Wednesday, October 29, 2008


A regular reader emailed a chart showing how our soldiers in Iraq will vote heavily for McCain. As we all know, Obama would have pulled out of Iraq in defeat 19 months ago, terrorism would be on the loose again. Now that the Iraq phase has been all but won, Obama refuses to admit that this phase of the war on terror has been won. He learned from Bill Clinton that the best political strategy is to repeat certain words until the storm passes, words similar to "I did not have sex with that woman". The war on terror is one of those areas where Obama found a politically popular point and stuck to it no matter the facts. He continues to win brownie points with many Americas by saying that he will end the war in Iraq. McCain gets little credit for helping win the war in Iraq.

As regular readers know, I hate the fact that the US Government spends 33 billion dollars per year to subsidize ethanol. I hate even more the fact that the government forces its "free citizens" to "spread our wealth" to the "poor" farmers. I hate that we are forced to spend trillions of dollars on a fuel that causes children in poor countries to go hungry. I hate that the production of that fuel harms the environment greatly. And, I hate the hypocrisy. The situation is like that of Ananias and Sapphira, the lies are one thing but the hypocrisy gives off the putrid smell of death. Obama does not care, provided he is the elected one. In the face of growing evidence that ethanol and wind mills are not up to snuff, Obama continues to extol their value.

Obama continues to support annual subsides to wealthy farmers to the tune of 33 billion dollars. At the same time, he attacks McCain for the oil company subsidies that Obama helped pass. Obama voted for oil subsides in a trade off to win ethanol subsidies. McCain voted against both oil and ethanol subsidies. McCain and Obama disagree with the economic policies of Bush, McCain objects to the reckless spending and Obama objects to the lower taxes on capital gains, inheritance and income.

It is understandable how the public was easily duped when the price of oil was rising. Bush joined the democrats in making it look like the government could solve an economic problem; when will politicians learn? Democrats went much further than Bush when they repeated, at least a few thousand times, that "we cannot drill our way out of this crisis". The reason the price of gasoline is about to drop to $2 is because a huge amount of drilling was done over the past 6 years. Marginal new supplies have finally topped marginal new demand. Yes, I know, demand is down because of world wide recession but supplies of 60 million barrels per day in the late 90's were boosted to 87 million barrels per day now. If supplies were still at 60 million barrels per day, we would not see prices falling. In addition to the producing supplies, the discovery of 70 billion barrels of oil off the coast of Brazil, not more than a drop of which has been produced, puts OPEC in the position of continuing to sell all they can at $67 because the price will be lower in a few years. US offshore drilling will help us by the time demand growth resumes.

Obama likes to claim that he will create 5 million new jobs in the alternative energy business. I have a couple of news flashes for him, 1) the millions of subsidized jobs created in Europe to build wind mills and solar panels are at risk, 2) the private sector will create the jobs in the most productive area, if wind mills is one of the winners, that will be just as good if nuclear power is one of the winners. However, the rational for investing huge sums into wind mills was marginal at $147 per barrel but really stupid at $67 per barrel. Sixty percent of the investors in T. Boone Pickens energy fund have asked for their money back. The Pickens plan relied on government subsidy to work. The likelihood of massive government subsidy for wind mills has fallen now that the price of oil is down 60%. Obama's campaign slogan is Change, yet he has handcuffed himself to a winning political story even though he knows the economical story is false. Or is he so naive to think that we can or should beat the Europeans at government subsidy and ownership of businesses?

Areva, the nuclear plant builder in France, just made a deal with Northrup Grumman to build a nuclear parts plant in Virginia and the Department of Energy just signed off on the wisdom of reprocessing nuclear waste into new fuel. For a very long time, our nuclear power plants have burned 4% of the fuel and left 96% as waste. Even at such low utilization rates, nuclear plants have been economically competitive with other means of energy production, including dirty coal. It takes 10 nuclear regular nuclear plants to produce the fuel for one fast burner plant. The fast burners will turn tonnes of nuclear waste into trillions of dollars worth of fuel.

A couple of days ago, I had a conversation about nuclear power with a friend from Canada and a friend from Switzerland. The thought that nuclear power might be the answer was almost repulsive to each of them. However, when the Canadian learned that China has built a nuclear power assembly line, which will make possible the production of electricity for 1.3 to 2 cents per kilowatt, he acknowledged that nuclear power makes economic sense. The friend from Switzerland was unwilling to dwell on the economic question but repeatedly went back to the dangers of nuclear power. The events at Chernobyl are ingrained in his thoughts. However, he was willing to accept my point that at least 10s of millions of people have died producing coal power or by breathing dirty coal air. When asked what the world would be like if we did not consume coal or nuclear energy, he had no answer. If memory serves, there were 14 people who died immediately at Chernobyl and the expert estimates of those who died because of radiation range from 40 people to 2 million people. I believe the low number is in the ball park and my friend believes the high number is. We ultimately had to agree to disagree. Thus far, my friend has delayed the installation of roof top solar panels: he is waiting for the relative total price per kilowatt to come down. He will have a long wait. Jimmy Carter put roof top solar panels on the White House, Ronald Reagan took them down.

Obama and my Swiss friend continue to support wasteful spending, but: 1) Thunder Horse, in the US Gulf of Mexico, just brought another 100,000 barrels per day online, 2) Mexico just voted to allow drilling in the Gulf of Mexico by companies that know how to find and economically produce oil, 3) natural gas production growth in the US has grown dramatically over the past couple of years and it should grow for 50 more years, 4) China has broken ground on two new refineries, one in Nigeria, 5) Russia is adding a Chinese spur line to its pipeline from Siberia to Japan, 6) Kazakhstan is moving forward with the development of the huge Kashagan oil and gas field, 7) the net growth of the worlds population was down in the 90's down more each year of the 2000's and it should reach zero in about 50 years, 8) every day trillions of energy saving substitutions are being made.

The stock market in resource rich Russia is down 70%. Bulk supply shipping rates are down 87%. The mortgage interest rate bottomed in 1977 three years after the end of the real estate recession. The mortgage interest rate bottomed in 1993 almost three years after the end of the real estate recession. Smart investors will buy real estate today, using variable rate financing, and they will lock in fixed rate financing in a couple of years. As evidenced by the shipping rates, the demand for iron oil and other goods required to build big factories or big office buildings or big bridges will be slow for a number of years.

On the other hand, the US economy continues to be amazing. With the exception of autos, retail sales continue to be extremely strong. Total loan growth in America continues at double digit rates, down from the peaks, but still strong. Americans are apparently taking the money they would normally put into a new car and spending and spending part of it elsewhere. The strongest area of employment growth is in the hotel and leisure goods business. Apparently, retired baby boomers are traveling. Based on research done by the Cleveland Federal Reserve Bank, inflation expectations are from 1 to 1.6% and GDP growth for 2009 will be in the 3% range! The guys and gals on TV are talking about a bust but the market bust shows a major decline in capital goods, energy and materials and a surge in other areas.

How can it be that housing, banking and autos are in a major recession but the US economy is still so relatively strong?

I always circle back to the innovations taking place. Yesterday, I wrote about the progress being made toward "print manufacturing". In a few years, if a company needs a certain part, it will download the specs and hit the "print" button. Supper strong, super tiny materials will be arranged according to the specs. The savings will be huge.

Yesterday, Google settled the law suit between them and book publishers. Google, perhaps through Amazon, Sony and others, will soon make millions of out of print books available on line. Google will keep 36% of the sales revenue and 100% of the advertising revenue. Google will win but so will the rest of the world. Shared knowledge is extremely powerful. The invention of the printing press was one of the greatest inventions ever. Even so, it took a major shift in attitudes to make the printing press feasible and another major shift in attitude to make its products useful. Think about how life would be today if only priest were allowed to read. China was once the greatest nation on earth but it lost its way when those in power decided knowledge should be sequestered.

The savings that will be realized by the movement of paper books to electronic readers will be enormous. The number of trees saved will be in the trillions. The easy access to great stores of knowledge will trump the benefit of saved trees many times over. Sales of the "Kindle Two" will be huge relative to the Kindle. Amazon might win big but the people will win more.

Mountains of new royalty income will flow to those who have written "good stuff" in the past. Those who write "good stuff" in the future will find an audience. Under the "laws of the long tails", we know that the distribution curve will be flattened. The most popular stuff will not necessarily lose readership, but billions of people will find millions of books on the subjects they enjoy. The costs of any one book may vary greatly but the net cost of reading good books will fall dramatically.

Thousands of book stores and thousands of video rental stores will close or convert to coffee shop book and movie preview locations, kind of like sports bars for books, videos and magazines. Floor space at many other stores, including Wal-Mart, will be reallocated. Paper newspapers will go the way of answering machines, fax machines, analog TV, hand written letters, dial up Internet, cameras that use film and yellow pages (for a longer list go to

The "gales of creative destruction" are nothing more than the biblical teaching that there is no joy without suffering. When Obama, McCain and others, push to eliminate pain, they also push to eliminate the resulting benefits. The push to eliminate pain is the equivalent of taking heroin or drinking excessively. While Obama has done a masterful job of running as a liberal democrat during the primaries and as a centrist democrat during the general election, he has not changed his fundamental positions. He is still a big spending, "spread the wealth", liberal. He is still willing to shrink the economic pie, provided he and his "friends" get a much larger piece of the smaller pie.

The good news is that multiple new economic pies are in the oven. The market will spread the benefits around the world. For example, the decline in the cost of books is going to be of greatest benefit to the poorest of people. Can you imagine how the availability of cheap books and videos will change the lives of billions of poor children in Africa, China and India?

The bad news is that we are a long way from one of the attitude shifts we need in America. Unfortunately, the old rhymes that compare school houses to jail houses have come true. Most of our children are locked into holding cells for a few hours each day. I taught a few classes at local middle and high schools last month. I learned more than I wanted to know. Our teachers need the authority to expel children from class. Children who are not motivated to learn should not be allowed to disrupt the educations of those who are. Indeed, classrooms are "old school". Each child should have his own "study office" with the freedom to come and go to the gym or playground or education conference, provided he works hard enough to "keep his job". Political brainwashing should cease. The Google book project grants free library access to millions of volumes. Motivated children should be given free access to these millions of volumes. Children and adults should have access to the facts. Obama is not the one at fault for his willingness to ignore the facts, he is simply a reflection of a society that has been brainwashed.