanks for both replies. As far as the "Pickens" plan, I really don't know if it makes sense or not (or if it simply makes sense to T. Boone). The "recommendation" was only to suggest that we need to do something (and here's something off the shelf).

MoM -- if you've never seen This is Spinal Tap, you've missed one of the all-time funniest movies ever. You're "of an age" that the characters will ring strikingly true and Rob Reiner created a film that's as funny (maybe funnier) the fifth time as the first.

I've attached the YouTube clip of "it goes to 11" -- it's less than a minute and completely out of context so it may not be that funny (Reiner is interviewing the Spinal Tap guitarist who is a loveable moron). Get the movie -- it's a hoot and at worst PG.


Ed S.
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