Posted by: Bruce Allen | October 28, 2012

MotoGP 2012 Phillip Island Results

An edited, slightly less entertaining version of this article appears on

Stoner wins!  Pedrosa crashes!  Lorenzo clinches! 

In the 41 minutes it took to run the 2012 Australian Grand Prix, a number of pressing questions were resolved.  Would Repsol Honda top gun Casey Stoner be able to make it six wins in a row at his home crib?  Could teammate Dani Pedrosa make it four in a row for 2012?  Would factory Yamaha mullah Jorge Lorenzo pick up the three points on Pedrosa he needed to clinch the 2012 championship?  And, finally, would one of the local wallabies hop through the infield prior to the race as a reminder we were on the other side of the planet?  In order, the answers were:  Yes.  No.  Yes, and Yes. 

In front of 53,000 delirious fans, Casey Stoner, as is his wont, ran away from the field for his sixth consecutive premier class win in Australia.  Being the fastest rider on the fastest bike at the fastest track on the tour, there was little question that Stoner would go out in grand style in front of his homeys.  He was at the top of every single timesheet all weekend and never seriously threatened during the race itself.  Although he didn’t enjoy a great start, he oozed past Lorenzo on a decisive second lap into the lead and ended up winning by some nine seconds. 

Want a good definition of the word “dominant”?  Over the last six years at Phillip Island, Casey Stoner led 160 of 162 laps.  Does that constitute perhaps the greatest home field advantage in the history of sports?  Tough question.  But the only good news about Stoner’s impending retirement—I read he’s moving on to automobile racing starting next year—is that someone else will have a chance to stand at the top of the podium next year at Phillip Island. 

Pedrosa Finally Cracks

Dani Pedrosa came into the race today needing to make up 23 championship points in two races, an almost impossible task unless Lorenzo were to make some kind of uncharacteristic gaffe.  Despite having won five of the last six races, Pedrosa was unable to gain much ground on his consistent countryman.  As Pedrosa kept winning, and the deficit to Lorenzo shrank ever so slowly, pressure continued to build on the diminutive Spaniard.  Today, it found its release. 

Starting from the front row, the three Aliens had good starts, with Stoner settling into third position while his tires warmed up.  Pedrosa put the pedal to the metal (?) and went through on Lorenzo into the lead midway through the first lap.  On lap two, Stoner went through on Lorenzo, and was dogging his teammate when Dani lost the front in a slow, arcing lowside that looked eerily like Simoncelli’s crash last year at Sepang.  Although he was able to re-mount his damaged bike, he entered pit lane moments later, his day, and year, suddenly over. 

On the back nine of his MotoGP career at age 27, the brooding, introspective Pedrosa appears to be on his way to becoming one of those eternal runners-up.  Entering today’s race, he, Stoner and Lorenzo each had 44 career wins, a statistical anomaly of the first order.  But Stoner and Lorenzo have now each won two world championships, while Pedrosa has a fourth, three seconds, two thirds and about a pound of titanium plates and screws to show for his efforts since 2006.  I’m reminded of Fran Tarkington and Jim Kelly, both stellar NFL quarterbacks with 0-4 records in Super Bowls.  I’m thinking of Karl Malone, who played second fiddle to Michael Jordan all those years; in terms of championship rings, it ended up Jordan 6, Malone 0.  The difference between being a great athlete and a world champion often comes down to timing, luck, and karma, none of which Pedrosa seems to enjoy to any great degree. 

From the Department of Idle Speculation, we believe next season may be his last to capture a world championship.  He will have Lorenzo and Valentino Rossi to deal with on the factory Yamahas—ugh—as  well as his new teammate, Alien-in-waiting Marc Marquez, who himself clinched the Moto2 title today.  Pedrosa should be able to contain Marquez during his rookie season, but the New Kid in Town looks ready to start winning premier class titles sooner rather than later.  And Lorenzo, hard as nails and regular as a piston, is two years younger than Pedrosa, who will turn 30 during the 2014 season. 

Winning a title is not going to get any easier for Dani Pedrosa. 


2012 MotoGP World Champion Jorge Lorenzo

Jorge Lorenzo—First Spanish Double World Champion 

As dominant as the Spanish riders in all three classes are these days, it’s surprising to me that Lorenzo is the first to win two premier class titles.  The secrets to his success are, in my opinion, consistency and a crystal clear understanding of what he is capable and incapable of doing on a Yamaha M1.  He has matured greatly since joining the premier class in 2008, and in mid-career is at the top of his game.  Assuming he podiums in Valencia, he will set a new MotoGP record by recording 17 podium finishes in one season.  That, folks, is consistency. 

In several respects, Lorenzo’s Yamaha has some disadvantages compared to the Repsol Honda RC213V, most notably the Honda’s superior acceleration coming out of turns.  This is not to say that the factory Yamaha is a tortoise compared to the Repsol hare.  But it does back up the assertion by many knowledgeable MotoGP people that grand prix racing is 80% rider and 20% bike. 

Congratulations to Jorge Lorenzo on a stellar 2012.  I’m pretty sure this will not be his last world championship celebration. 


Cal Crutchlow, who had failed to finish four of the last six races, spent a lonely, productive day in third place for his second career premier class podium.  His post-race comments about the inadvisability of going after Lorenzo today were a hoot…Andrea Dovizioso spent his day fighting with satellite Honda pilots Stefan Bradl and Alvaro Bautista, finally going through on both simultaneously late in the last lap for a well-earned fourth place finish…Two of the best battles of the day were intra-team affairs.   Valentino Rossi and Nicky Hayden played grab-ass all day long, with Rossi prevailing for another ho-hum seventh place finish.  And Power Electronics’ Aleix Espargaro essentially clinched the imaginary CRT championship by out-racing teammate Randy de Puniet for an 11-point lead heading back to Spain.  De Puniet would have to finish, like, sixth at Valencia for any chance to outpoint his teammate, and THAT’s not going to happen. 

On to Valencia 

And so the grid heads back to Europe for the annual Valenciana Anti-Climax, with nothing on the line, as usual.  Rather than running another meaningless season-ending parade, I think Dorna should organize Valencia as a series of three lap match race heats, with the winners facing off for a five lap finale: 

  • Stoner vs. Lorenzo vs. Pedrosa
  • Crutchlow vs. Dovizioso
  • Hayden vs. Rossi
  • Bautista vs. Bradl
  • Barbera vs. Abraham
  • Espargaro vs. de Puniet 

Let the winners of each heat compete for a big cash prize, and start them on the grid in the reverse order of their finishing times in the heats, handicapping the field so even Abraham or de Puniet might have a chance to win.  Something like this, it seems, would be a more interesting way to spend a Sunday afternoon on the Iberian peninsula than watching 21 guys compete for a title that has already been decided.

Posted by: Bruce Allen | October 18, 2012

MotoGP 2012 Sepang Preview

An edited version of this story will appear on at some point, complete with high rez photos.  In the meantime, enjoy it here.

The Hurrier Dani Pedrosa Goes, the Behinder he Gets

Even with Repsol Honda’s dogged Dani Pedrosa driving the RC213V like a world champion, trailing series leader Jorge Lorenzo by 28 points with three rounds to go, the 2012 championship race is not as close as it seems. 

A crash out of the points by either will decide the title in an instant or put it completely up for grabs. But if no one crashes, Lorenzo wins.

Those of us rooting for a gripping Game 7 in Valenciana in November will continue to send bad karma toward Lorenzo.  Those in the “Let the Best Man Win” school are hoping to see the two of them pull into the Ricardo Tormo Circuit within a half dozen points of each other, qualify on the front row, and let it rip all day, teeth bared, wheels touching, taking it down to the last turn of the last lap.

If Lorenzo can manage to appear on the podium each round for the rest of the season, he has clinched.  The worst he could do each week, assuming Pedrosa wins, is to give up nine points by finishing third.  Do that three times and you win the title by a one.

The point here, if there is one, is that Pedrosa can actually run the table and still lose the title.

I measure the margin in terms of “points per round” that Pedrosa has to make up.  Two rounds ago, he trailed by 38 points with five rounds left, a deficit of 7.6 points per round.  Two wins later, he trails by 28 points with three races left, a deficit of 9.3 points per round.  This is why the sub-headline at the top of the page is actually quite good:  Trail by 7.  Win twice.  Trail by 9.

Recent History at Sepang

For Jorge Lorenzo, the 2009 Malaysian Grand Prix was just one of those days.  The Yamaha up-and-comer qualified second, missed his wake-up call, arrived at the track late, had to start from 18th place on the grid, and eventually finished fourth. All in a soaking rain.  Meanwhile, Casey Stoner took his Ducati for a stroll in the park, hammering Dani Pedrosa by some 14 seconds, with Rossi third.  Rossi’s podium finish clinched the 2009 title for the Italian.

In 2010, it was Rossi, on the Yamaha, fighting his way back from injuries earlier in the year, edging compatriot Andrea Dovizioso on his Repsol Honda for the win.  Lorenzo closed out the podium, with Tech 3 Yamaha rookie Ben Spies finishing 4th.  For the second consecutive year, the third place finisher at Sepang clinched the world championship.  Last year Rossi.  This year Lorenzo.

2011 was, of course, the year the race was cancelled.  Casey Stoner had clinched the title the previous time out at Phillip Island, so there was really nothing to race for.  It is interesting to note that the track was in bad condition all through the weekend, with standing water in a number of corners.  Marc Marquez had difficulty seeing one of those in practice on his Moto2 bike and endured a brutal high side that left him with blurred vision for six months.  Yet Simoncelli’s crash appeared to have nothing at all to do with the conditions.  Just one of those things.

In a perfect world Simoncelli would still be with us.  And the sport, the entire premier class of MotoGP, is worse off for his loss.

The Big Picture

Pretty simple, really.  Lorenzo keeps his bike upright, stays on the podium each round, can’t lose.  Lorenzo crashes, all of a sudden it’s a dogfight between Pedrosa and Lorenzo.  Sepang and Phillip Island are Yamaha-friendly, while Valencia is Honda-friendly.

Stoner and Dovizioso slug it out for third place, the second in a row for Dovi if he can manage it.  Bautista appears safe in fifth place, while Rossi and Crutchlow will battle for sixth.  Rookie Stefan Bradl will outpoint former world champion Nicky Hayden.  Beyond that, no one really cares.

Although there are few interesting mathematical possibilities for the end of the 2012 season, it’s way better than in previous years when the title was a foregone conclusion two-thirds of the way through.  Lorenzo must do more than simply show up for the remaining three races of the year, which he will.  Pedrosa must continue to work like a dog and hope for the best.  God will sort out the rest.

Bautista Gets His Ride

It was finally announced this week that Alvaro Bautista will hold on to his San Carlo Gresini prototype Honda for next season, signing a new one-year deal with Fausto Gresini.  Once Dovizioso, Spies, Crutchlow and Andrea Iannone had committed for next year, there weren’t really many serious options left for Gresini.  The guy and his sponsor still desperately want a dominant Italian rider, but these days they’re not easy to come by.

For Bautista, two podiums in three rounds suggest he is coming to terms with the Honda.  Next year will be pivotal.  Have a great year—a win or two, four or five podiums—and he becomes a contender for Alien status.  Have a so-so year—one or two podiums, no wins—and he will be consigned to the second division of MotoGP for the duration.  The competition at the top next year may be slightly softer than this year, with the incomparable Stoner departing in favor of Rossi, who returns to the Yamaha M-1 after two years away.  It’s probably wiser to assume that Rossi will immediately return to winning form in early testing, in which case Bautista’s challenge won’t get any easier.

A Quick Peek Ahead at 2013


Now that all 12 prototype bikes have been assigned, we thought it was high time someone—us—ranked the 12 in order of their expected standing at the end of 2013, roughly 13 months in advance.












Defending champion.





Bridesmaid again.





He’s baaaaaack.





Rookie is for real.





Best of the satellites.





Two Brits at Tech 3





Uphill all the way.





Must move up!  Must!





Fading into the sunset.





#2 Brit at Tech 3.





C’mon Ben, surprise us.





Just hang on, Joe!

The Weekend Forecast for Greater Kuala Lampur

The forecast for the weekend is typical for this part of the world—hot and sticky with a good chance of storms each day.  The air will be heavy with remembrance of the loss of the irrepressible Marco Simoncelli here last year.  This is a track where the Yamahas should do well.  If conditions don’t interfere, I see Pedrosa, Lorenzo and Crutchlow on the podium.  Personally, I would enjoy seeing the controlled pandemonium of a flag-to-flag affair, in contrast to the instantly out-of-control pandemonium that was the 2011 race.  A flag-to-flag race is the only thing likely to throw a spanner into the works of Jorge Lorenzo’s impending second coronation,

Personally, I’d like to see Lorenzo win the 2012 title.  In the last turn of the last lap at Valenciana.  THAT would rule.

Posted by: Bruce Allen | March 17, 2009

Re: AIG Executive Bonuses

big-moneyThere are dozens of ideas floating around out there on how to punish AIG for the impending payment of $165 million of U.S. taxpayer money in executive bonuses.  Tar and feathers have been mentioned.  The New York Attorney General has issued a subpoena, something usually done only for criminal misconduct.  Team Obama is jawboning like crazy.  The problem is, the bonuses are going to get paid, regardless of subpoenas, jawbones or tar and feathers.

So the Administration and Congress needs to do an Al Capone on them.  If you can’t nail them for bootlegging and murder, pin a tax rap on ’em.  Better yet, do it in such a way that it is unfairly retroactive and puts AIG in a box from which they can’t escape without knocking down the entire string of dominoes.

The most satisfying solution at this point would be for Congress to pass legislation enforcing a 100% tax on monies paid out in executive bonuses in companies which have accepted TARP funds.  If the companies have a problem with that, let them return the TARP funds and go ahead with the bonus payouts.

Sure, it’s unfair, being retroactive and all.  Sure, it will probably get overturned some day in a U.S. Court of Appeals ruling, or perhaps even a Supreme Court case.  In the meantime, it will give the nation’s taxpayers a good feeling, and will mute the howling mob long enough for us to enjoy March Madness.

Posted by: Bruce Allen | September 30, 2008

What’s Wrong With This Idea? Fix the Mortgage Mess!

Let's Put a Stop to This Mess!

Let’s Put a Stop to This Mess!

I’m wondering about the practicality of the suggestion that homeowners who are under water and unable to keep up with rising/confiscatory mortgage payments be converted temporarily to leasees, with a local bank as the lessor.The monthly lease payments would be held at some formerly affordable level while the market bottoms out.Housing and employment markets will at some point in the foreseeable future stabilize at a point where the homeowner is again solvent and, one hopes, interest rates are suitable for converting to a new, affordable fixed rate mortgage.

A New Class of Mortgage – the Neutral Mortgage

Such a product could be seen as a way station between a conventional mortgage and a reverse mortgage, a new status of “neutral” mortgage in which the owner voluntarily becomes a tenant for a number of years while the markets stabilize.  An arrangement established as part of a federal housing market recovery program.

The idea is to incent banks to resume their former model of making, selling and servicing mortgage loans in their markets, the de-collateralization of the industry, complete with financial underwriting.Next, it intends to keep people in their homes until order returns to the real estate market.Finally, it provides for the tenant to become the owner again, with a new, smaller mortgage loan within, say, five years.It would specify insurance and property tax payment arrangements, etc.

How Would the Neutral Mortgage Work

  • The bank keeps the owner in the home, maintaining it, and securing positive cash flow.
  • The bank gets to sell the new mortgage at the time it becomes feasible.If the bank chooses to enforce an artificially high rate of interest, the owner is free to re-finance elsewhere at no cost within a year (?)
  • The plan allows homeowners cum tenants to continue to take the mortgage interest deduction on the loan.This would be Federal dollars at work, permitting those who comply with the regs to maintain an after-tax standard of living that makes sense.
  • The bank would purchase underwaterand foreclosed mortgages in its market area from wherever they currently reside, at a discount.The bank would then execute Federal Form leases, with standard language, with the owners.The houses would serve as the security deposits, and the monthly payments would be established per regulatory language.
  • Provision for default of lease terms would be needed; a number of families won’t be able to keep up with even an adjusted series of payments.The turmoil in financial markets is expected to reach employment markets very quickly, and job losses are expected to grow.Separate provision could be made for tenants who lose jobs and thus the ability to continue payments, etc. etc.

What would be the actual Federal costs involved?There would be a buydown of CMOs, reflecting the loss in home values, and writing down for usurious and predatory loan terms, execrable underwriting practices, and morally offensive behavior on the part of executives throughout the financial industry.For example, a home that was previously worth $300,000 and had a $290,000 mortgage is now worth $225,000.The difference between the $290K and the $225K is the buydown–$65,000 in this example.

Local banks become titular owners of these homes, making a new mortgage for $225,000.The former owners would pay “rent” equal to the interest payments only on the new loan, plus taxes and insurance.At that point, give the homeowner 5 years to assume the new mortgage, which is still $225,000.The point where that makes sense will be a function of interest rates and home prices.Given the behavior of markets during the recent bailout arguments, it is pretty clear that interest rates may be going up as soon as a deal is in place.Worst case, such a program forestalls another round of foreclosures for five years, while looking for other solutions.Such solutions might include subsidized interest rates on new FHA loans, etc.

The depth of the provisions will parallel the depth of the problems, which appear to be potentially extreme.The housing market is not behaving as though a bottom is imminent.I say this, in part, due to my regularly being wrong about this type of thing, and hoping that in the immediate case I am wrong.

Once the housing market bounces off its bottom, so to speak, the scope of the problem will be more clear.Until then it’s a devil we don’t know.And it may take a year or two to get to know this particular devil.

Keeping the devil from the door of working people seems to be a worthy expenditure of federal funds at this point in time.

Bailout: What’s in it for homeowners
How Much House You Can Afford?

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Posted by: Bruce Allen | September 24, 2008

$1 Trillion+ Federal Deficit in 2009 Now Certain

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

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

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

  • Falling home prices, with an attendant negative wealth effect.Most second mortgages are being used as ATM machines, and more and more people are going underwater, an inch at a time.Like proverbial frogs in the warming pot.These people now may expect a bailout if push comes to shove and will probably keep on spending.At some point, they will be asked, or rather directed, to stop.
  • The recent, brief correction in crude oil prices. ( The guy who knows as much about real global reserves as anyone thinks $500 oil is a given.)Notice how we gleefully fill our tanks to the max when gas drops by 10 cents a gallon.
  • Epochal distress in the automobile and airline industries and the industries that support them.A sea change in the way Americans shop for cars, which has blindsided American manufacturers and supported the business models of the Asian giants.Even Toyota, Nissan and Honda got caught with some enormous SUVs and pickups.
  • Rising domestic unemployment, with prospects for more.That old global economy thing again.No traction to raise prices in response to rising costs.

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

Source - Federal Reserve

Source – Federal Reserve

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

  • Secularly rising oil and commodity prices across the globe.
  • Partial recovery of housing prices in a market that is probably oversold.
  • The expansionary effects of a $1 trillion federal deficit in fiscal 2009.Perhaps $1.2 trillion.
  • A foreign exchange deficit in the neighborhood of $700-800 billion a year, by which we export growth and import inflation.
  • A weak dollar, falling in response to the sheer weight of bonds on the market.The first faint shadow on the US treasury’s ability to make good on its obligations since the mid- 19th century.

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

And they call this the dismal science.

*  *  *

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

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

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

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

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

Nikkei Exchange closing averages, 1970 - present

Nikkei Exchange closing averages, 1970 – present

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Posted by: Bruce Allen | September 11, 2008

Balancing Federal and Trade Deficits: Not Likely

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

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

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

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

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

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

o    crumbling global infrastructures everywhere but downtown Dubai City.

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

A Little Ideology, Please

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

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

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

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

When Does The Fed Run Out Of Bullets?

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

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

There’s No Free Lunch

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

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

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

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

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

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

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

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

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

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

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

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Posted by: Bruce Allen | August 27, 2008

Republican Economic Disinformation

National Debt 1953 - 2008

This post from February needs to be dusted off in honor of the Democratic National Convention.
Administration     Change in National Debt as % of GNP …… Verdict…..
Eisenhower………………… -16.2%……………………………… Outstanding
Kennedy/Johnson……….. -16.5%……………………………… Outstanding
Nixon/Ford…………………. -2.8%………………………………. Adequate
Carter…………………………. -3.2% ……………………………….One term only
Reagan……………………… +20.5% ……………………………..Impeachable
Bush Sr……………………… +13.1% ……………………………..Shameful
Clinton………………………… -8.8%……………………………… Very good
Bush Jr……………………… +12.4%*……………………………. Unacceptable
*End of year 2008 estimate.

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

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

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

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

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

Posted by: Bruce Allen | August 6, 2008

Rock–Ben Bernanke–Hard Place. Seriously.

Seal of the United States Federal Reserve System.

August 6, 2008

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

Disequilibrium: Weirdness in Abundance

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

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

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

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

Immovable Object vs. Irresistible Force

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

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

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

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

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

2006%     _______Category    __________ 2008%  ___ ____hange

30                         Housing[1] 32                        +10%

15                         Utilities[2] 21                        +50%

7                            Gasoline                         15       +110%

13                         Food                               18           +35%

5                           Medical                           6             +20%

5                           Clothing                          5          ——-

10                         Entertainment[3] 2                      -80%

5                           Vacation                         1            -80%

5                           Cars                               3             -40%

5                           Savings                          -3               now negative

100                                                             100

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

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

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

[1] Rent, mortgage, insurance, property taxes

[2] Gas, electric, phone, cell, water, sewer, trash, cable

[3] Includes restaurants

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Posted by: Bruce Allen | July 29, 2008

The Economics of Water

No drinking water, prohibition sign D-P005 acc...Image via Wikipedia

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

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

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

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

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

One toilet for 5400 people!

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

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

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

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

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

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

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

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

Aral Sea, March 2008

Aral Sea, March 2008

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

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

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Posted by: Bruce Allen | July 21, 2008

Inflation + Recession = Stagflation

World map showing inflation. Grey means no data.Image via Wikipedia

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

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

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

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

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

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

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

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