2008

2008 may turn out to be a good year for the environment. Thanks to sky-high oil prices followed by a financial crash, many people have decided to drive less and fly less. They are also traveling less and spending less. All of that is really great news for our survival on the planet.

To recant an old phrase with a new meaning, when it comes to pollution and destroying habitats: it's the economy, stupid. What is wrong is not oil, inefficient light bulbs, oversized SUV's, global warming, etc. What is wrong, plain and simple, is too many people using too many resources.

Since 2/3's of our economy is in consumer spending, and 90% of that spending ends up in the trash within 6 months, it should be rather clear that we need to change our ways. It should also be clear that this cannot be done without "damage" to the economy. What we affectionately call the economy is really a huge churning waste generator.

We need to reduce our spending and consumption rather dramatically if we are to stand a chance of surviving for much longer on this planet. "Much longer" could be as short as 50 years but it may well be 500 to 1,000. If you think that is absurd, just remember that 1,000 years isn't all that long in the scheme of things. I doubt that it will take that long though. All future predictions are fraught with error so we need a bit of a fudge factor. A couple 100 years is in the noise, when it comes to planetary events.

So, even though you may feel 2008 was an annus horribilis, look at the bright side. At least we are on the right track to saving our existence. Happy New Year.

duplication

Here is one fundamental culprit of environmental destruction. It is called duplication, or to be more numerically correct, quadruplication or quintuplication. It is the basis of the consumer society that we live in. Let's start with a simple example: the toilet, often called the bathroom or restroom for modesty reasons.

It all started with an outhouse located some distance from the main dwelling, or, when space was tight in a lean-too building. That made good sense as toilets are associated with smells and sounds that are somewhat obnoxious and distasteful. 

Having an outhouse can be problematic, especially for the elderly and the obese and those who cannot walk easily. It is also a chilly experience in winter especially in those climates that have harsh winters. To say nothing of night time evacuation, something that may affect the younger, the elderly, and the infirm. The night pail with cover provides some relief but it is not an appealing solution.

To solve these problems engineers devised a remedy that -all things considered- is very wasteful and very inefficient. The remedy is the flush toilet with siphon. The siphon is a device, a kink in the tubing, that retains some water and thereby blocks offending smells from rising up. But it also prevents material from going down, and it needs a certain amount of water to block the pipe.

So we flush. We are so used to flushing that many of us can no longer imagine a world without it. Save for those who are involved in athletic activities, or visit parks, or do outdoor labor, where porta-potties provide relief, the "civilized" among us always flush.

Flushing accounts for the majority of water usage in the West. Furthermore, since virtually nobody uses grey water, flushing uses clean, potable water that is brought in, filtered and treated at great cost. Dams are built, ecosystems destroyed, salmon go extinct, rivers are polluted so we can flush in the privacy and warmth of our own homes.

Modern toilets do not solve the instantaneous smell problem. So the bathroom needs ventilation and since few bathrooms are sealed off, the bathroom becomes a major source of heat loss or heat intrusion for the house. That little room not only wastes vast quantities of good water, it also wastes tons of air conditioning and heating. It has a huge carbon footprint.

Houses used to have one bathroom. They also used to have five or more residents. All that was not a major problem "back then." Now houses have on average 2.1 residents and few of those can imagine living with just one bathroom. "Oh dear, that must be hell." So here comes duplication.

The consumer society loves duplicates and triplicates. Now you need to buy three or more toilets, three or more fans, three or more sinks, mirrors, lights, etc. Everyone living in the house has their own bathroom, and it doesn't stop there. Any decent home has a few extra rooms just in case. And those rooms too have bathrooms. What about the guests dear, surely they can't use our bathroom?

A "normal" sized home now has two or three bathrooms. Some have five or six. More heat intrusion or heat loss. More pipes, more vents, more copper wire. More air freshener spray cans. More odor-repellant boxes, dried leaves, and other contraptions. More toilet brushes, light bulbs, mirrors, cabinets, toilet paper stands, garbage cans, soap dishes, soap, etc.

Where do all these consumables and waste products end up? A large part goes to sewage treatment plants. More energy usage to "treat" something that would make excellent fertilizer. But who in their right mind would go there? One can buy nice clean fertilizer from Home Depot. White pellets in paper bags to drop on the lawn.

business failure

American businesses have failed us. Lured in by Wall Street they have become agents in the financial Ponzi scheme we talked about before. They corrupted their standards and defrauded us. Our public companies are acting in ways that are destructive to us ( their owners) in the long run. They became willing collaborators in the financial Ponzi scheme.

A little over two decades ago Wall Street financiers started convincing CEO's and board members that all business needed to do was to generate ever larger profits. They told management to put aside their standards and ethics and to focus on short term profits only. The next quarterly earnings report. And if managers had to take decisions that ignored the long term well-being of the business, so be it. Even the outright cheaters were not just condoned by praised.

Wall Street created a culture of lies and deception. A culture that fueled bubbles and made some people incredibly rich. Wall Street became an engine for shifting wealth instead of creating wealth.

Steering by quarterly earnings is bad business. Even kids know as much. It also ignores most duties an ethical business has. The Wall Street money men said to management: "Your fiduciary duty is to shareholders only and shareholders only care about revenues. Never mind laying off workers, as long as it helps the bottom line. Never mind uprooting communities, as long as profits soar." That was false and dishonest. That was not what the owners (the public) wanted.

Wall Street had the owners in its pockets though. By promising them ever greater returns they preyed on the greed of the ignorant. The financial "engineers" lured companies into their bubble game by forcing them to take on more debt. More debt not only made companies more dependent on financiers, it also generated commissions and fees everywhere. In return, Wall Street rewarded such mismanaged companies with higher share prices. They did so by talking up their prospects. They knew this could not last, but they were happy to cash in on fees while it lasted.

Well run companies, with responsible management that refused to take on excessive debt and make outrageous claims were punished. Their stock prices floundered, their managers were put down, their practices were called outdated. Their P/E went to 1.0. In many cases, eager young financial minds engineered hostile take-overs. Like buccaneers they could not wait to board the ship, fill their pockets, and lay the rest to waste.

We, the American public let it all happen. Because we were greedy. Because we got to have more microwaves, more TVs, more refrigerators, and bigger cars. We ignored the plight of so many who were robbed blind, because our 401K's were flying high. Hot air lifts all bubbles. 

Unfortunately the party can't last. No Ponzi scheme can run forever. And the higher one flies the harder the crash.

ponzi in the open

I have to say, the P-word is becoming quite popular. First regulators uncovered "super-genius" investor and all time star Madoff, who practiced the "pure" form of this art. That was followed by a long series of articles, some of which went to great lengths to explain to people what Ponzi schemes are and how they work.

Then today, Nobel Laureate Krugman went a step further and called our beloved financial system a Ponzi scheme. He went about it in a very systematic way and pointed out why this is so. He then highlighted how Mr. Madoff fit into this picture. He showed how others did exactly what Madoff had done but with a few extra steps. It can't get any more basic than this. 

And there you have it folks, from a true expert, something I have been saying all along: our Western financial system is a Ponzi scheme.

Guess what, we just authorized our government to pump $700 billion into that system to make sure it survives. Because, as W would say, it is fundamentally a "good" system and we want to keep it around. There were just a few rotten apples and we should not throw out the baby with the bath water, as the old cliche goes.

Unfortunately, reality is a bit different. The system apparently is rotten to the core and maybe there are a few unspoiled apples, and perhaps many apples that look OK but are really rotten inside, who knows?

The more we find out the more America in the 21st Century starts looking like Rome in the 3rd century. And we all known what happened there next.

deflation is happening right now

You know how it always takes a year or more before officials declare we are in a recession? No doubt they hope the recession will be over before they admit to it so they never have to acknowledge its existence, except in retrospect. While the country is suffering, everyone keeps on repeating, "we may be in a recession, if this keeps going, we will end up in a recession, the fears of recession run high, etc., etc."

Well, this time around there is no such quibbling. The current "recession"  has been confirmed. Furthermore, we have heard it has already lasted over a year. But does that mean officials are reverting to straight talk? Dream on.

First of all, we are NOT in a recession, we are in a depression. How long will it take before someone is willing to state that obvious fact? We are just reading the same evasive sentences with a different noun. "People fear the recession may give way to depression, there is a chance of depression, the likelihood of depression goes up, if the economy continues to slip, we may enter a depression, blah, blah."

Next, deflation is for real too. We are, right now and at this very time, experiencing deflation. We are not "in danger of, slipping into, fearful of, etc," deflation is here and it is here NOW. Everybody knows prices are going down instead of up. Everybody is expecting and waiting for them to drop further. Just try to sell something and you will see. 

Normally selling something around christmas is the easiest thing in the world. People are in buying mode at this time of year. You can sell ice to the eskimos at christmas. Not so in 2008. Not so unless you are willing to discount the hell out of things and give freebies on top of it.

Nobody in their right mind will pay full price for anything anymore. Nobody will buy items that are on sale if "on sale" means a meager 10-20% off. People expect prices to be AT LEAST 30% off and I won't buy anything unless it is 50% off. Neither should you, unless you are tired of your money.

That is deflation. Serious deflation!

Even the government's own figures show deflation is real. After extensive data massaging to make something look good, all officials can come up with is an inflation rate of 0.1% (0.2% for the optimists). But anything less than 1% inflation is de facto deflation. 

You heard it here. Look around, it is there for everyone to see. Prices are dropping like bricks from the sky.

Meanwhile, the Fed is expected to lower interest rates to 0.5%. Big deal. Last week they sold treasuries at 0%, a guaranteed loss after expenses. Investors are willing to lend Uncle Sam money for free. They are willing to pay Uncle Sam to lend money to him!

And guess what? The offering was FOUR TIMES oversubscribed. That, my dear friends, is called deflation !

the crisis explained-without equations or buzz words

The current economic crisis is easy enough to understand. There is no need for fancy (or at least fancy-looking) equations or buzz words such as "the liquidity trap." It is quite simple and also easy to see why it has not hit bottom yet and will continue for a long time to come.

It all started with housing. The bubble burst. Too many people had bought houses they could not afford, or houses they never intended to live in but were going to "flip" for a quick profit, or extra houses they did not need. More people had refinanced their existing homes to cash out equity and spend it on frivolous things that they did not need.

The whole financial system went along with this, happily making money. As time went on, the finance guys got bolder and bolder, inventing ever more creative ways to get commissions and reap benefits. They lured developers, builders, appraisers, land speculators and others into their game. Everyone was getting drunk with success, and the more drunk they got, the more risky and borderline their moves became. Quite a few stepped over the line too.

The financiers also snared local and foreign investors with complex financial arrangements. Soon enough the insurers found ways to participate as well.

Each step along the way, everyone added some leverage. More and more hot air entered the bubble. Eventually it burst. It burst with a loud pop, but because it was so large and convoluted and had some many compartments, it is still popping left and right and leaking excess as we speak. In fact there are many parts of it that are still hyperinflated and have not felt the inevitable pop yet.

Now we have many folks who lost their homes. A significant number of them counted on their home, not just to live in, but to fund their retirement and their children's education. On top of it all, many of these people also lost what meager savings they had in their retirement accounts.

Huge numbers are "underwater" with their mortgages. They owe more than their house is worth. Even if they stay put, they perceive a huge loss and many of them too counted on their home to pay for future expenses.

Everybody lost big in their retirement savings. With so many baby boomers close to retirement and therefore unable to recover easily, the trouble and the fear are widespread. 

With the loss of retirement people think they will need to work longer. But jobs are disappearing too. Even those with jobs today, face uncertainty. Those who lost their job are close to despair. Nearly everyone is without savings to fall back on so the fear of joblessness is truly paralyzing for many.

Meanwhile credit has dried up. Faced with huge losses, complicated financial instruments that are incomprehensible and likely worthless, widespread fraud, and a poor economy, nobody is willing to lend money anymore. All cash influxes are immediately earmarked to fill the black hole of losses or perceived losses and no amount of cash influx increases the appetite to lend or to spend. All the money the government doles out disappears in a black hole.

Consumers refrain from replacing items that work. They postpone expenditures, they forgo luxuries or anything that is not necessary. They cancel trips and vacations. Many make deep cuts that may even include seeking medical help. They are in survival mode. All cash provided to them is immediately sucked into their own personal black hole.

Meanwhile there is excess inventory. There are too many houses and more appear every day. Prices crater, causing more problems for those with mortgages trying to survive. There are no buyers. Nobody is in the mood to think long term. Few have money to spend, some want to wait because they think prices will fall further and a lot are cut out because there is no credit even for those with good scores.

There is also excess inventory in other goods, including non-durables. All these were produced and are produced based on projections that are now far too optimistic. Inventories grow and companies slash prices and start layoffs. That further reduces the buyer pool and leads to expectations of more price drops.

Consumers are no longer interested in discretionary spending. They are no longer into bargains. They are in survival mode. Other things are no longer in their minds. They are deaf to the siren call of advertisers. They are saving and looking to save more.

New investment is halted because nobody wants to consider it. There are no buyers, and even the dreamers have ceased to dream. Nobody wants to focus on the long haul when they fear near term disaster. People dying of thirst in the desert are immune to 80% discounts on clothing.

Additionally, bad memories linger much longer than good ones. So expect people to take a very long time to change their habits -even if they could, but most can't anyhow.

Welcome to the depression of 2008. I'll be surprised if it clears before 2015. As you can see, I am an optimist. It took over 10 years and a world war to resolve the 1930's depression. 

the implosion continues

Chinese exports dropped significantly in November. The magnitude shocked economists. Read about it in the New York Times today. See my other postings on China. This turned out to be an easy prediction.

It is also a further indication that the crisis is far from over. Seriously, the worst is yet to come. For those of you who think we reached bottom, think again. I also stick to my prediction of a Dow 6000. I don't see any improvement until at least mid-2010. Most economists believe things will turn around in mid-2009, but then again, they don't get paid to spread bad news. And economists have been wrong before. Recently, as a matter of fact.