Monday, April 21, 2008


After Paul Ehrlich wrote "The Population Bomb" in 1968, the New York Times called him and his new age Malthusian friends Doomsters. The Times called the optimist, Cornucopians or Boomsters. According to Ehrlich, urgent governmental action was needed to prevent the pending starvation of 10's of millions of people. The starvation could not be prevented without heavy handed population control such as the forced sterilization of Indian's and the withholding of food aid to any country not willing to severely limit births. Group think was the order of the day. Millions bought into "the end of the world as we know it". One of the great ironies is that on the scientific front, he and the others believed that "Global Cooling" would be the catalyst to massive starvation by reducing the amount of food that can be grown.

From 1875 to 1901, it has been estimated that 20 to 25 million people died from famine related causes. From 1975 to 2001, the best guess is that about 2 million people died of famine related causes. During the second episode, there was plenty of food available but the politicians in charge used food as a weapon. What a contrast to the doom predicted by Ehrlich who stated that the maximum population that the USA could support was 150 million. We have double that number and food is so plentiful that we use it to fuel our cars.


Obama believes that people under stress look for scapegoats. He even suggests that religion, guns, and the hatred of other people are forms of "scapegoating". Looked at from the other side, he and his friends have tried to use free trade, the war in Iraq and George Bush as scapegoats for all the worlds ills. The logic of the arguments do not matter because he and his friends are emotionally vested in a mindset of looking for scapegoats. Free trade, for example, is the scapegoat for the loss of jobs and the recession even though we know that recessions were so bad that they were called depressions back in the day when trade was severely restricted. We know that free trade boost employment, boost the average wage and increases standards of living but when a scapegoat is needed, don't confuse us with the facts.

Once the game of scapegoating gets a good start, it is hard to put an end to it. The automatic feedback loops that serve to prevent natural processes from running out of control are ignored or even seen as "the problem". For example, the Carbon Dioxide that feeds our plants is seen as the reason for "global warming". After the constant drone of a few leaders, a group think hysteria takes over and billions of dollars are being spent to sequester the carbon dioxide so that it can't do its job of encouraging plant growth. We are like the kids who try to build sandcastles to keep the ocean away.

The situation in free trade is similar when some person who loves the economic freedom of living in America wants a little protection against this very same freedom for others. This is what caused the Great Depression. Representatives Smoot and Hawley proposed a bill that would protect US workers and businesses from foreign competition. Unfortunately, instead of ignoring the country that was willing to shoot itself in the foot, other countries retaliated by shooting themselves in both feet. They passed even higher tariffs against US goods. The people of the world suffered but the battle to eliminate free trade was won.

I like the analogy made by Don Boudreaux, Economics Professor. He notes that had the world protected itself from the importation of the polio vaccine, a number of industries would have continued to prosper. These included the makers of iron lung machines, sophisticated leg braces and fancy wheel chairs. The fact is that this "new technology" put a lot of companies out of business, a lot of people lost their jobs and the world is a better place.


Once a person develops the mindset that all must be done to "save the world", he should stop to remember that any one action starts a chain of events. This is often spoken of in terms of the "butterfly effect", the flap of a butterfly's wing can ultimately cause a tornado, the holding open of a door for another might lead to a kind word from a spouse and another kind word to a child as opposed to a hateful word and a slap on the behind (and the kicking of the dog).

In the case of the environmental movement, hundreds of millions of acres of sedentary rock lies beneath the ocean floor just off the US coastline. This rock indicates that there are massive deposits of oil and natural gas available for the taking. The people of the USA have been talked into avoiding the recovery of this oil and natural gas in order to save the environment. As a result, trillions of tons of dirty coal have been burned, billions of people live tougher lives, wars have been fought, trillions of dollars have been wasted and millions of people have starved. If there was ever a demonstration of the "butterfly effect", the refusal to drill for known reserves of oil is it.


The real basis for the "energy problem" starts with the false science we were all taught in elementary school. We were taught that the oil on this earth was put here by a process some millions of years ago whereby plant materials were covered over and converted to oil through decay and pressure. The fact of the matter is that oil is being "manufactured" in massive quantity, second by second, minute by minute, day and night. As Thomas Gold wrote in 1999, "Hydrocarbons are not biology reworked by geology but rather geology reworked by biology".

The number of methane producing "bugs" on this planet is estimated to be 5 x10 to the 30th power. These "bugs" are constantly at work converting plant matter to useful energy. And, by the way, many of these bugs are extremophiles. Some can work thousands of feet deep in the ocean, others can work in extreme heat, others in very salty water, others in acids, others in poisonous bases, most in the absence of oxygen. Hopanoids, "the most abundant natural product on the planet earth", which are the oils produced by ferns and lichens, were once believed to have been created by pressure and decay but it is now known that the oils produced from this plant material is the work of bacteria. OIL IS RENEWABLE ENERGY!


In the same way that "excessive production" of carbon dioxide stimulates plant growth and the balancing of the oxygen to carbon dioxide ratio, the price of money automatically adjusts to re-balance the economy. Without any assistance from the FOMC, the US Treasury Bill rate fell from above 5% last year to below 2% this year. Indeed, the FOMC got in the way and caused the effective T-Bill rate to be much higher than the natural rate. Lower T-Bill rates are like oxygen to people and like carbon dioxide to plants. We can all breath easier when interest costs are reduced.

The DOOMERS keep telling us what we already know, which is that the consumer accounts for better than 70% of all economic activity. The Doomers see an economy caught in a positive feedback loop. They see free trade as causing the loss of jobs, the loss of jobs as causing a cut back in spending, and the cut back in spending causing the loss of even more jobs. They see the decline in interest rates as no big deal because an unemployed person will not buy a capital good no matter how cheap it gets. Of course, if the economy really worked this way, the last 100 economic recessions would have each been the end of the world as we know it.

The reality is that economic slow downs cause interest rates to decline and the decline in interest rates cause ones dollars to go a lot further. Take a look at any long term chart in the history of economics and you will see that a sharp drop in interest rates preceded a surge in consumer spending. Take a look at the times when there was a long lag and you will find the intervention of government. For example, the Great Depression, which started as a scheme to protect jobs, was prolonged by the government intervention which included make work jobs paid for by government. Adding a tax on labor (the social security payroll tax) right in the middle of an economic downturn was the height of folly.


The end of recessions happen when real average weekly wages take off. This does not mean that everyone must get an raise. Real wages go up when the cost of living (including the cost of interest) goes down. The increase in wages, in the face of very cheap goods that are partially the result of lower interest costs, leads to a significant increase in personal consumption.

One of the interesting things about this "recession" is that we are still in the middle of a business investment boom. On top of that, despite what you read and hear, we are still in the middle of a second home purchase boom! One out of every three homes bought in the USA in recent months was a second home!

Doomers, such as Professor Nourial Roubini, have focused in on the decline in home construction as the cause of the coming depression. He and all others seem to be unable to appreciate how rich we are. The steady decline in the percentage of our incomes spent on food, energy and shelter insulates us from economic recession. Today we spend less than 20% of our disposable income on food and energy. Today, most people are able to retire by the age of 62 because of accumulated wealth, not because they can draw SSN. Housing construction is in a recession but it represents only a tiny portion of our economy today, less than 4%!


The "phony baloney credit crisis" is being solved. The Bank of England just announced a program of swapping mortgage notes with government bonds. This will allow banks to get back into the business of lending money for home purchases in England. They will not make 105% loan to value loans but they will make loans to thousands of people who can now afford a home as a result of the decline in interest rates.


The recent doubling of the price of rice is a direct result of ethanol production. In the USA, over 600,000 acres were moved from rice production to corn production last year.


Last year, the number of bus departures increased by 13%. An express bus passenger goes about 160 miles per gallon of fuel. Greyhound charges less than 25 cents per mile (12 cents for a spouse) from Raleigh to Myrtle Beach, a hybrid vehicle cost about 10 times as much, $2.50 per mile to operate.

Please remember that high inflation rates come right at the worst of a recession and that they fall during the second half of a recession and they continue to fall in the months and even years after a recession. Lower inflation rates boost personal income and personal consumption. A boom is in the works and consumers will start getting their $600 rebate checks next week. The boom will start as a trickle and it will become a flood!