Thursday, May 27, 2010


When the Greek debt/deficit crisis first bubbled up at the beginning of the year it was said to be a problem for that country but wouldn’t extend to others of the Euro zone. Greece after all only makes up about 2% of the Euro zone economy and the mainstays of that area, Germany, France, in particular, were not in bad shape.

Just a few months later there’s talk of doom for the Euro and it’s lost about 20% of its value against the dollar… as if the US didn’t have its own serious fiscal problems with debt and deficit of huge proportions. Fear, however, is contagious and investors - banks, fat cats and institutions - are getting spooked and that is leading to demands for high interest to compensate for the very real possibility of default.

Greece is being forced to tighten its belt, but while that’s inevitable, frugality may also exacerbate its fiscal problem by slowing the economy and consequently reducing tax receipts. But the country was living beyond its means before the recent sharp downturn. Borrowing is just too easy as a means of paying bills and stimulating the economy. It’s a nearly painless way to make everyone happy; that is, until the payments come due.

Sovereign debt is addictive. It’s fed by the neighborhood pushers - the banks, etc. - who generally aren’t worried about your ability to pay it back because they expect you to get bailed out if you run into trouble. That, however, adds to the total debt, only stretching out the payment schedule. In the case of Greece, accepting the bailout will bring its national debt to 150% of GDP from the current 115% and still leave it in precarious financial straits. Ultimately, the choices are narrow and stark: pay it back with great difficulty or default with the resulting chaos.

Borrowing has also of late been made easier by the existence the vast amount of wealth held by the filthy rich who need to have something do with their oodles of cash. The politics of the past 30 years has had governments throwing money at the wealthy in the (absurd) belief that their having it will accrue to the benefit of all. As a result they have far more than they know what to do with.

The result is a situation where the top dogs are flush while governments are put through the ringer. Everything governments do for ordinary people gets squeezed so the wealthy can have more money to play with. But they can’t spend very much of it since they already have everything. According to the theory, they will use their money to start new businesses, but they hardly ever do that. In the event, they buy securities or real estate but that does nothing to put people to work unless it’s part of creating a bubble and that obviously is only temporary.

Today, it’s clear that America’s run up in real estate values was in large part the result of sub-prime lending. Without all that extra cash floating around looking for something to do, there would’ve been no bubble. Real estate values tend to go up in the long run but do not necessarily create bubbles.

Many commentators on the left have been and still are pushing for additional stimulus spending. This is fine. Maintenance and construction of infrastructure is needed and important, especially if it involves electric rail transportation or conversion to alternate energy. Supplementing state budgets so they don’t have to lay off so many teachers,, also is important. This however, does not require deficit spending. No borrowing is necessary to stimulate the economy, it can easily be done by taxing corporations and the wealthy. Furthermore, in contrast to taxing the lower classes which reduces disposable income and can bring the economy down, taxing the upper classes is a win-win situation, except for the wealthy, of course.

In addition to the needed revenue, curbing the wealthy also curbs speculation. If they have less money, they’ll have less ability to jack up prices of real estate and less of an impact on commodity prices. Until the recent real estate market crash, ordinary people were being priced out of the market by skyrocketing prices… tax the wealthy and prices will tend to stay more reasonable. In 2008 when oil prices hit $148 per barrel, 30% of that number was said to be attributed to speculation. Take away the fat cats’ money and you get a lot less speculation.

And I haven’t even touched on the moral imperative of correcting the great income disparity in America which is wider than at any time since 1929. It’s morally wrong, it’s economically wrong and yet Obama came into office promising tax breaks for everyone earning up to $250,000 per year. That may be politically astute, but it’s part of a blindness which will eventually have disastrous economic consequences. Those upper middle class people would be far better off in the long run paying extra taxes so that the US could balance its books rather than having the extra few thousand bucks to blow on totally unnecessary luxuries – they already have everything they truly need – or use the money to put in the bank or buy stocks.

Besides, considering the world is already using up its resources with abandon, it’s wacky and counterproductive to give people who are already comfortable more money to indulge in the superfluous.

People like to bring up the economic philosophy of John Maynard Keynes to justify deficit spending. He famously suggested back in the early 30’s that it was ok for countries to go into debt during hard times to keep the economy afloat. He was responding to President Hoover cutting the federal budget in response to declining revenues which only served to plunge the American economy further into depression. Those proponents of deficit spending conveniently forget, as noted in a previous post, that Keynes also said governments should put money away during good times to be prepared for bad times. Today it’s either high deficits during relatively good times or very high deficits during bad and not even a suggestion of getting the deficit down to a reasonable level, let alone balancing the budget for many years in the future.

However, the world is still owned by the banksters, thanks to generous government subsidies, and they will start to get freaked about huge deficits and begin to withhold their money or demand much higher interest rates… and that day is not far off, and the consequences will not be pretty.

Monday, May 24, 2010

Oil Be Damned Update II

In British Petroleum’s latest gambit to try to stem the flow of oil out of its gusher in the Gulf, they successfully inserted a 4 inch (10 cm) pipe into the well, which looks to be at least a foot wide, to siphon off the oil. At first we heard they were getting 1000 barrels per day or 20% of the flow, then they upped that to 2000 barrels or 40%. Last word was they were up to 5000 barrels which should have completely stopped the flow since we’ve been told right along by BP (and parroted by the government) that that was the total amount being spewed into the Gulf.

Meanwhile, after three weeks of intense pressure on the part of congress and independent researchers for more information on the gusher, BP released a 30 second video of it, the first to the general public. By virtue of modern digital technology, researchers determined that the amount coming out of the well is at least 10 times and possibly 20 times the figure stated. That means somewhere between 2 million and 4 million gallons per day or a spill equivalent to the Exxon Valdez every 3 to 5 days.

Therefore it’s easy to understand why BP was desperate to withhold the video. They were probably hoping one of their magical cures would stop the flow before anyone found out the true extent of the damage. The fundamental problem is they have no idea what they’re doing or how to cope with a spill one mile down.

That, however, didn’t stop them from cutting corners to save a few bucks, like lobbying against the requirement to include a remote controlled switch on the blowout protector. Or, as has recently come to light, BP failed to do a required final inspection on the just installed concrete casing on the well. This in spite of the fact that failure of concrete casings was the cause of about half of all underwater spills.

Now they want to shove old shredded tires or heavy mud or some other such bulky, funky thing into the well to try to stop the flow. I’m not an engineer but that seems to me like trying to plug a high pressure fire hose by shoving a cork in it. LOL.

What’s remarkable to me is that the oil is coming out like a geyser even though pressure at that depth is about 2300 pounds per square inch or one metric ton per 6 square centimeters.

The only sure way to stem the flow, which could take another two months, is to drill a companion well into the original one and plug it from there. Meanwhile, they are using large amounts of chemical dispersants to try to prevent the oil from coming ashore. What this does is break up the oil, which otherwise would come right up to the surface in large coherent blobs, into tiny globules that hang below the surface.

While it’s probably a good idea to try to stop the oil from coming ashore, it’s hardly benign having millions of barrels of oil hovering below the surface, besides the fact that a million gallons of dispersant, which is basically a solvent, can’t be too good for the water either… so a lose-lose situation.

Meanwhile, the doomsday scenario, which has to put fear in the hearts of all involved, is a good strong hurricane which would coat everything inland for miles with a toxic mixture of oil and dispersant.

Meanwhile, in spite of the current disaster, oil companies are itchy to start drilling in the Arctic Sea. You can just image a blowout happening under a frozen sea with no way to get to it through the ice and absolutely nothing to be done about stemming the spill until next warm season.

But those are the kinds of places where the remaining oil is and we’re hungry for it (and the profits involved) 0so desperate measures are required and warranted.

Meanwhile, though BP has said it will take responsibility for the damage, you can bet they will spend the next couple of decades fighting proper compensation in the courts. So what if they spend a billion dollars on legal fees, they’ll still save billions in comp costs. The bottom line is what’s important.

The current fiasco is another reminder that corporations desperately need to be reined in. If I as an individual cause death and injury, even if unintended, I’ll serve time for it. When a corporation causes death and destruction on a scale we are now seeing in the Gulf, it should face the death penalty and the CEO’s and top managers who okayed cutting corners in spite of the danger should face jail time. The US cannot shut down BP because it’s a multinational corporation, but it can ban it from doing business in America. LOL again.

Sunday, May 16, 2010

Athens Enflamed

The crisis in Greece is multifaceted both in its sources and portents. In addition to the inability of many governments – which includes UK, US and Japan, to name a few - to get serious about taxing sufficiently to maintain a reasonably balanced budget (it’s too easy spending money you don’t have) Greece is faced with corruption at the top and featherbedding on the bottom.

As to the former, wealthy weasels collude with corrupt bureaucrats to avoid paying taxes, which seriously truncates tax revenue.

The latter involves lots of ghost workers and jobs that are way too cushy. Ghost workers are those that only make their presence known when it’s time to collect their paychecks. Featherbedding is best described by an experience I had working on the NY subway system back in 1964. It was World’s Fair time and I got a temporary 6-month job as a car cleaner for the line that served the fair.

It was graveyard shift, 10 pm to 6 am. We had a quota of 8 cars to sweep a night, but most nights it didn’t take much more than an hour to do the work. We’d punch in at 10, sit around the lunch table till after 11, go out and sweep 4 cars and then sleep in one of the cars till lunch at 2. After lunch we’d go back and sweep 4 more cars then take another nap till punch out time at 6. If anybody hadn’t shown up for work, there’d be overtime, 2 hours for 2 additional cars.

If you had a puke to clean up that could take extra time but the cars were new with smooth floors and hard plastic seats so very easy to clean. They also had only lateral seating, that is, against the sides of the car. It was on the city’s IRT line, the oldest of the three subway systems and the cars were narrower and shorter than in the other two newer systems. Since the cars on the newer lines were wider there was room for perpendicular seating so the two types of seats, lateral and perpendicular, alternated, making lots of little corners to sweep. And being older than the new cars I worked on, the floors were kind of rough. Those cars actually took some time to sweep, though still nowhere near one hour per car.

It was union work rules that created lots of easy jobs. I’m somewhat conflicted on the subject. On the one hand I like the idea of jobs not being excessively stressful and frantic. On the other, well, it does get boring not having anything to do and besides there’s always productivity to consider. Breaking down costly and unproductive work rules was part of the Reagan legacy. In some ways it was good, but the industrial world has carried it way too far in the constant drive to push workers harder and harder to eke out every penny of profit. Every downsizing involves forcing the remaining staff to work harder.

In order for Greece to maintain its bloated civil service in the face of inability to raise revenue, compounded by the economic downturn, the country was forced to borrow at unprecedented levels. Their borrowing, by the way, was aided by Goldman Sachs, the investment bank most of us like to hate, which provided ‘innovative financial instruments’ that allowed the country to hide its true debt level.

Now its annual deficit is running at nearly 14% of GDP and total debt is about 115% of GDP. The country can no longer finance its debt, since investors are now asking for very high interest on Greek government bonds out of the very real concern that the country may default. It cannot afford the interest. If it had its own currency instead of using the Euro, it could just print money, thus devaluing the currency and lessening the debt burden. It can’t print Euros so it’s either got to pay or default.

The only way Greece can pay is if it gets bailed out, and the only way it’ll get bailed is if it changes its profligate ways, otherwise no other country will be willing to risk their taxpayer’s money on a country that can’t figure out how to live within its means. In order to get that help they must either end the tax evasion at the top, or severely reduce benefits and cut back on its bloated civil service, the latter much easier to do than the former. They will also be raising value added taxes, which is equivalent to sales taxes, that will hit everybody. The workers are understandably balking. Nobody wants to lose benefits or suffer drastic pay cuts, they will naturally fight. Some workers are suggesting the alternative, defaulting, saying let the fat cats pay.

The high rollers would pay for sure in a default scenario, that’s why European countries and the IMF are frantically putting together a trillion dollars worth of guarantees and bailout money to keep their troubled economies afloat, otherwise their banksters will take a deep hit and they’ll wind up bailing the banks out directly. The Greek bailout is in the form of debt which, though it will be on favorable terms and save the country from default, will seriously add to its total debt burden… so maybe only a temporary fix.

Default, on the other hand, is also no bed of roses. If the deficit is 14% of GDP then the country is getting 40 to 50% of its budget from borrowing. In a default scenario, that source of money instantly dries up so the result is cutbacks far more drastic than proposed in a bailout scenario. Moreover, instantly removing 14% from the economy would throw it into a tailspin with unemployment spiking and economic hardship across the board.

Argentina defaulted about ten years ago. The country was immediately transformed from a middle income country to 60% living in poverty. Much of the economy turned to barter as their only means of exchange. In some cases workers took over shuttered factories. Today, the country seems to be doing ok but it still has not returned to its former economic status.

The root of the debt problem, it seems to me, is the mania for growth. In that scenario, some level of budget deficit is considered a good thing because money is being injected into the economy. According to the theory, borrowing that stimulates the economy is not a problem because the resulting growth lessens the impact of the debt. However, problems arise because governments tend to get hooked on debt – it’s so much easier to borrow than tax – and they become unable to rein in spending to match income. Eventually, as we see in Greece, debt can become so large it is unsustainable and requires drastic retrenching to return to balance.

The debt/deficit situation in the US is actually not far from that of Greece. Total debt is about 100% of GDP. Deficit spending at $1.4 trillion is now about 10% of GDP and that borrowing represents 40% of the budget. The only thing that saves America from Greece’s fate is the use of the dollar as an international currency. For instance, here in Cambodia about 80% of all transactions are in dollars. When Cambodia needs dollars it has to pay for them, which in effect provides interest free loans to the US.

The dollar is temporarily riding high against the Euro because of the Greek problem but Greece is a very small part of the Eurozone and the main countries in it are in fine financial health so unless the US starts to get serious about reducing its deficit the dollar at some point will reverse present course and crash. Meanwhile the idea that America will at any point in the near future begin to bring its finances into balance is risible, unthinkable, almost unimaginable.

However, if the US keeps merrily ignoring fundamental fiscal reality, believing it can be the world’s only exception it will be merrily waltzing over a cliff. The catalyst will be a rise in interest rates. At some point, and in the not too distant future, resource depletion will cause a spike in inflation which will trigger an increase in interest rates (not that raising interest rates in that scenario makes any sense but that’s how the economic establishment thinks about those things) which will sharply increase debt service… and thus begins the downward spiral. You know, yourself, when you get too far into debt, and have to start taking money out of daily life to pay down that debt, it’s very painful living without your usual amenities until you get back on an even keel.

In any case the prognosis isn’t pretty.

Thursday, May 6, 2010

Oil Be Damned Update

From what I can glean, not being an expert on these matters, the cause of the explosion on the oil rig was the drill hitting a pocket of gas under high pressure. BP is digging the deepest wells in the Gulf, a possible reason they were surprised by the gas explosion event.

The regulatory strengthening which I mentioned in the first article, which the oil giants, including BP, fought successfully against, had to do with having the fail-safe mechanism, the blowout protector, operable by remote control. This is common practice in Europe. The ability to shut off the well in a few seconds rather than the time, maybe hours, it would take to get an unmanned submersible to the site, might have made all the difference. It’s also possible that the valve was damaged as a result of the explosion so that nothing would’ve gotten it to close.

If the lack of a remote operated valve was the difference then the Gulf of Mexico was sacrificed to save $500,000, the cost of the device. Latest estimates are that the oil is flowing at the rate of 25,000 barrels per day, which translates to about 1 million gallons per day. If by some miracle it is possible to shut off the flow of oil in the next couple of weeks then it will only be a major environmental disaster. The latest idea is a heavy steel dome that will be placed over the worst leak which will, in theory, allow the gushing oil to be contained and brought to the surface in a safe manner. Time will tell if it actually works.

If it goes on for months the cost will be almost incalculable. It will be an endless Sisyphean nightmare of futility in which no matter how hard you work, your efforts are quickly overwhelmed by more oil. Fisheries gone, wetlands destroyed, beaches tarnished.

While this particular spill is one of epic proportions, environmental disaster is going on in many facets of fossil fuel production on a daily basis. Extracting oil from the Alberta tar sands is an energy intensive, climate destructive and extremely dirty process. Producing gas through the process of hydraulic fracturing, or fracting, is destroying ground water in the Rocky Mountain states as well as upstate New York. The process involves injecting chemicals and water into the well under high pressure which forces the gas out.

A couple of years back when I did a nostalgia hitchhike from Portland to Denver I got picked up by people in Utah whose friends had experience with the impacts of fracting. Before gas extraction began they had high-quality ground water. After fracting their water was smelly and turned into a murky brown color. Their animals wouldn’t drink it, their crops died when they used it to irrigate. Their well had been permanently poisoned. The gas well wasn’t on their property so they enjoyed no monetary benefit that might’ve compensated a bit for their loss.

The price of crude oil is back up to around $85 per barrel. It is predicted to rise to $100 by the end of the year. After that the sky’s the limit, and with very high prices, companies and countries will take increasing chances drilling and extracting in more and more difficult places, with the inevitable consequences of occasional catastrophic failure. It doesn’t need to happen very often to make the entire process too dangerous to attempt.

Saturday, May 1, 2010

Oil Be Damned

It now looks like the oil gushing out into the waters of the Gulf of Mexico from the ill-fated oil drilling platform will probably equal in environmental devastation that of the Exxon Valdez oil spill.

Details are a bit murky, similar to the waters one mile down where the oil is leaking from, but it seems the pipe is leaking in three places and dumping about 5000 barrels or 210,000 gallons a day – 1 barrel equals 42 gallons – into the Gulf. British Petroleum, owner of the oil, has sent down remote controlled submersibles to try to activate the shut off valve to no avail. It’s not easy working down there under the extreme pressure of a mile of water.

Too bad the oil giants, including BP, were just recently successful in preventing new regulations that would’ve strengthened fail-safe mechanisms designed to prevent such disaster scenarios. As for Obama, egg on his face for only one month ago opening up large areas of America’s coastline to drilling, saying the technology is now so advanced there’s little chance of environmental catastrophe.

I imagine everything, all the machinery and piping, is a bit twisted and askew as a result of the rig blowing up and sinking, so it may not be possible to turn off the well. If so the only alternative is to drill another well beside the existing one and use it to block off the one that’s gushing. That, unfortunately, will take at least 3 months at which time about 450,000 barrels of oil will have been fouling the sea and coast.

Meanwhile strong winds are currently hampering efforts to stem the flow of oil toward land and that area is entering storm season.

Barring a miracle a one billion dollar seafood industry is about to go down the tubes. The Exxon spill killed 3/4 of all sea life in the spill area, and many parts have still not fully recovered. The Exxon spill, in fact, was probably easier to handle since it all came at once. This is likely to go on for a long time.

All of the oil that’s still to be found and tapped in the world is in similarly difficult geology. The well in question actually goes down 3 miles below the sea floor. These oil spills will almost certainly become more frequent as drilling goes into more and more difficult circumstances.

One thing you can bet on is that mega-corpses like BP will go to great lengths to mold the rules to their profit margin no matter the potential harm to society or the environment. They’ll take big gambles - play the odds - in order to increase their profits. If they lose the bet, we, and our environment, pay.