Peak oil again

I have had peak oil on my mind lately.  Probably because I find it interesting for speculation but, I also find it interesting to read what others have to say on the subject.  It has become a topic of discussion on the main stream media lately and, like most things they discuss, the information that they present is either just outright wrong or highly distorted.  I wonder if our class room teachers do a better job of explaining things than the knuckle heads in the media.  Part of the problem with the main stream media, MSM, is they all have a bias and simply cannot tell you anything without attempting to make Obama look great or make him look stupid.  It all depends on politics.  Why is it that everything has to be politicized?  I mean things like global warming and peak oil really should be scientific subjects and presented as matter of fact.  What I mean is that facts should be presented without the politics.  Dream on.

I’m drifting again.  Back to peak oil.

If you open a text book on oil exploration you will almost certainly be presented with a graphic image that attempts to show the cross section of the earth under an oil well.  So far, every one of these images that I have seen has it wrong.  A casual reader will come away from the book with an image of a pool of liquid oil somewhere below the surface trapped above a salt dome.  I mean a literal pool.  You know something you could swim in. I do not know why it is always represented that way because there is no such thing.  Oil is not in pools under the surface.  Oil is distributed throughout porous rock layers.  Oil must move through the pores of the rock in order to get to the well and then to the surface.

Keep that thought in mind for a second.

I will now turn your attention to Boulder Dam.  Behind it is a huge reservoir of water from the Colorado River.  There is enough water behind the dam to supply Las Vegas for a hundred years.  OK, now we are going to turn off the water flowing out of the dam and in place of the normal discharge, we will drill a hole through the bottom of the dam into the lake behind it and that hole will be 1 inch in diameter.  So, here is the question.  How many people can you keep alive given that there is enough water behind the dam to supply everyone in Las Vegas for 100 years IF the only way you can get at the water is through the 1 inch hole?

There you have it.  That is what the MSM always seems to get wrong.  You hear them say things like we have enough oil beneath the earth to supply mankind for 100 years.  It makes absolutely no difference whether there is enough to last 100 years or 10,000 years.  The only thing that matters is how fast you can get it out of the ground.  If you cannot extract the oil as fast as it is needed you have a supply vs. demand imbalance.  If you only have a 1 inch hole then you might have a problem.

The MSM forgets that it is not the quantity of oil that is left but the rate at which it can be extracted that is important.

The rate at which oil can be extracted from an oil well depends on the oil pressure and the diameter of the pores in the rock in which it resides.  When the first well is drilled into a new oil field, the pressure is great and the oil comes out of the well rapidly.  As more wells are drilled into the field and as oil is extracted, the flow rate of the wells decreases over time.  As more and more wells are drilled into the field a curious thing happens. Basically, if you double the number of wells then, the flow rate at all the wells is cut in half.  If you quadruple the number of wells then the flow rate at all of them is reduced by a factor of 4.  At some point no matter what you do, you cannot increase the total extraction rate for oil from that oil field.  When that happens, you have reached “peak oil”.   Peak oil means peak oil extraction rate.

There are methods for increasing the flow rate but, these enhanced extraction methods only cause the oil field to be drained quicker and are expensive to employ.  Mexico has the third largest oil field in the world and it passed it peak production rate in 1999.  It has been in decline ever since.  All of the latest enhanced extraction methods have been applied to that oil field.  It is expected to stop producing oil completely within 7 years.  In fact, the majority of oil fields in the world are past peak and are in terminal decline.  They may have enough oil to last 100 years but they have reached maximum production and each year that goes by they produce less and less oil.  The entire world has already reached peak oil and it did so many years ago.  No one will tell you that on the evening news.  Now I have to be careful here.  What I mean is EXISTING oil wells combined are producing less and less oil every year.  The amount of oil available from EXISTING oil wells is decreasing at a rate of about 4% per year.  If nothing is done the production rate will accelerate and in 10 years or so the production rate is expected to be about 7% per year.

So, if we are to continue to produce oil sufficient to meet the needs of the world then, we must be actively looking for new oil to take up the slack.   The oil companies have been successful at this and for the last 5 years the worldwide oil production rate has remained almost constant.  But, the worldwide total production rate has NOT increased.  To do that we would need to find even more oil.  And to do that oil companies are now drilling wells in the deep ocean to depths approaching 30,000 ft; as deep as Mt. Everest is high!!!

So, when the MSM talks about peak oil they really mean the day when the new oil discoveries are no longer sufficient to offset the declining production rate of existing oil wells. .  When the supply of oil drops below the demand, you can expect the price of oil to sky rocket.  That is what all the hubbub is about.  And, of course, it has become very political.

But, that is not even the biggest problem or even the first oil problem that we will face regarding the worldwide oil supply.  There is another problem that is on its way and is already on our door step.  This problem is one we will have to deal with long before peak oil becomes an issue.

Recall that I said that Mexico has the third largest oil field in the world and that it will be dry in 7 years?  Well, in about three years, the oil consumption inside Mexico will increase to the point that Mexico will not have any oil to export any way.  They will have oil but none to sell us.  And, as the oil producing countries get richer and richer they want air conditioning systems, cars, electricity and all the things that oil is used for.  And they want more and more of it every year.  So, while the oil production rate from oil wells is decreasing at only 4% per year, the oil consumption rate of the oil producing countries is increasing at about that rate as well.  And this means that the oil available for export is decreasing at about 6% per year.  The world needs to find and bring on like new oil fields to replace all of the loss.  As oil producing countries see their reserves decline, they are torn between limiting exports to preserve their supply and increasing exports to obtain much needed cash.  Eventually, they will all stop exporting.

Here in America, we have an even larger problem.  We already use 25% of all the oil that is produced every year.  Developing countries like China and India are getting rich and they want cars and air conditioners and electricity and all the stuff that is made from oil.  As they consume more there will be less for us.  IF the demand exceeds the supply you can be sure that prices will escalate and that will price a lot of people out.

If you have not watched this clip, you might want to take a look at it.  It outlines where we are headed: http://www.environmentalleader.com/2010/01/15/jeff-rubin-at-the-business-of-climate-change/

Regards

Health care

I really and truly want health care reform in America.  My reason is very simple and totally selfish.  Health care costs too much money.  It is as simple as that.  I have heard politicians tell us that they are going to lower costs but, they never talk about the root of the problem.  No.  No.  They tell us that the way they are going to lower costs is to provide a way for more competition between insurance companies or that they are going to stream line the system or that they are going to “get rid of waste” in the system.  I have been hearing the “get rid of waste” line from politicians all my life and the only thing I can attest to is that costs just keep going up.  All of this is just so much talk.  I have said from the beginning that nothing useful will come from the so called health reform bill.  All we will see is more bureaucracy and more money leaving our pockets.  Anyone with an IQ larger than their shoe size should be able to see that the problem is not “inefficiencies in the system”.  No.  It is nothing more than unbridled human greed. And, that human greed is all pervasive in the health care system.  I cannot think of a single aspect of health care that is not riddled with it.

When we first moved here I checked with the hospital to see what the double occupancy room rate was.  I forget now what made me do that.  Anyway, at that time, the rate was $350 per day.  Mind you, that was more money than the room rate at a Hyatt Regency in New York City at the time.  And, you could get a single occupancy hotel room for $35 a night back then here.  With two people in a hospital room, the hospital collects $700 per day compared to $35 per day in a local hotel.  You tell me.  What justifies a 20 to 1 increase to move three blocks from the hotel to the hospital?

I know.  Let me guess.  The extra money is needed to pay for the nursing staff.  But, but, but…… If each nurse takes care of 10 patients, i.e. is assigned to look in on 5 rooms then, the hospital is collecting $3,500 a day from those 10 patients.  If the hospital has to hire three nurses to watch over those 10 patients 24 hours a day in three shifts then they have $1166 per shift to spend per day!!!

Now the real bull crap starts right here.  The hospital does not hire registered nurses to look in on patients.  They actually hire nurses’ aids and they pay them the lowest wages of all.  I would be willing to bet a pretty penny that 17 years ago you could have hired a nurse’s aid for about $10 an hour and that would make their expenses $80 per shift plus overhead.  I will estimate labor overhead at 50% of wages.  With that kind of overhead the cost of having a nurse’s aid work for an 8 hour day would be $120.  With three nurses’ aids to man the place 24 hrs a day, it will cost the hospital $360 per day.  But, they are collecting $3,500 a day.  This is nearly a 10 to 1 mark up on the service provided!!!

It is this way with every service that a hospital provides.  Everything is marked up at least 10 to 1 and some things are marked up 100s to 1.  We have all heard of a hospital charging $25 for a $.01 aspirin.

Of course, the hospital management will tell you that they have to charge such steep room rates because the cost of the equipment in the room is so darned expensive.  Why a modern hospital bed alone could cost upwards of $25,000.  But, but, but…..  If only 10% of the room rate that I pay is going to pay the staff then, the hospital has $315/day to pay for the equipment.  So, that excess builds up to about $1,000 every three days.  In the course of a 30 day month, the excess adds up to about $10,000.  That means that the $25,000 hospital bed can be paid off completely in less than three months.  You could have gold plated bed pans and pay them off in less than 6 months.  While we’re at it lets gold plate the plumbing fixtures too.

It is all bull.

And, that is just the bull associated with the basic room rate.  Intensive care is even more extravagant.

Hospital pharmacies are notorious for overcharging.  If you ask them why a $.01 aspirin cost $25 they will give you some phony excuse like “we charge extra because we have to pay for xyz”.  But, that is bull because everything about a hospital is billed at super expensive rates.  Everything pays for itself ten times over every few months.  Hospitals are nothing more than money machines that gouge patients to extreme levels.

Take an x-ray machine as an example.  Lets say it cost $1 million dollars to buy and install.  The actual price is irrelevant because the hospital will turn it into a cash cow without shame.  The last time I was in a hospital they ordered up x-rays.  All told, they took 5 x-rays of me.  The bill was $75 each.  So, my x-rays generated $375 for the hospital and it only took 10 minutes.  People tell me that the x-ray machines run full time in most hospitals for at least 2 shifts.  Let’s see.  $375 dollars for 10 minutes equates to $2,250 per hour.  If that pace keeps up for 16 hrs a day then the x-ray machine generates $36,000 a day in revenue.  Over the course of a 30 day month that adds up to $1,080,000!!!  The thing is paid off in 1 month!!!!

In a normal business, capital equipment purchases are considered a good deal if the equipment will pay for itself in 18 months or less.  That means that the x-ray machine, which I said was running 16 hrs a day full bore, could run for less than one full hour a day and still pay for itself in 18 months.  Once it is paid for any additional run time is essentially free.  This is a huge scam.

It makes no difference what service a hospital provides, the prices are sky high.  And they are supposed to be “not for profit”.

This kind of greed run amuck pervades the entire health care system including and in particular the pharmaceutical manufacturers.

And prices just keep going up.  My insurance costs go up almost 20% per year, every year.  For what?

The health care system in its entirety is corrupt.  Like the school system, the only way to fix it is to throw it out and start over.  Until that is done, there will be no meaningful change in the system.  There are simply too many vested interest and we have elected officials who are more interested in taking bribes campaign donations than they are in taking care of the electorate.

I wish Obama luck but know that nothing will change.

Regards

P.S.  If you take a careful look around you will discover that rampant greed is what has been driving the country for the past 20 to 30 years.  It has led to a completely fake economy.  The wind has not been completely let out of the real estate/banking/derivatives bubble yet.  But, the unwind is on its way and will be on our door step soon enough.

Ramblings again

The chatter on the net is that the federal government is running out of buyers for treasuries.   The traditional buyers like China, England and Japan are either unable or unwilling to buy US treasury bonds.  That leaves Timothy very short of buyers.  Something must be done.  There must be a piggy bank somewhere that can be raided.  Sure enough, two new piggy banks have been identified and will most likely be raided.  The first is the cash that resides in money market funds.  The second is the cash that resides in retirement accounts, IRAs or otherwise.  The idea would be that our legislature would pass a law requiring that in order for a retirement fund to qualify for deferred taxes, i.e. IRAs, a certain percentage of the fund must be invested in federal treasury bonds.  A similar requirement would be placed on money market fund deposits.  The beauty of this would be that the person with investments in money market funds or in a retirement account would not “feel” the affect.  It would not be perceived as a new tax and the government would get to use the money to prop up the general coffers.  Great idea huh?  In effect this would make at least a portion of your retirement fund operate like social security.  You would only be able to draw an annuity from your fund.  At the moment you can withdraw any amount you want after your retire.  That would end.  This has already happened in the United Kingdom.

There is one little problem with this.  Once the government spends the money in all the retirement funds what piggy bank will they raid next?  It is estimated that there are only $15 trillion dollars in all the retirement funds combined and with the anticipated Obama budget shortfall of around $2 trillion a year, the entire collection of retirement funds would be exhausted in about 7 years.  I’m sure that by then he will have the “paygo” system working like a finely tuned watch.  But, in my opinion, it is just one more way to “pretend and extend” the fantasy economy that we currently enjoy.

I read an article today that made the brazen claim that only 15% of the population is directly employed by a government agency.  Of course, that is a deceptive statement and hides reality.  What needs to be considered is what percentage of the people who receive a regular income get that income directly from a government agency?  When the question is asked this way, you get a very different picture.  One of my business associates told me back in 1980 that at that time, 50% of the people who receive a regular income work directly for a government agency.  I did not believe him.  I got an almanac and checked it out for myself.  Sure enough, as long ago as 1980, 30 years back, 50% did receive their incomes directly from a government agency.  Today the percentage is much higher and, if you include all the indirect ways that governments pay people, I would be inclined to guess that only about 15% receive incomes from something other than a government agency.  Every time the navy orders a ship, that generates jobs at the ship yard  But, it also generates jobs at steel mills, railroads, iron ore mines, goal mines, electrical power generating facilities, restaurants, grocery stores, truckers, farms, fertilizer factories, highway construction crews, hospitals, etc.  None of those jobs would be required if the ship was never ordered.  This is one of the reasons why Obama et. al. believe that the government can create jobs.

We are in fact a socialist country, like it or not.  But, if the government does not stop acquiring the wheels of industry I will have to call it something different.  With controlling interest in big banks and the automotive industry along with the fact that the federal government and its quasi federal agencies like FHA, Freddy Mac and Fanny May and the fact that they have what seems like a burning desire to take control of more like health care, we are sneaking up on becoming a fascist government.  But, that is political and I can’t go there.

I do not know how old the oldest book is.  But, if we take the oldest history books and read them, we find that somewhere in the very first chapters that human kind has been fighting wars for as long as anyone can remember or record.   So, is war a fundamental part of the very nature of humankind?  If so then, it would be impossible to find any culture that is or was not war like as a fundamental part of their culture.  Right?  I mean cats are predators.  Predation is a fundamental part of their nature.  We simply do not expect to find a cat species somewhere on earth that is a docile vegetarian.  Right?  So, what if we can show that at one time humans were not war like?  If we can show that to be true then we would be forced to drop the notion that humans are by their very nature war like.
Then I discovered the Cucuteni-Trypillian culture.

These were people who lived in Romania and the Ukraine from 5500 BC until 2750 BC.  That is a period of nearly 3,000 years and the reason that this is important is because,

“Many tools, weights, and accessories have been found at the Cucuteni-Trypillian sites. Among these artifacts are clubs, harpoons, spear and arrow points for use in hunting and fishing, made from an assortment of materials, including stone, bone, antler, wood, leather, clay, sinew, straw, and cloth. Towards the end of this culture’s existence, a number of copper weapons and tools began to appear. However, there has been only a very few weapons found that were designed for defense against human enemies. The implications of this seem to lead to the conclusion that the inhabitants of this culture lived with very little threat from possible enemy attack for almost 3000 years.” — http://en.wikipedia.org/wiki/Cucuteni-Trypillian_culture

So, let me see.  Here we have people who managed to live together in villages of as many as 15,000 people for 3,000 years and there is no evidence that they were killing each other in wars!  Wow!   Does this mean that the basic nature of man is really not war like?  If so, does that mean that there is something about human cultures that makes people war like?  Does that mean that if we could figure it out then we could redesign human cultures to be “nice to each other”?   It is something to think about.

I’ll bet the progressives are already working on it.  It would be a feat of social engineering that they would just love to tackle.  I mean this would be really big.  Taming humans so we could have “peace in our time” is such a big notion that it might inspire Hillary to really go for it and run for the presidency as soon as Obama vacates the position.

But, that is politics again and I should not go there.

I have noticed that in the last couple of weeks there has been more than one article proclaiming that “peak oil” is eminent if not here already.  Sir Richard Branson is the latest to make the proclamation.  For some reason, when he says it, people find it easier to believe.  The question I would put to folks is simply this, “What does the arrival of peak oil mean to the man on the street”?  The answers that you are likely to get for this question are going to be very dependent on the respondents world view.  I would not pretend to tell people how to respond to peak oil.  Responses are wide ranging.

Some 6 day creationists have an apocalyptic world view and simply shrug the notion of peak oil or anything else that might take place say 10 years from now as not worth thinking about because the world will end before then and no one will actually have to deal with it.

There are those who are absolutely convinced that technology will come to our rescue.  They take the position that humans are really smart, technology is capable of almost anything and in fact will provide us with a fantastic future.  Peak oil?  Who cares?  We will have fusion reactors to save the day.  Why, they almost have one working now.

Then there are the pragmatic business school graduates with MBAs who assure us that if the price of oil rises too high then there will be an alternative to take its place such as bio-fuels or wind.  But, we are not to worry because the world is not going to run out of energy.  I mean we have the tar sands in Canada, deep sea oil, arctic oil, methane hydrates along the continental shelves, shale oil in the Rocky Mountains, etc.  Each of these is capable of meeting all of our energy needs.  Energy is setting right here in our back yard and all we have to do is go after it.

Then we have a group who do not believe the Apocalypse will happen any time soon.  They also believe that fusion reactors are the energy of the future and “always will be” and that at some point, it will take more than one barrel of oil to extract one barrel of oil from the deep sea, or anywhere else.  When that happens its game over.  This group does not believe that there is a “solution” to peak oil and they further believe that man, being war like in nature, will drop civilization in a heartbeat.  Anarchy will rule the day.  Their advice is to buy lots of guns and ammo.

But, there are those who think it is a lot of hooey and probably a conspiracy between the big oil companies as a way to justify charging more for oil.  It is nothing more than big corporate greed!

I don’t know.  I have my eye on a couple of acres of bottom land with a double wide on it and I am looking forward to raising chickens and planting a big garden.

Regards

Economy or Not

In my last essay I tried to show that the US economy is actually almost completely dependent on government spending.  While I may not like this situation, there is little or nothing that anyone, other than the legislators, can do about it.  The great money engine of the 20th century, the manufacturing industry, has left America and possibly will never return; at least not in my life time.  As long as the wage difference between the west and the east persists, manual jobs will gravitate to the east.  To be sure, the folks in Shanghai are going to want more money for their labor as time goes by.  Not to worry.  There will be other folks from the interior who will work for the low wages.  China alone has three times as many people as the US and only a tiny percentage of them are being paid well.  With such a huge supply of cheap labor, it will take a very long time for wage increases in China to make a material difference in the prices of the goods they sell to us.  I think we can consider this arrangement as a permanent one.

Don’t misunderstand me.  America still has manufacturing companies but, the total number of them is greatly reduced from what it once was and many that do exist actually have their products made elsewhere.  Given the highly competitive nature of world trade, the pressure will continue to be applied to any remaining manufacturers to move operations to China or India.

So, where does that leave America’s economy?

We are in trouble.

Ever since the 1980s, we have been living in a false economy driven by ever increasing debt and speculation of one kind or another. I am conservative by nature and would rather put a dollar into savings instead of eating out.  But, my actions, emotions and motivations are a far cry from what most Americans have been doing for the past 30 years.  It is not necessary to place a moral judgment on the actions of myself or others because the only things that are important are consequences.  The consequences of our collective actions have been such that we are collectively bankrupt and scared.  Note that this is a 30 year period of spending mania and a large percentage of the population remembers nothing but this time.

It was oh so tempting to buy a big house.  Credit was available and everyone was doing it. And besides, house “values” were going up so fast that all you really needed to do was keep it for a couple of years and then sell it to some other fool for a huge profit.  What could possibly go wrong?  You could take out a second mortgage and use the house equity to buy all kinds of stuff that you have always wanted. You know, stuff like a 48 inch flat screen TV.  Life was good.

But, the party ended and now people are trapped with mortgages that they cannot pay and they have run their credit cards to limit and many have lost their jobs.  What do we do now?  The president wants all American’s to start spending again.  The trouble is that Americans do not have any money and their credit cards are at limit and they cannot afford the big house that they bought thinking they could “flip” it for a profit.  The dilemma that President Obama is facing is simple this; people who can afford to borrow won’t and people who want to borrow can’t qualify.  The result has been that private spending has fallen off a cliff.  Automobile sales are down some 40% from the 2007 levels.  The list of things not sold is quite long.

In order to keep the economy moving at least a little, both President Bush and President Obama have offered financial incentives, outright cash, and increasing government spending on “stimulus” projects.  These did induce people to buy cars and houses but as soon as the government stops handing out “incentives” sales plunge.

Some say that we should get used to the new economy because from here on, we are all going to have to make do with less.  We are now going to be forced to live on our income and not our home equity and credit cards.  If that is true, and I believe it is, then there are going to be some major changes in how people live.  I do not have a crystal ball that works so, I cannot predict what people will do.  I will only say that each person will make their own adjustments as they see fit.  However, I believe it is safe to say that the future will not be like the past.  We will not continue business as usual.

It is my personal opinion that there is so much debt in the system that cannot be serviced that, it will have to be paid off or defaulted on before things get better.  In recent times the federal government has passed laws making it difficult for individuals to declare bankruptcy and rid themselves of all debt.  That means the debt must be paid off and that will take most people many years to accomplish.  In the mean time, while the debt is being removed from the economy, I expect little or no real economic growth.  Note I said “real economic growth” as opposed to debt driven growth.

Russia went through an economic collapse starting in the late 1980s.  Dmetri Orlov sojourned in Russia before, during and after the collapse.  His writings on the subject make for great reading.  I recommend that all Americans read his story.  You can find his articles on the net with ease.

Regards

Challenges

I will step back a minute and consider two simple facts.

1) People in China and India are willing to work for $.10 per hour

2) Americans will not work for less than several dollars per hour.

Is this sufficient information to make predictions about such things as the jobs going off shore?

Well, no. People in Nigeria and Haiti will work for $.10 an hour too and no one is actually considering sending manufacturing jobs to those countries.  So, what makes India and China different? Several things.  First, India and China are more or less politically stable.  Second, the people are educated.  At least the upper classes are. But, even that is not sufficient to make jobs go from the US to Asia.  What really makes the difference is that India and China and other countries have acquired knowledge about how to build things and they have the tools to do so.  Education, skills, knowledge and tools combined with a low labor rate make Asian countries into manufacturing magnets for western jobs.

Now that everyone in the west has become accustomed to and in fact we demand cheap consumer goods, there is no going back.  Manufacturing jobs that leave the US are not coming back to the US any time soon.  And, we can expect more and more jobs to leave the US for the same reasons.  Engineering of all types, software programming of all types, banking services that do not require local customer contact and virtually all manufacturing will no longer be practiced in the US in the not so distant future.  I don’t think anyone needs a crystal ball to see this coming.

So, what will Americans do to make a living after all these jobs are gone?  Sell insurance, real estate and hamburgers to each other?

Let’s see.  We will still have mineral extraction for such things as iron, copper and coal. There is a reasonable chance that there will still be some jobs for medical practitioners and lawyers.  Of course, we will still grow food.  We will still have retailers, barbers, undertakers, and maintenance folks.  And, we will probably have a military.

What else is there?

Well, it turns out that probably everyone else will be essentially a ward of the state.

I know that this sounds foolish but, I think it is true when you look at the details.  Consider the following.

The gross domestic product of the US is $14.4 trillion dollars.  President Obama has submitted a budget proposal for approximately $3.8 trillion dollars.  Note that this is 26% of GDP. The rule of thumb for the money multiplier in the US and most industrialized countries is about 3.  This means that every dollar spent by the government, results in nearly $3 dollars in circulation.

You get a single $1 from the government.  That dollar is tallied as your income and is added to the next years GDP total.

You buy stuff with the $1 and then,

The merchant spends that money on merchandise. The cost of the merchandise is added to the GDP for next year too.

The suppliers of merchandise pay people to manufacture the goods they sell.  The money paid out for raw material and labor is also added to the GDP total for next year.

So every dollar that the government spends results in $3 dollars added to the GDP.  Pretty good huh?  So, if the federal government collects then spends $3.8 trillion dollars that money will account for $3.8 x 3 = $11.4 trillion dollars of the total $14.4 trillion dollars of GDP.  This means that the federal government is directly or indirectly responsible for 79% of the GDP!

When the Navy orders a new aircraft carrier that creates lots of jobs in the ship yards.  It also results in lots of restaurants, shopping malls, banks, automobile repair shops, etc.  But, if the Navy had not ordered the ship none of those other jobs would exist.  A clerk at the local restaurant near the ship yard may not think he/she is a ward of the state.  But, he/she owes their job to the government anyway.

If you add up all the other people who work for local governments you discover that just about the entire economy is in fact a ward of the state.  These would include police, fire men, road building and repair crews, school teachers, prison guards, city council persons and their staff, state and local government employees, park rangers, etc.  Since state and local taxes also result in a multiplier effect of nearly 3 to 1 it is safe to say that nearly the entire economy in the US is dependent on government money.

What this means is that the US and most of the industrialized western countries are in fact socialized welfare states.  If you were to remove government spending from the economy, the economy would collapse.  Every year, more and more of our industrial capacity is hollowed out and that leaves the rest of us more and more dependent on the government for our livelihoods.  Most of the western industrialized countries are more dependent on government spending than we are because they have nationalized or socialized health care.

There was a time when industry was the primary source of GDP.  Those days are long gone and will probably never return; at least not in our life time.  In theory, if the government can collect 33% of the total GDP in taxes and then by spending those taxes the multiplier effect results in 100% GDP then, we have a perfect perpetual motion machine.  What could possibly go wrong?

It really does not make any difference what goes wrong, does it?  If anything goes wrong and for some reason the multiplier effect drops to say 2.5 then the GDP will be reduced.  If a hurricane strikes New Orleans and that siphons off some of the government money to rebuild, that unexpected expenditure will also result in a lower GDP.  Without any excess money in the economy, we cannot withstand and weather through unexpected things.

But, the worst part of all this is that the government does NOT collect enough taxes to pay for the federal budget.  The money that the government spends does result in generating most of the GDP but nearly half of the money that the government spends is borrowed.  If for any reason, any reason at all, the federal government cannot sell enough government bonds to raise the full expenses of the government then, there will be real trouble in the economy.

We are almost at this point now.  Our largest benefactor, China, does not want to lend us any more money.  Japan and England are our next largest benefactors and they are too broke to buy any of our government bonds.  I wonder what the US treasury will do when the bond market fails.

All I can say is we are probably going to find out in short order.

Regards

Social Entitlements

There are people who are paid to think about the economy and the ramifications of government legislation and policies. There are others who think about these things without getting paid to do so.  It is somewhat like an expert witness who has come to court to provide testimony for or against a defendant.  The attorney who calls the expert already knows that the expert agrees with the prosecutor or the defense.  An attorney simply will not call an expert if he/she thinks the expert will disagree with the position that the attorney is presenting.  In a similar manner, if senator XYZ wants to “prove” that his/her bill is going to accomplish the stated goal then there is always an expert who will support that position.  You can always find an expert who will support any position you like.  How does that saying go?  ”It is difficult to get someone to accept something if that persons continued income is predicated on him not recognizing that the thing exist”.

So it is with social welfare programs.

This will come as no surprise to anyone but, the costs of social welfare programs have been increasing at a rate faster than the economy has been growing and way faster than government tax receipts.  No problem.  The government simply borrows the needed money by selling bonds.  That increases the national debt.  No problem.  Sell 30 year bonds and you will not have to think about it until the bonds are mature and payable.

Everything is OK.

But, at some point the bonds do become payable.  What if we can no longer borrow the money to keep the social welfare programs going?  Of course, that day will arrive but, we do not need to worry about it right now. Do we?

It is hard to get a senator to acknowledge that a problem exists when his continued reelection (i.e. continued income) is predicated on him not recognizing that the problem exists in the first place.

So, year after year, our legislature keeps adding more and more benefits to the social welfare programs.  It is only a matter of time before they will become too expensive to maintain.  What do we do then?

OK.  Let’s assume that everyone in the US accepts that this will happen.  Who among us is willing to give up benefits so that some level of social welfare can be maintained?  Which of us are willing to accept only half of the Social Security benefits or go without that medical treatment just so the system can be maintained?

Hmmmm.

Or, are we just going to be like yeast in a petri dish who keep eating any food that is left until it is all gone and then all of the yeast die?  Are we smarter than yeast?

There are a good many people who would suggest that we are going to behave just like yeast.  Even if the voters do not demand more and more benefits from the government, our senators and representatives just cannot stop themselves from giving us additional benefits anyway.

I think a day of reckoning is coming and that right quickly.

Regards

Vote them all out

If you listen to the voices, you will be forced to conclude that the way that an elected official gets elected is by promising to “give” people something; a bridge, a library, a highway, more jobs, change you can believe in, etc.

Is this true?

I don’t think so.

Did you actually vote for Obama because you believed him when he said that he was going to run a more open administration and require that all bills be put on the internet 72 hrs before any votes are taken and that he would have televised congressional debates on the health care proceedings?  If so then, what makes you believe that any politician will actually deliver on their promises?  Is there a preponderance of evidence somewhere that I have missed that makes this a good bet?

I don’t think so.

I think people vote against one politician in each race and one of the consequences is that the other politician wins.  Obama was not voted into office.  The Republicans were voted out.

So, what about all those, so called, “ear marks” that are attached to each and every bill?  Those are pay back to people and companies who put up the money to get the politician elected.  Or, they are out and out graft.  You know.  Things like a construction project for a new wing on the city library in a town where the politician’s son in law (I mean his/her daughter’s husband) owns the main construction supply company.  Politicians want to keep ear marks secret.  They do not advertise them as “work accomplished” when it comes time to be reelected.  They do not want you to know who is getting paid back or special treatment.

Every bill that is crafted is done so with direct “aid” from special interest groups via the representatives for those groups.  These are private advocates.  Each and every bill is really just eye wash for the public and pay back to the monied interest that paid to get the politicians elected.  Money makes all the difference.

And what results can we point to from all this activity?  A budget that is so large that it cannot be paid for with taxes without destroying the economy.  The only way that the federal budget (state budget and local budgets as well) can be paid for is by selling bonds.  Bonds are nothing more than loans made to the government in return for some interest.     Nearly half of the federal budget is paid for by selling bonds.   All those bonds have to be paid back some day.  As it turns out, 1/3rd of all the federal bonds are to be paid back this year.  Isn’t that sweet?

So, in addition to raising 50% of the 2010 federal operating capitol by selling bonds, in 2010 we must also raise enough money to pay back 1/3rd of the existing bonds with interest.  Where are we going to get the money to pay back the bonds that have come do?  Why, the answer to that is simple.  We are going to sell more bonds to raise the money.  This is the very definition of a Ponzi scheme which is to take money from new “investors” to pay off old “investors”.  Bernie went to prison for doing exactly what our federal, state and local governments do all the time.

This is the equivalent of borrowing money from your credit card to pay the mortgage on your house.  It may let you make one more mortgage payment but it only gets you farther into debt.  At some point, your credit card will be maxed out and then what will you do?

This is the fix the federal, state and local governments find themselves in.  Credit lines have been maxed out.  China has been buying most of our federal bonds but they have made it clear that they are no longer interested.  The UK and Japan have been buying lots of our federal bonds but they are in such bad trouble that they need to spend their money at home.  No help there.  So, where is the money going to come from?

The federal government spends about twice as much as it takes in taxes.  There is absolutely no reason to believe that our elected officials will do anything about this imbalance as long as they can sell more bonds.  But wait.  Who cares if there is someone to buy bonds anyway?  We have a printing press in the basement of the Fed and we can just print some more money.  That will solve everything.  Right?

Well that is exactly what the federal government has been doing ever since I can remember.  That is why a loaf of bread now costs $1.40 instead of $.07.  All those extra dollars that the fed has been printing have diluted the value of the dollar down to only 5% of what it used to be worth.

So, what’s the problem with that?  We can still buy a loaf of bread because our wages have gone up just as fast as the dollar has been devalued.  Problem solved!  Stop whining.

But, but, but…….

What if wages stop going up as fast as the dollar is devalued?  That is where we are headed if the federal government does not get the budget under control without turning on the presses.

How can they do that?

Raise taxes.

OR

Reduce spending.

Those are the only two options other than turning on the presses.

The only time in my life when I have seen the government actually lower spending…..  Wait a minute what actually happened was the federal government reduced the budget.   That is different from reducing spending.  See, the government keeps two sets of books.  One is called “On budget”  and the other is called “Off budget”.    During the Bill Clinton years, the On budget expenses were in fact reduced.  This came about because in the previous administration, congress pass a bill to close 400 military installations.  However, congress did not lower taxes to compensate.  So, the  tax money kept rolling into the federal coffers and as the On budget expenses dropped with each base closing, walla, a “surplus” was generated.  Isn’t that great?

Of course, congress spent ALL of the surplus for OFF budget things.

So, I can stand witness to the fact that at least one time in history congress actually voted to reduce the budget.  By the way, it was not Billie’s administration that voted to reduce the budget.

But, that is politics so we will simply move on.

It is very unlikely that our governments will do much to reduce spending.  The reason is simple.  Most of the budget is taken up by entitlements like Social Security, Medicaid, Medicare, etc.  Is there anyone out there who will willingly take a 50% reduction in their “entitlement”?  I don’t think so.

The alternative is to raise taxes. But, in order to raise enough money from taxes to pay for the entire budget, taxes would need to be doubled.  Who among you is willing to pay the government twice as much in taxes as you pay now?  Not very many I suspect.

But, more importantly, who among you would vote for a politician who did double your taxes?  That is the worry that all politicians have.  They know that the budget is out of whack and they know that something must be done.  They just do not have the guts to do what needs to be done.  So, they will do nothing.  At least nothing you can see and tie directly to individual politicians.

What they are going to do is turn on the presses.  They have been doing it for decades.  But, now, they will do it big time.  And when they do, the dollar will be devalued much faster than wages will rise.  This will result in inflation, big time. We have seen it before.  During the Nixon presidency, we had 15% to 20% inflation and I believe we will see it again.  Soon.

So, what we really need right now is another government entitlement to add to the list.  Universal health care.  That is what we need.  Health care will not be called an entitlement.  But, it will be mandated and you will have to pay for it whether you want to or not.

I’m sure it will all be better then.  Aren’t you?

If you like how our crop of politicians are running things then vote them back in. But, if you are discusted by the shenannigans then vote them all out so we can start over.

Regards

Algebra again

    It seems that California wants to drop teaching cursive writing and require 8th graders to pass a course in algebra.

 

Find it here.

 

http://www.orovillemr.com/opinion/ci_11482716

 

    I agree with the author.  I simply cannot tell you how silly I think this is.

 

    They also have a problem in that they do not have enough qualified teachers for the task.  You can find that here.

 

http://www.edweek.org/ew/articles/2009/01/07/16report-1.h28.html

 

    I am pretty sure that this is some political answer to why America is not graduating enough engineers and scientists.  Of course, the real answer to that question is that lawyers and investment bankers make more money than either engineers or scientist.  So, why would a young person want to be an engineer or a scientist?  This is no mystery to me.  Follow the money.

 

    However, I really believe that very few students in the 8th grade are ready to learn algebra.  What I mean is that even if they weren’t spending all of their time thinking about Britney Spears or Brad Pitt, the majority simply do not have the discipline required to learn formal subjects like algebra.

 

    On pain of boring everyone, I will do a small demonstration.  Here are the basic rules of algebra. 

 

1) Any number multiplied by 1 remains unchanged.

 

2) When a number is multiplied by 0 the results is 0

 

3) When multiplying numbers together, the order of multiplication is not important. 

 

Example:     thee times five gives the same results as five times three.

 

4) Division by 0 is not allowed and is undefined in algebra

 

5) If equals are added to equals the sums are also equal.

 

    Note that these five simple rules are adequate to teach the first semester of high school algebra.  It is also instructive to note that all five of these rules are totally made up.  Moses did not bring them down from the mountain inscribed on the back of the tablets.  Furthermore, you are not allowed to question any of the rules.  They are to be taken as true without any proof whatsoever i.e. like religion, algebra is axiomatic.

 

    The 5 rules listed above and the paragraph given above should be presented to the class on the very first day of the first semester of algebra.  I would expect each student to recite all the rules from memory without error.

 

    The problem is not the rules.  The difficulty comes when you start to apply the rules to symbols and you require the students to “solve problems” formally.  Up until their first algebra class, most students have never had a course that required anything more than memorizing facts.  Well, that is not entirely true.  They do a little bit more than rote memory in basic math.  But, not much more because all they need to do is learn to add, subtract, multiply and divide and all of these follow rigid rules that can be learned by rote and, once learned, are easily applied.

 

    Lets be realistic.  If a child is having trouble with basic math then, that child is NOT ready for algebra.

 

    While the five rules given above seem simple enough, the devil is in the details.  For example, when a mathematician uses the word “add” this word does not mean the same thing as it did in basic math class.  Basic math class does not consider such things as negative numbers.  The transition from the concepts of basic math to the more rigorous concepts of algebra requires that the level of understanding of numbers in general be increased.  You really cannot learn algebra without an understanding of signed numbers.  But, signed numbers is NOT part of formal algebra and more than the times tables are.  Algebra assumes that the student is already competent with the times tables, multiplication, division, signed numbers among other concepts. 

 

    Making the transition from basic math to algebra usually requires a student to take a pre-algebra course in which the new concepts are to be learned.  So, if we are going to teach algebra in the 8th grade then we need to teach pre-algebra in the 7th grade and that implies that the student must have already mastered basic math by the end of the 6th grade.  You see the problem.

 

    The idea of teaching algebra to every student in the school system is sweeping the nation.  It is completely misguided in my opinion.  I think it will result in more high school drop outs and discouraged students.  It should be stopped.

 

California Budget

    California is the poster child for what is wrong with Americans.

 

    Let me see.

 

    The state is broke.

 

    The governor will not sign the budget bill because it requires spending more money than the state can collect in taxes.

 

    The legislature will not raise taxes or lower spending.

 

    There simply is no market for state bonds that have been used in the past to raise money for the deficit spending.

 

    Unless they can find a “friend” to lend them some money they are at the end of the line.

 

    Hmmmmm.

 

    Isn’t this exactly the same thing a person who is maxed out on credit cards, who cannot increase his/her income but wants to keep shopping anyway?  They want their friends to lend them money so they can keep on spending.

 

    In this case, California’s “friends” are you and me.  They want the federal government (that means us) to bail them out with borrowed money.  I think we should just cut them off and let the chips fall where they may.

 

    But, I will bet that Washington will bail them out with our money.  I’m sure you won’t mind helping out a “friend”.  Will you?

Stimulus Package

    Let’s see.  It is almost a certainty that there will be a stimulus package from the federal government.  What I have read tell me that it will amount to about $500 per person. 

 

    Hmmmmm.

 

    That is less than $10/week.  But, it will increase the national debt by something like $800 billion dollars.  I have a better idea.

 

    Instead of paying off a little extra on your credit cards each month.  Just give your kids a little extra allowance each week.  They are going to spend it for sure.  I mean, if $10/week extra spending from each of us is going to save the country then we can do it without a stimulus package by simply passing a law that requires each and everyone of us to eat at least one meal away from home each week.  That should do it.

    I’m joking but, this guy is not joking and he wants to go way beyond my suggestion.

 

Here is the quote.

 

“The next logical step, although it may be politically controversial, would be to do the opposite of what the Tories suggest. Instead of reducing taxes on interest payments, the Government could tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets – or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump.”

 

You can find the original article here.

 

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5469589.ece

 

Watch your pocket books.