A National Political Brownout, Part I
Here at The Daily Reckoning, it’s no secret that we don’t always see eye-to-eye with Thomas L. Friedman…but recently he pointed out something that we couldn’t agree with more: the ridiculousness of the U.S. energy policy. And we’re not alone. Dr. Marc Faber explores…
Although I don’t always agree with the views of columnist Thomas Friedman, I couldn’t agree more with his criticism of US energy policies. In a recent article entitled "The energy to be serious", he takes Hillary Clinton and John McCain to task for their suggestion that the federal excise tax on gasoline be suspended this summer
According to Friedman, "It is great to see that we Americans finally have some national unity on energy policy. Unfortunately, the unifying idea is so ridiculous, so unworthy of the people aspiring to lead the United States, it takes your breath away.
"Hillary Clinton has decided to line up with John McCain in pushing to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for this summer’s travel season. This is not an energy policy. This is money laundering: We Americans borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks. What a way to build a country."
When the summer is over, we will have increased our debt to China, increased our transfer of wealth to Saudi Arabia and increased our contribution to global warming for our kids to inherit.
No, no, no, we’ll just get the money by taxing Big Oil, says Clinton. Even if we could do that, what a terrible way to spend precious tax dollars – burning it up on the way to the beach rather than on innovation.
The McCain-Clinton gas holiday proposal is a perfect example of what energy expert Peter Schwartz of Global Business Network describes as the true American energy policy today: "Maximize demand, minimize supply and buy the rest from people who hate us the most." …
Few people know it, but for almost a year now, Congress has been bickering over whether and how to renew the investment tax credit to stimulate investment in solar energy and the production tax credit to encourage investment in wind energy. The bickering has been so poisonous that when Congress passed the 2007 energy bill last December, it failed to extend any stimulus for wind and solar energy production.
Oil and gas kept their credits, but those for wind and solar have been left to expire this December… These credits are critical because they ensure that if oil prices slip back down again – which often happens – investments in wind and solar would still be profitable. That’s how you launch a new energy technology and help it achieve scale, so it can compete without subsidies… It is so alarming, says Rhone Resch, the president of the Solar Energy Industries Association, that the U.S. has reached a point "where the priorities of Congress could become so distorted by politics" that it would turn its back on the next great global industry – clean power – "but that’s exactly what is happening."…
While all the presidential candidates were railing about lost manufacturing jobs in Ohio, no one noticed that America’s premier solar company, First Solar, from Toledo, Ohio, was opening its newest factory in the former East Germany – 540 high-paying engineering jobs – because Germany has created a booming solar market and America has not. [Germany and Japan have, respectively, 20- and 12-year solar incentive programs in place – ed. note.] In 1997, said Resch, America was the leader in solar energy technology, with 40% of global solar production. "Last year we were less than 8% and even most of that was manufacturing for overseas markets."
The McCain-Clinton proposal is a reminder to me that the biggest energy crisis we have in our country today is the energy to be serious – the energy to do big things in a sustained, focused and intelligent way. We are in the midst of a national political brownout.
At about the same time, John Gapper, writing for the Financial Times, lamented the poor state of US infrastructure in an article entitled "On the pot-holed highway to hell":
"If anyone doubts the problems of US infrastructure, I suggest he or she take a flight to John F. Kennedy airport (braving the landing delay), ride a taxi on the pot-holed and congested Brooklyn-Queens Expressway and try to make a mobile phone call en route. That should settle it, particularly for those who have experienced smooth flights, train rides and road travel, and speedy communications networks in, say, Beijing, Paris, or Abu Dhabi recently. The gulf in public and private infrastructure is, to put it mildly, alarming for US competitiveness…
"Faced with the emptying of the Highway Trust Fund, established in 1956 as the US entered a period of growth and prosperity, Mrs. Clinton suggested cutting its source of funds (which she claimed could be made up by a tax on oil companies)… At times I wonder whether the world’s biggest economy has the will to solve its challenges or will end up wandering self indulgently into the minor economic leagues. I expect it will get serious when the crisis is too blatant to ignore, but it has not done so yet.
"Perhaps this is a bit unfair. Some leaders have recognized the problem for economic development, as well as for safety. They include Arnold Schwarzenegger and Ed Rendell, governors of California and Pennsylvania, and Mayor Michael Bloomberg of New York. The trio have allied to press for the states and Washington to act."
Gapper then quoted Ed Rend, incidentally one of Mrs. Clinton’s biggest supporters, who supported her initiative to suspend the "gas tax" and increase taxes on oil companies (a really bad idea, since higher oil company taxes will curtail exploration). "Dams are in a horrible condition … we have no real rail transport, unlike most nations in the world… Summer delays make flying in America a disaster," Rendell said.
According to Gapper, "…there are lots of ways in which infrastructure inadequacy matters to the US but I would focus on two.
"First it imposes a drag on economic growth. The private infrastructure is poor enough – broadband speed lags behind other countries and mobile coverage is spotty. But much of the public infrastructure is unfit, a fact that was becoming clear even before Hurricane Katrina flooded New Orleans and a Minneapolis bridge collapsed during rush hour last year.
"Second, it presents an awful image of the US to investors and other visitors. The state of transport and communication infrastructure is a symbol of a nation’s economic development and the US is starting to look like a third world country. In fact, scratch that. Many developing countries look and feel better. Of course they are in a different phase of development. The US invested 10% of its federal non-military budget in infrastructure in the 1950s and 1960s as it built the interstate highway system – at the time, the envy of the world. While the US investment has fallen to less than 1% of gross domestic product, China has been matching its double-digit postwar record… Americans may not like the sound of that, but they cannot expect the US to maintain the economic dynamism of the late 20th century in the 21st unless they buckle down. Sooner or later, wishful thinking is going to crash into financial reality."
In a column for the New York Times, Thomas Friedman noted that Americans really "want to do nationbuilding" – not in Iraq and Afghanistan, but in America.
According to Friedman, "We are not as powerful as we used to be because over the past three decades, the Asian values of our parents’ generation – work hard, study, save, invest, live within your means – have given way to subprime values: ‘You can have the American dream – a house – with no money down and no payments for two years.’ …
"A few weeks ago, my wife and I flew from New York’s Kennedy Airport to Singapore. In J.F.K.’s waiting lounge we could barely find a place to sit. Eighteen hours later, we landed at Singapore’s ultramodern airport, with free Internet portals and children’s play zones throughout. We felt, as we have before, like we had just flown from the Flintstones to the Jetsons. If all Americans could compare Berlin’s luxurious central train station today with the grimy, decrepit Penn Station in New York City, they would swear we were the ones who lost World War II.
"How could this be? We are a great power. How could we be borrowing money from Singapore? Maybe it’s because Singapore is investing billions of dollars, from its own savings, into infrastructure and scientific research to attract the world’s best talent – including Americans…
"And us? Harvard’s president, Drew Faust, just told a Senate hearing that cutbacks in government research funds were resulting in ‘downsized labs, layoffs of post docs, slipping morale and more conservative science that shies away from the big research questions.’ Today, she added, ‘China, India, Singapore … have adopted biomedical research and the building of biotechnology clusters as national goals. Suddenly, those who train in America have significant options elsewhere.’"
I have quoted Friedman and Gapper extensively for several reasons. I have been accused of being anti-American, and therefore I wanted to show our readers that there is an increasing body of Americans who are very concerned about their country’s misguided fiscal and monetary policies, which are designed to boost consumption not only of oil, but of everything else as well, at the expense of capital investments, and research and development spending, which are badly needed if the US wants to regain its competitiveness.
Dr. Marc Faber
for The Daily Reckoning
June 11, 2008
Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report and author of Tomorrow’s Gold, one of the best investment books on the market.
Headquartered in Hong Kong for 20 years and now based in northern Thailand, Dr. Faber has long specialized in Asian markets and advised major clients seeking bargains with hidden value, unknown to the average investing public.
Show us a human being…and we will show you why democracy is a bad idea and why contrarian investing is a good one. From the South Pacific this morning comes news that a tribe in Melanesia believes that Britain’s Prince Philip is immortal.
"As unlikely as it sounds, the people of Yaohnanen and surrounding villages worship 85-year-old Prince Philip as a god," reports the Daily Telegraph. "They believe him to be the son of an ancient spirit who inhabits a nearby mountain, on the island of Tanna."
"You must tell King Philip that I’m getting old and I want him to come and visit me before I die," said the white-haired chief, who thinks he is about 80. "If he can’t come perhaps he could send us something: a Land Rover, bags of rice or a little money."
So, you see, dear reader, whether you have a bone through your nose or a Hermes tie around your neck, you want your gods to provide the same things. The difference is that Prince Philip might actually be a good sport and send the savages a few bags of rice. The Fed is almost certainly to disappoint the heathen on Wall Street.
Lately, we have seen the biggest bubbles in debt, delusion and fantasy in human history…more new money and credit created than ever…probably the biggest financial mistakes ever made…the largest drop in U.S. household wealth since the Depression…as many as 15 million negative-equity mortgages…a $57 trillion U.S. government "financing gap"…hundreds of trillions in derivative contracts…
…and now, if you believe yesterday’s trading results, it’s all over. Everything is okay.
The big financial news yesterday began with a remark by Fed chairman Ben Bernanke.
The Fed will "strongly resist" any surge in inflation expectations, he said.
What he means by that is obvious: America’s central bank is going to fight inflation and protect the dollar. At least, so he says.
Investors neither smiled nor blinked yesterday. Instead, they took him seriously. Oil dropped $3. Bonds sold off – sending the yield on the 10-year note back up over 4%. The bonds that sold off most, by the way, were mortgage bonds.
The property market is still weakening. The condominium vacancy rate has risen over 15% – the highest ever. And Floyd Norris of the New York Times says that one out of every four condos built since 2000 is empty. House prices nationwide are down about 13% from the top…but falling more and more rapidly – at a 25% rate in the last three months.
The crisis that began last year seems far from over.
But the big losses, yesterday, were in gold. The yellow metal was down $27 yesterday – to $871. Investors must have figured that gold was doomed – now that the Fed has turned its big guns to an inflation-fighting position.
Now, the dollar will strengthen…(it went up to $1.54 per euro yesterday)…inflation rates will go down…oil will go down – everything will be okay. Really. Honest. No kidding.
But the big question is: how can the Fed really fight inflation, after the biggest jump in unemployment in 22 years? How strongly can the Fed really resist inflation?
We don’t know, but it might not have to. American consumers are buying less from the rest of the world. This leaves less U.S. money in the hands of foreign central banks…and less reason for them to inflate their own currencies. Less demand = less inflation = lower prices. But the price of lower prices is high. It means a worldwide slump…which brings down oil, commodities, gold, employment – and equities. This is not the sort of world in which the Fed raises rates. The Fed’s "fight" against inflation is likely to succeed, in other words, only if it doesn’t need to fight at all.
*** "What’s your solution?" asked a reader in response to Friday’s Daily Reckoning. "Or isn’t there one? If the world’s population is going to implode will that be through mass starvation/dehydration? Or will we run out of beer and all end up killing each other? Or will a terrorist bomb wipe us all out first? Will technology save the day? Isn’t the whole thing survival of the fittest? Is survival of the fittest really the best way of describing it for the human race? Or is it more ‘luck’… Is there a solution, or do we just sit back and watch the world fall apart? "
*** Comes no answer, but more thoughts, from our Pittsburg correspondent, Byron King:
"’Dearer to God are the prayers of the poor,’ go the words to a sturdy old Anglican hymn.
"Well, at $138 per barrel of oil, I think we are about to find out how dear those prayers really are. This, plus the impending agricultural disaster due to low planting levels and other bad weather, will spell impoverishment for large swaths of the American middle class.
"In the United States, the poor and working poor are already marginalized. Now, with the ongoing melt-up in oil prices the middle class is being financially suffocated.
"Just on Thursday and Friday of last week, wholesale gasoline prices went up 33-cents. No typo. That’s 33 cents, in two days. So let’s round it out and add another $500 to the annual gasoline bill to operate one average automobile in the US of A. If you are a two-car household, make that number $1,000. Just from a two-day spike. And that does not count the impact on diesel (killing trucking & agriculture) and jet fuel (killing airlines).
"We are seeing the rapid evisceration of the guts of the U.S. economy. We are seeing the beginnings of an Energy Recession, if not an Energy Depression.
"Back in the Great Depression of the 1930s, it was different. There were ample natural and energy resources, but the factories were closed. There were factories, of course, but the workers were laid off. There were workers, but no one could afford to hire them. The banks had failed due to lack of funds. Overall there was just not enough money priming the pump to get things moving.
"Problem now? The resources are depleted. Many of the factories are gone and not replaced. Indeed, we have a manufacturing-averse culture in many respects. (The faux-environment movement has not helped.) Our educational system has produced a lop-sided labor force, such that there are critical skills shortages all through key parts of the economy (like energy…).
"And there’s too damn much ‘money’ floating around. Actually, it’s just excess U.S. currency in the form of credit instruments. Much of it has floated into the hands of people who are not ‘us.’ A few key resource-producing areas, along with overseas governments and sovereign wealth funds, have control over immense levels of global cash flow. With the rapid run-up in energy prices they are draining the daily capital out of the United States.
"So the overall view is…. not enough resources, not enough productive capacity (esp with energy), not enough skilled labor, and a decapitalized-indebted-illiquid-insolvent financial system that cannot get traction to move ahead.
"And when you don’t move ahead, you fall behind.
*** Here at The Daily Reckoning headquarters we have no solutions…and no prayers. (If we have any hope of God’s intercession in our lives, we’re not going to waste it on the economy.) Instead, we sit back and let the world go whither it wouldst. We just try to figure out where it is going…and get a parking place before everyone else shows up!
The Daily Reckoning