America at a crossroads? or have we already crossed the event horizon?

For a while there, it looked as though there might be a chance that the United States would do what was necessary to get back to some sort of fiscal sanity....for a while there.

Today we still have our $14+ trillion dollar national debt, trillion dollar deficits as far as the eye can see and, perhaps more importantly, something like $57 trillion in unfunded liabilities, that is, money we've promised to pay out in entitlements that nobody has a clue where it's going to come from.

Paul Ryan and friends proposed to cut the growth of Medicare at least, by block granting fixed amounts to the states. You would have thought he proposed internment camps for the elderly. "Hands off Medicare" is the popular chant. I don't imagine Social Security reform is going to fare any better. Lest you think that government will be forced to make reforms just in the nick of time, consider Eastern Airlines. Unions knew full well that if they didn't make major concessions the company would go under. They didn't, it did. In the case of the auto industry, the government took the companies from the rightful owners, the bondholders, and just gave it to the unions. No incentive for concessions there. It's not just unions. It's everyone that get some kind of check from the government, and boy there are a lot of them.

Americans still like to think in terms of the land of the free, home of the brave, baseball, apple pie, etc., but they also seem to want to continue to work toward a society where everyone's basic needs are taken care of by somebody else. This has never worked and never will, but that's not slowing down the movement. Americans are looking for that fairy tale hybrid of capitalism and socialism. They want the vitality, innovation, creation, wealth and productivity of capitalism, with the carefree security of cradle to grave socialism. I guess the hope is that there are enough people who are genetically inclined to produce and excel, regardless of incentive or motivation, that they will deliver enough to take care of everyone else. It's a fairy tale.

It's entirely possible that hundreds of years from now, the decline and fall of the United States of America will be marked as beginning around 2007. I hope that I'm wrong, but I don't see any popular movement that would change it. No China is not going to be the new global superpower either. In fact, the alleged economic behemoth wont even be able to produce enough electricity to keep their own factories operational this summer. They have tightly controlled the power industry to the point that it's tied up in knots and they have no idea how to fix it. Getting out of the way is not on the proposed solutions list. I think a rudderless, backwards world economy is the more likely scenario for quite a while.

I don't know exactly what the future will bring in my lifetime. But I do know that, in general, the American public is not in the mood for limited government and real free markets and politicians are not going to do anything long term or substantial without the express consent of the voters.

I'm beginning to feel that we are not, as many like to say, at a "crossroads", a point where we can determine whether we're headed for greater prosperity or history's dust bin. We may have already crossed the event horizon into the black hole of "something for nothing" land. We're just too close to the situation to see it clearly.

Jefferson the American Prophet

Among the many inspirational and insightful quotes collected for Brett Sizemore's book 'Here's a Straw, Suck it Up.' is this gem from Thomas Jefferson in 1802 that's eerily relevant today:

"Banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around them, will deprive the people of all their property until their children wake up homeless..."

Here's how that works. First, consider the purchase of a home. Now hold the value of the home constant and consider it is the value of the currency that fluctuates. During a time of inflation, or rapidly rising home prices, you buy your house (with a mortgage) at $200,000 with the expectation that prices will continue to rise. Now, deflation hits the housing market instead. Prices fall. Your house is now worth $100,000. You were counting on rising home prices to allow you to take out a mortgage to cover your other bills. Now you can't afford the payments and you can't sell the house for enough to cover the mortgage.

Whether you foreclose or walk away, the bank gets the house back. Not only that, they were insured against losses with companies like AIG, so they also get the other $100k. On paper it looks as though the bank just broke even, or took a loss after expenses. In reality, if we're still keeping the value of the house constant, they started with the house, ended with the house + $100k minus expenses and insurance premiums. They did fine. The fluctuating value of the dollar is a smoke screen.

In the simplified scenario above, a number of players are inclusive in "the bank". I don't believe banks and real estate financing are inherently evil, but they are susceptible to great abuse if customers are not wary.

Banks give currency value in that they provide an orderly, secure delivery and storage system. They are run by human beings, who must not be entrusted with all our cash unsupervised and unchallenged. Trust, but verify.

The recipe is simple: Inflate, Deflate, Repeat.

The oil pantry effect

Crude oil supplies are plentiful. Use has not spiked, yet prices did? What's going on?

Well, the common explanation is "speculators". But, I'm familiar enough with speculation to know that paper trading of commodities one never takes delivery on cannot cause sustained price increases. It must be something else. So what?

What do you do if you believe food prices are going to go up substantially in the near future? You stock up your pantry and your freezer. I have to believe that large corporations and governments that consume a lot of petrol do the same.

The U.S. government publicly discloses figures for the U.S. strategic oil reserves, but private companies, the military and most other governments do not. If they see uncertainty ahead in the market, it is only prudent that they fill their reserve storage. This would explain how you get a spike in prices even without a spike in actual usage.

It also explains why the price of crude sometimes falls like a rock. When end users stop filling reserves, demand falls. If they actually start drawing from them for their day to day use, demand plummets. Prices follow.

This is the most logical and simple explanation for the behavior of oil prices, and according to Occum's razor, the most likely.