06 May, 2011

About That Double Dip Recession

You can spin the data any way you want, apparently. There were several articles published yesterday about the likelihood of a double dip recession. They tended to say that such an item is inevitable, and appeared to use contrarian logic to what I used yesterday. Here’s an example from Robert Stacy McCain:

Insofar as there is any really good news, it’s that the price of crude oil declined sharply – except that’s bad news, too: Investors anticipate declining demand for oil because they expect an economic downturn. Which brings us to my favorite bad-news headline of the day:

Double-dip recession is now undeniable

So, McCain is arguing that the drop in oil prices indicates a double dip recession, while my post yesterday said that increasing energy prices would indicate a recession on the horizon.

These seem to be contradictory statements, but they’re not. My post was showing how a recession may be coming soon. McCain’s post shows that it may be already here. Declining prices indicate that energy may have already reached the tipping point, and indicates a drop in demand due to slowing economic activity.

Of course, if it drops enough, the economy might pick back up. All this just shows that you can interpret the data in many different ways, but regardless of how you interpret it, our economy is not stable enough to handle any more pressure.

And Round One Goes To…

Former Governor Tim Pawlenty (R-MN) was the clear winner in last night’s GOP debate. He was energetic, focused, and on message. He handled the question about his former support of cap and trade very well. “We did the research and discovered it was a bad idea. I was wrong.” As long as the big names stay out (Huckabee, Gingrich, Daniels, Romney, Palin), he has to be considered the frontrunner, and may still be even after some of them enter.

Herman Cain (R), and former Senator Rick Santorum (R-PA) also distanced themselves from the rest, but each had some problems as well. Cain is clearly uncomfortable talking about foreign policy, and while a FairTax supporter, his defense of it was very weak. Santorum seemed defensive and awkward at times and used the word ‘I’ far too often. Still, both of them were on message more than they were off.

Congressman Ron Paul (R-TX-14) was, well, Ron Paul. He speaks the libertarian game very well. But too many mainstream conservatives regard him as a wacko for him to be considered a serious threat. Still, any support he gets just shows the GOP that they need to consider the ideas of the libertarians. Every time he opens his mouth though,  I get a knot in my stomach from wondering what he’s going to say.

And that brings us to the last of our intrepid debaters, former Governor Gary Johnson (R-NM). How can I put this? Well, he stunk. I honestly hope I don’t have to sit through another debate with him as a participant. He was petulant and stumbled through his answers. His answer on how he’d respond to pro-life critics (he’s pro-choice) was terrible. His drug answers weren’t much better. And he just seemed very uncomfortable up on stage. In fact, his only good moment of the night was during his closing statement. It was the only time he looked like he was having fun, and he got in a plug for his website.

Focus groups thought that Cain won the debate and Santorum came in second. I’d say that Cain gained the most last night, but I don’t think he won. Still, he was good enough that people are going to start paying attention to him, which is what he needs. Santorum’s high praise was due almost entirely to his attack on ObamaCare which was very well done.

In all, I think that the heavyweights that skipped this one made a mistake. It was a very good debate, and clearly it’s going to give momentum to Pawlenty, Cain, and Santorum heading into the summer.

Opinions on debates tend to be highly subjective, and depend, more often than not, on your presupposed opinions before the debate even started. Therefore, I present the following videos of the debate in its entirety, so that you may watch and judge for yourself.

05 May, 2011

W. It Isn’t Just For Bush Anymore

No, it’s also for economic cycles.

Are we in a double dip recession? If so, that would pretty much doom President Barack Obama’s (D-USA) re-election hopes. But still, I hope not.

However, there are several indicators that another recession may be just around the corner, if it’s not the case that we’re already in one.

Take a look at this pic:

The lines represent energy prices and the horizontal axis shows a count of months from the start of a recession. The black line represents where we are now. The 0 point is where recessions have been noted to have officially begun. The convergence is artificial as it’s set to 100% at the start of the recession. However, the point worth noting is that we had big rises in energy costs before each recession.

The pic is from a blog called “Early Warning”, and I’ll leave the summary to him:

In every case, energy prices were rising either before or immediately at the onset of the recession, and in every case they "broke" in some sense before the recession was over - either declining, or at least sharply slowing in growth.  The paradigm case is 1973 where energy prices were rising steadily and then a huge oil shock coincides with the start of the recession, which only ends after prices have stabilized.  However, even in cases like 2001 where most of us would think that energy prices had relatively little to do with the recession, there is a pattern that they were growing rapidly before the recession, and then broke near the start of it.


If we look at trough to peak change in energy prices in these intervals, the factors are as follows: 1973: 2.0, 1980: 1.9, 1981: 1.7, 1990: 1.6, 2001: 1.9, 2007: 1.6.  This is a crude indicator, since in some cases the trough was clearly before the start of my 24 month lead-in, and I didn't go back before that interval.

So, what’s the magic number for 2011? We’re a little over 1.5 as of 03/01/2011. That’s using the 24 months from 03/01/2009.


So, we’re right at the bottom end of an energy price spike that might indicate an impending recession. We could still avoid one at this point, but if energy prices continue to rise, it’s hard to see how we can avoid another recession.

Are energy prices going to rise?


Based on WTI futures and options prices, the probability that the monthly average price of WTI crude oil will exceed $120 per barrel in December 2011 is about 32 percent.  Conversely, the probability that the monthly average December 2011 WTI price will fall below $100 per barrel is about 38 percent.


EIA expects regular-grade gasoline retail prices, which averaged $2.76 per gallon last summer, will average $3.86 per gallon during the current driving season. The projected monthly average regular retail gasoline price peaks this year at $3.91 per gallon in early summer.  Diesel fuel prices, which averaged $2.98 per gallon last summer, are projected to average $4.09 this summer.  Weekly and daily national average prices can differ significantly from monthly and seasonal averages, and there is are also significant differences across regions, with monthly average prices in some areas exceeding the national average price by 25 cents per gallon or more.

We hit the $3.90 mark last week, so the EIA projection seems conservative.

But there’s still Natural Gas and Electricity:

U.S. Natural Gas Prices. The Henry Hub spot price averaged $3.97 per MMBtu in March, 12 cents lower than the average price in February and 6 cents lower than the March forecast in last month's Outlook (Henry Hub Natural Gas Price Chart).  EIA expects that the Henry Hub price will average $4.10 per MMBtu over 2011, a decline of 29 cents from 2010. However, the projected Henry Hub price rises to $4.55 per MMBtu in 2012.


During 2010, retail prices for electricity distributed to the residential sector averaged 11.58 cents per kilowatthour, about the same level as in 2009.  EIA expects residential prices to rise by 2.3 percent in 2011, followed by little change in 2012.

To sum up, prices are expected to rise throughout the rest of the year, but not much. However, further price increases are expected next year. We may stay just outside a recession right up through next November. Keep an eye on the price of crude and the price of gas. If EIA has been too conservative here, that may be the tipping point.

UPDATE: Changed text to make it more obvious why this is a “W”: double dip recession.

UPDATE: Was asked to recalculate where we are. As of data ending 03-01-2012, we actually look a bit better. For the 24 preceding months the PPIENG is only up about 20%. The warm weather helped create a surplus of natural gas, and kept prices down. We did have a spike in February that I believe continued through March, so we should peek again after the March data is available. But we’re still below where we were last June or so.

energy prices

The forecasts are that energy prices will hold steady throughout the rest of the year and perhaps even decline a bit, but uncertainty is very high as this graph of expected crude oil prices shows:

crude oil forecast

Here’s To You, Alan Shepard

50 years ago today.

GOP Nomination Process Begins Today

It begins. The circus we call the nomination process.

Today we will have the first of countless GOP debates between the candidates for the 2012 Republican nomination for President. Who’s going to be there?

Former Minnesota Gov. Tim Pawlenty, former Pennsylvania Sen. Rick Santorum, Texas Rep. Ron Paul, businessman Herman Cain and former New Mexico Gov. Gary Johnson will face off in Greenville, S.C., in the Fox News-sponsored debate that begins at 9 p.m.

All names that are on everyone’s short list, I’m sure.

Many people have opined on why most of the major names are not here (Romney, Gingrich), and also on why so many expected candidates (Palin, Daniels) have not even thrown their names in the ring yet. I have no opinion on why, but I do think that it’s about time to get this party started. I think a candidate who has not made an official declaration by mid-summer will likely be in trouble. Time will tell.

Anyway, since this is the start, it’s worth taking a look at something I wrote over 2 years ago:

At this point, a 2-term Presidency for Mr. Barack Obama (D-USA) seems a near certainty.


What’s the #1 question in voter’s minds when they go to the polls to re-elect an incumbent or vote in a new President?

“Am I better or worse off now than I was 4 years ago?”

It’s hard to see how most people will answer that as “worse”. I certainly hope that most people won’t. That would mean that we really are in a “depression” and not a “recession”. Because otherwise, because of or in spite of Mr. Obama, the economy should have recovered to some degree by then.

Well, we seem to have missed the “depression” many were worried about, but I’m not sure too many people will say that they’re better off then they were in 2008 at this point. We are still at nearly 9% unemployment, and the only reason it’s even that low is because so many people have given up looking for work. Gas prices are through the roof. Inflation is digging deeper into people’s pockets, people that haven’t gotten any raises in three years. The housing market is still in free fall. And people are again talking “recession”. Add all that up, and it’s ugly.

Still, the election is 18 months away from tomorrow. Quite a bit of recovery could occur between now and then. It would be foolish to expect it, based on the recovery we’ve seen so far. But, you never know.

So, tonight the five men listed above will bring up some of these facts, and tell us how they’re going to fix them, and how stupid the other four men are. Be sure to tune in. 9 pm EDT on FNC.

02 May, 2011

Yes, Osama Is Dead

How I choose to commemorate it:


The fight goes on.

01 May, 2011

Have We Hit The Real Debt Ceiling Already?

Forget that debt ceiling vote coming up in Congress. The problems are worse.

As Megan McArdle points out:

In response, during a recent summit, the leaders of Brazil, Russia, India, China and South Africa (the BRICS) announced that they want to trade between themselves in their own currencies. This comes amid a growing chorus in China pushing for a limit of dollar reserves to $1.3 trillion. At present, China, whose economy the IMF says will outpace that of the US by 2016, has $3.04 trillion in dollar reserves. What's going to happen to the dollar when China sells off $1.74 trillion? And who, besides the Federal Reserve, is going to buy our bonds?
If anything, I think this understates the problem.  The real issue starts, not when China starts selling our bonds, but when China stops buying our bonds. As soon as that happens, we're in big trouble.

Exactly. China is the biggest purchaser of our debt (with one recent exception, which I’ll cover in a moment). If they stop buying, what will we do then? You think Japan is going to buy more, with their problems? Not a chance. Egypt, India, France? Yeah, right.

Right now, when Treasury goes to sell new bonds, it enters a fairly robust market, with not just the Fed but a bunch of fairly price-inelastic Asian central banks who are willing to take on our bonds at whatever the market offers.  If China exits the market, we will either need to borrow less, or attract new lenders by offering higher interest rates.  Even a noticeable decrease in volume would force us to pay more for our deficits.

And since we can’t afford our deficit, we’d have to sell yet more bonds, increasing our debt even further and further increasing the pressure on the dollar and pressure on our buyers.

It won’t matter how high we raise our debt ceiling, if we can’t get anyone to buy our debt.

As Ed Morrissey says:

We are rapidly approaching a moment of truth.  While we debate the finer points of raising debt limits and calculating just how many hundreds of billions of dollars in annual deficits we’ll tolerate, the truth is that the money to fund any deficit spending may soon run out.  Fiscal sanity may wind up being imposed on us if we don’t choose that path willingly.

However, Morrissey may be optimistic. We may be already there.

I mentioned earlier that China has not been the largest purchaser of U.S. bonds lately. It’s been someone else.

From Mark Steyn:

My weekend column is about “the debt ceiling” and how, even as the Treasury issues more and more debt, there are fewer and fewer people willing to buy it. I forgot to mention the really startling number. Pimco (which has now dumped US Treasuries) estimated last month that, under QE2, 70 per cent of the US Government’s debt is being bought by the Federal Reserve.

Ah yes, QE2 rears it’s ugly head again.

We’ve been buying our debt because no one else is willing to buy it. QE2 ends in June. What happens then? Someone asked this earlier.

And if it doesn’t work, what do we do then? Print even more money? What’s the end game here? Where will all this money printing on an unprecedented scale take us? Do we have any guarantees that QE2 won’t be followed by QE3, 4, and 5, until eventually – inevitably – no one will want to buy our debt anymore? What happens if the Fed becomes not just the buyer of last resort, but the buyer of only resort?

And, as I pointed out at the time and almost two years ago:

So the problem is the debt-to-GDP ratio. There are exactly four ways to reduce it. I suspect that we’ll have to do at least two of them.

1) Grow the economy

2) Cut spending

3) Increase taxes

4) Print money

I’m no Nobel Laureate, but if there’s another way, I sure don’t know about it.

Let’s assume that we’re not going to buy our way out of this by printing obscene amounts of money. You get double and triple digit inflation that way and destroy the economy. Generally, that’s a last resort. And usually fails in any event.

Everything Obama has tried has failed at #1. He’s utterly opposed to #2, and the economic situation and the new Congress makes #3 out of the question. We’re now left with #4, the one that I assumed at the time we’d not be stupid enough to attempt.

If no one will buy our debt, #1 & #3 won’t work anyway. Don’t solve the problem fast enough. We could do #2, but we’d have to do it harshly, completely ending programs, not just reforming them. Again, all we’re left with is #4.

Repeating that someone’s words, for emphasis:

Do we have any guarantees that QE2 won’t be followed by QE3, 4, and 5, until eventually – inevitably – no one will want to buy our debt anymore? What happens if the Fed becomes not just the buyer of last resort, but the buyer of only resort?

We may find out the answer to that question very soon. And it won’t be pretty. November, 2012 may be too far away to solve our problems. We may not make it until November, 2011.

Yes, my posts have been incredibly pessimistic lately. I admit it. Hope and change? I’ve lost hope. And I don’t think change can come soon enough.

A Taxing Discussion

If you don’t subscribe to Megan McArdle’s posts at the Atlantic, you’re really missing something. She recently made a couple posts on what we’d actually need to do to tax our way out of our debt problems. The articles are well worth a read in their entirety. Go here and here.

Basically, she points out that we’d have to get our tax receipts in the range of 25% GDP, and what that means.

Without arguing about whether our tax system is fair or not, the fact is that the federal income tax is the most variable part of the code, and the federal income tax is now very progressive; it collects most of its revenue from people at the top.  (Whether it should collect even more is an argument for another day.)  Because it collects most of its income from people at the top, and because the incomes of the wealthy are more variable than the incomes of the poor and middle class (Warren Buffett's income can drop by $300,000; mine can't), we're going to get deep troughs in recessions, and high peaks in boom times.  We will get particularly high peaks when the booms are delivering huge chunks of income to a handful of people in a very short timeframe.

In other words, the only times we’ve approached, or even briefly exceeded 20% GDP have been in high economic booms where the rich got really rich. And that’s just to 20%. We need to get t0 25%. So, she assumes a baseline of 18.5%, rather than 20%. Which is still probably high, but we’ll let that go.

A tax hike of 5-6% of GDP doesn't sound like much.  But that's a big tax hike if your baseline is 19%--it means that everyone's taxes go up by about a third.  If the equilibrium tax revenue at Clinton rates is more like 18-18.5% of GDP, then obviously, they have to go up even higher, from a lower baseline. If you try to concentrate the pain on the wealthy or corporations, it's an even bigger whack.  Meanwhile, state and local taxes will be going up too; they have many of the same pension and entitlement problems that the federal government does.

These aren't little adjustments.  They're huge changes in the overall tax burden, and they will have big effects on peoples lives, and the economy.

So, the libs expecting tax receipts as a % of GDP to be higher than they ever have. They’re expecting them to stay at that level forever, and they’re increasing the tax burden of every person by huge amounts. She delves into some real numbers in her next post.

So our baseline would be returning effective tax rates on the top quintile to around 28%; effective tax rates on the middle quintile to 17%; and effective tax rates on the bottom quintile to 6%.  Then we raise each tax rate by a third to 37%, 23%, and 8%, respectively.  The current tax rates?  We don't know exactly (the data only go up to 2007), but a rough estimate is 25%, 14%, and 4%.

Wow, that sounds pretty big. But what does it mean to me in terms of take home pay? Well, Ms. McArdle comes to the rescue again.

Can this be done?  Maybe.  Probably, at least on the lower tiers, who don't respond to tax rates the way the wealthy can.  But it won't be easy or moderate.  I'm sure there are a number of people in my readership where two spouses take home $125,000 between them.  How easily can you guys chop $20,000 out of your budget?  And though the percentages are lower, in practical effect it's even worse for the bottom: if you're making minimum wage, $460 is several weeks worth of paychecks.

Ok, I’ll admit it. We’re in that range. $20,000 out of our budget? We could do it. Barely. But I can tell you what it’d mean. It’d mean we’d never go to Best Buy again. We wouldn’t go see movies. We’d hold on to our current cars even longer. My younger daughter would wear even more hand-me-downs. We wouldn’t replace our flooring throughout the house, which desperately needs to be done. We wouldn’t be buying that outdoor furniture we want. We wouldn’t replace our couch downstairs or the mattress upstairs. We wouldn’t take that trip to Disney next year. We wouldn’t visit the in-laws nearly as much.

Ok, that’s just one family. Now expand that nationwide. The economy would not just slow, but come to a crashing halt. And since our goal was to get the budget balanced, there’s not much we could do about the economy. We couldn’t spend more. We’d have to tax more then. We couldn’t cut taxes. We’d fail to meet our goal.

On the other hand, maybe we could cut taxes, because GDP would be so low at that point, 25% of it wouldn’t be that much.  Yeah, except the problem we’re looking at is based on rosy GDP projections. So, if GDP falters, our needs related to GDP actually go up. We might need 30%. Or even more.

And that’s why conservatives keep saying “we can’t tax our way out of this”.