From an essay by George Orwell entitled ‘In Front of Your Nose.’

 ”The point is that we are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield…..

To see what is in front of one’s nose needs a constant struggle. One thing that helps toward it is to keep a diary, or, at any rate, to keep some kind of record of one’s opinions about important events. Otherwise, when some particularly absurd belief is exploded by events, one may simply forget that one ever held it. Political predictions are usually wrong. But even when one makes a correct one, to discover why one was right can be very illuminating. In general, one is only right when either wish or fear coincides with reality. If one recognizes this, one cannot, of course, get rid of one’s subjective feelings, but one can to some extent insulate them from one’s thinking and make predictions cold-bloodedly, by the book of arithmetic. In private life most people are fairly realistic. When one is making out one’s weekly budget, two and two invariably make four. Politics, on the other hand, is a sort of sub-atomic or non-Euclidean word where it is quite easy for the part to be greater than the whole or for two objects to be in the same place simultaneously. Hence the contradictions and absurdities I have chronicled above, all finally traceable to a secret belief that one’s political opinions, unlike the weekly budget, will not have to be tested against solid reality.”

Beezer here.  So my diary continues.

While the Fed drops rates to 1% in an attempt to jump start lending, the real world participants in the economy are providing loans at rates much higher, more accurately reflecting the real cost of money than the government.  Big surprise there.

In the mortgage market, the government (in the form of Fannie and Freddie and credit reform legislation) forced private financial businesses to throw caution to the winds, lending money to extraordinarily dodgy borrowers and speculators.   Wall Street, charged with coming up with financial instruments to cover these stupid loans, invented a boatload of toxic securities that have crushed banking capital worldwide.

Now that some semblance of sanity has returned, major companies such as food giant Nestle have had to settle for credit line terms that are much higher than government backed loan rates.  Banks now realize they have been loaning out working capital money, such as credit lines or commercial paper, at ridiculously low rates.  It’s about time they wised up.

Banks are in the business of making a little money steadily.  They should not be taking big risks with depositor money.  They collectively forgot.  And now they’ve given all their profits back (and most of shareholder equity), because they took huge risks. 

Because banks have come back to their senses, there’s a credit crunch.  What’s really happening is that corporations were lulled into laziness with the cheap money and forgot to tend to their internal cash flows.  Now they must do so.

Meanwhile the average Joe the Plumber or Maggie the Florist have discovered that they, in their own way, had grown accustomed to cheap credit too.   Their retrenchment is individually smaller, but collectively huge.  Customers are not using credit cards as much.  Small business is retrenching quickly, as well.  Over the counter, cash is becoming a more important ingredient.

And while the price of commodities, especially gasoline and diesel fuel, have plummeted from the mid-summer highs, consumers know the relief may be short lived.  They will continue to cut back.  

Americans traveled 5.2% less, year over year in August, a total of some 15 billion miles in the biggest decline since 1942.  Tire shipments to New England dropped some 25%.  In some states it’s 30%.  And tires are considered to be somewhat anti-cyclical because if consumers postpone new car purchases (which they are doing in a major way) they still need tires.  Not if they’ve parked the truck in the driveway.

Asking over-leveraged consumers to borrow more isn’t going to work.  Wishing banks would return to the easy money days won’t work either.  There’s a slimming down going on.  And it’s just in time to avoid a heart-attack, Beezer believes.

That’s the private economy.  What about government and its employees?  These folks have grown accustomed to secure paychecks, secure health and retirement benefits, and secure jobs.  Is that going to continue?  If it does while the private employees take the nut full face, there will be political Hell to pay.

Unemployment is a lagging phenomenon.  It has yet to hit in any substantive way.  If everyone who is unemployed comes from the private sector, there will be a revolt.  It’s not likely to show up during this election (although it might), but it most certainly will assert itself two years hence.  And if polls are accurate that the Democrats are going to sweep the White House and Congress, then they will have two years to start paying for the indulgences of everyone the past 8 years.   Or they will be swept out of office in two years in Congress.  And out of the White House in four.

Asset prices are shrinking across the globe.  America, the world’s largest economy, has had its credit markets seize up and its government forced to socialize its mortgage market.

How did all this happen?  Is this just another “bubble” of speculation that periodically appears on the American scene, creating a recession that hangs around for 12 to 16 months then disappears?  Or is it something potentially much worse?

Worse.  Take a look at Chris Neider’s “Bailouts, Hedge Funds and Energy” article at the Energy and Capital website.  Among other tidbits, Neider points out that he underestimated the influence of hedge funds this summer in the runup, and consequent selloff, of commodity prices. 

Hedge fund assets climbed from $13 billion in 2003 to $206 billion by March of this year.  In some cases these funds could be levereged by 100-1.  Neider cites a recent report by Masters Capital Management, an Australian investment firm, estimating that $60 billion went into the oil futures market in the first five months of this year, but that $39 billion has exited since.

That’s a bubble, all right.  But its “popping” has suddenly focused everyone’s attention on a much more serious problem: America’s monumental debt and leverage.

The official national debt stands at nearly $10 trillion, but total debt obligations become closer to $53 – $85 trillion when unfunded mandates like Social Security are factored in.  “The numbers really beggar belief,” Neider writes.

Total credit market debt now stands at a record 342% of GDP, a level even above the last all-time peak of 1929.  And that is definitely not a good thing.

Leverage can be a positive thing, particularly if it is used to make productive improvements, such as those that will flow from an aggressive national energy policy.  The transition away from fossil fuel dependence will create millions of manufacturing jobs right across the board.  Almost every segment of manufacturing, and manufacturing support, will benefit dramatically from this purposeful use of leverage.

Instead of using massive leverage in a chase to gain nominal paper returns, such as the debacle witnessed this summer, this leverage will make real things that make more real things.    Within this effort are the antidotes to what ails America.

But as the ill-conceived uses of leverage quickly collapse and create havoc with asset prices, America will have to move quickly because this is a race against time–and not a lot of time either.  As T. Boone Pickens has so starkly pointed out, we are transferring our wealth overseas at an unprecedented rate.  If we don’t do something quickly, we won’t have the financial muscle to make the investments that need to be made.

War-like efforts which rally a country’s resources to a tremendous threat are made by Government fiat and intervention.  Recent government actions, socialist in nature to be quite honest, shoring up credit markets and the housing market, are probably just the beginning.

Hello McCain and Obama.  Who wants that job?

Five years of Nuclear Regulatory Hearings listening to every citizen speak who wants to speak, no matter that the same message is repeated endlessly, won’t get nuclear power going soon enough.  And the government will have to insure these projects because no private entity can.

Rebuilding a rail transportation system will have to be done by fiat, as in “The new line is going from here to here, you have to move.  Here’s a fair payment.  End of story.”

The government will have to pump money into a wide variety of industries, ranging from automobiles and trucks, to turbines and solar manufacturing, from batteries to investments in research and development in almost everything related to this “war effort” to energy independence.

In the meantime, money has to be pumped into America’s own gas and oil deposits.  At least that effort can be funded to a large degree by private investment, and royalty income from leases.

While all this is going on, Americans are going to make some sacrifices.  Rationing is quite likely.  You want to cut back on oil imports, you use less oil.  It may come to the point where using less won’t be an independent choice.  Odd-even days come to mind.  The plastic water bottle industry, a hugely wasteful user of energy, comes to mind.

Oh yes.  And taxes.  They will have to go up on the upper income groups.  For folks who complain these people already pay the majority of taxes, it should be noted that’s because they have the majority of money.  On the other hand, any tax that benefits corporate investment in “things that make things” should be encouraged.  Depreciation schedules come to mind.

What about global competition?  McCain supports NAFTA, Obama would like more direct negotiating on an individual basis.  Politically, Obama may have the edge here, particularly if the economy continues to worsen.  Unemployed people tend to dislike American manufacturing jobs going overseas.  However, the danger of trade restriction wars could plunge the world into depression if America suddenly becomes more defensive.

And finally, the last time America went into a Depression and weakened, enemies were emboldened. 

Investment icon Jim Rogers has predicted America is about to enter a “lost decade” as it suffocates under debt.  This won’t be a 16 month deal, he predicts.   The last “lost decade” of the 1930′s ended only with the beginning of World War II.

Drill, Drill, Drill.  Manufacture, Manufacture, Manufacture.  Goodby consumer economy. 

If you want an Obama/McCain comparison re: economy and investments, you can get one at Money and Markets.  The report, “The Pied Pipers of Washington,” is authored by Martin D. Weiss Ph.D., Founder of Weiss Research Inc.

The rumours that taxpayers were going to backstop Freddie and Fannie through a Treasury takeover has been building into what is now a certainty.  A turning point may have been when the $820 billion plus PIMCO investment firm this week refused to participate in a major bond sale, and two of its top leaders argued for the Treasury takeover.  (see “Tax Cuts” etc article in Economics category).

Both Presidential candidates quickly got on board.  Both made the obligatory acknowledgements that, at some future point, taxpayers should get paid back for their forced investment by Treasury of Freddie and Fannie’s morgtages.   Sure.

Bottom Line: This move is inflationary in nature as it represents an increase in the nation’s debt, which is essentially a levereging of future tax revenues.  That being noted, the levereging is being used to hinder what is feared could become a deflation hurricane in the morgtage, and thus, overall credit markets.

Bottom Line 2: For the longer term it would appear this type of action would push the dollar’s value down versus other world currencies.  Inflating the dollar supply overtime diminishes the dollar’s value.  If you want this point of view, in spades, click on Jim Rogers in our Illuminati listing.

Bottom Line 3: This levereging of future income comes at a very inconvenient time because the US is about to embark on additional, and massive, spending as it tries to wean itself from dependence on foreign energy supplies.  The silver lining in this energy spending is that it will go towards productive machinery and goods that will mitigate the inflationary borrowing.  Spending on goods producing machinery and labor is much better than spending on someone’s failed mortgage.

From an investment standpoint, all this would mean you’d have shorted the dollar.  And, of course, timing is all because if you’ve been short the dollar recently you have lots of shorts, but you have lost your shirt(s).   Old Chinese proverb:  Man with bad shorts has no shirts.

Beezer has added FabiusMaximus to the Blogroll.  It’s an intelligent blog chockfull of excellent energy references, among other things. 

email Beezer at wp.Beezernotes.com

Ever heard of the “paradox of thrift?”  It goes like this.  If we all suddenly pull back our spending and increase our savings (a good idea on an individual or family basis, right?) then our collective savings will actually fall!!! because one person’s spending is another’s income–the fountain from which all savings flow.

A related paradox, is the “paradox of deleveraging.”  When everyone, at the same time, starts to reduce debt on assets (like a home, for example) they drive down the value of the asset and, in effect, negate the whole excercise because it’s the asset value that supports the borrowing–or put another way, actually increases leverage by driving down borrowers’ net worth.

Guess who’s going through all this right now–particularly the de-leveraging part?  You and I.

If left to work itself out by itself, these paradoxes are likely to turn a pretty nasty recession into something quite worse.  A Depression.

Don’t trust Beezer?  Ok, then read two articles written by one Paul McCulley.  McCulley works for PIMCO, a Newport, CA based investment management firm with $829.5 billion under management.  McCulley is a PIMCO Managing Director. http://www.pimco.com/TopNav/Home/Default.htm

McCulley argues that in our current circumstances, somebody has to step forward with a real big pocketbook in order to blunt runaway asset deflation and deleveraging.  And that somebody has to be our government–or put another way, in this case, the collective “us”.  The government needs both to cut taxes, and increase borrowing, argues McCulley.

We just saw some of this type of action when the Federal Reserve essentially did what it could by lending $29 billion to buy the venerable Bear Stearns.  Congress also did what it could when it authorized $100 billion in rebate checks (that’s a tax cut by another name) this Spring.

McCulley argues that Congress is going to have to authorize the Treasury to open up its checkbook further because more is needed to avoid an accelerating deflation/deleveraging “paradox.”

And the tax cuts?  This is Presidential campaign season.  Politicians always tell their supporters they’re going to lower their taxes, implying the “other guys” are going to get whacked instead.  And somehow it’s all supposed to come out even, with no increase in America’s debt.  Yeah, right.  Beezer did fall off the tomato truck, just not last night.

And while we’re doing all this borrowing and tax-cutting in order to avoid an economic tsunami, how are we going to fund the trillions needed to make the energy transition away from fossil fuels–especially foreign owned fossil fuels?  Very, very carefully Beezer suspects. 

The silver lining on the Energy transition front is that the effort will provide millions of new, well paying jobs.  Jobs that create machines, which create new machines, which create new jobs–and so on.  Turbines, pipelines, refineries, transmission equipment, locomotives, buses, new efficient cars.  The list is nation-changing, as it should be.

We’ve spent the past century rushing confidently forward under the assumption that our energy is infinite.  Well it isn’t.  We made a mistake and now we must move forward under the assumption that our energy is finite.

Beezer calls this “Bartlett’s Question,” which you can check out below or under the Economics category. 

At least if we’re going to increase debt, do it in order to produce something with a life expectancy beyond a fast food hamburger.  

email wp@beezernotes.com

Alaska Governor Sarah Palin, a virtual unknown nationally until John McCain selected her as his VP candidate a few days ago, delivered a spot-on, confident “coming out” speech last night that shows why the Democratic ticket has its work cut out for it to win in November.

Palin expertly delivered a speech that highlighted every major difference between the two parties, and didn’t miss a beat in the process.  It was very effective.

Consider these points:

• Energy.  The Democratic party has consistently opposed expanding efforts to find and develop domestic fossil fuel reserves.  Palin said in her speech “The  stakes for our nation could not be higher.  When a hurricane strikes in the Gulf of Mexico, this country should not be so dependent on imported oil that we are forced to draw from our Strategic Petroleum Reserve.  And families cannot throw away more and more of their paychecks on gas and heating oil.  With Russia wanting to control a vital pipeline in the Caucasus, and to divide and intimidate our European allies by using energy as a weapon, we cannot leave ourselves at the mercy of foreign suppliers.  To confront the threat that Iran might seek to cut off nearly a fifth of world energy supplies…or that terrorists might strike again at the Abqaiq facility in Saudia Arabia..or that Venezuela might shut off its oil deliveries..we Americans need to produce more of our own oil and gas.  And take it from a gal who knows the North Slope of Alaska: we’ve got lots of both.  Our opponents say, again and again, that drilling will not solve all of America’s energy problems–as if we all didn’t know that already.  But the fact that drilling won’t solve every problem is no excuse to do nothing at all.”  Ouch and Ouch.
• Iraq War re: Leadership.  “This is a man (Obama) who can give an entire speech about the wars America is fighting, and never use the word “victory” except when he’s talking about his own campaign.”  Or this: “And though both Senator Obama and Senator Biden have been going on lately about how they are always, quote ’fighting for you,’ let us face the matter squarely.  There is only one man in this election who has ever really fought for you..in places where winning means survival and defeat means death..and that man is John McCain…..It’s a long way from the fear and pain and squalor of a six-by-four cell in Hanoii to the Oval Office.  But if Senator McCain is elected president, that is the journey he will have made.”  Ouch, and Ouch.
•  Taxes:  “The Democratic nominee for president supports plans to raise income taxes…raise payroll taxes…raise investment income taxes…and increase the tax burden on the American people by hundreds of billions of dollars.”  Ouch  “How are you going to be any better off if taxes go up:  Or maybe you’re trying to keep your job at a plant in Michigan or Ohio..or create jobs with clean coal from Pennsylvania or West Virginia..or keep a small farm in the family right here in Minnesota.”  Palin sounds like she’s from Minnesota, by the way.  She has that lilt.  Ouch. 
• Change/Washington outsider etc. etc.  Other than Palin, the other three pols in this race are all members of the U.S. Senate, part of a Congress that has lower approval ratings than President Bush.  “Senator McCain’s record of actual achievement and reform helps explain why so many special interests, lobbyists, and comfortable committee chairmen in Congress have fought the prospect of a McCain presidency–from the primary election of 2000 to this very day.  Our nominee doesn’t run with the Washington herd.  He’s a man who’s there to serve his country, and not just his party.”

Energy, taxes, leadership, change from the outside in–there’s your campaign.  All delivered smartly by an attractive, accomplished by any real measure, woman who has made history already by being the first female nominated to the Republican presidential ticket.

Now the media will descend upon her and her family like flies to a honey ham, looking for any weakness.  They’ll find something–anything–because they must in a world where millions spend million of hours watching E-Entertainment for news.

Be careful.  Palin may look nice, and speak well, but she’s already shown a very tough side.  She was elected to Governor as a reform candidate and her anti-”old boy network” credentials are excellent.  She even made that into a positive with the hockey mom joke.  “What’s the difference between a hockey mom and a pit bull?  Lipstick.”  Not bad at all.

Plus, the speech was mercifully brief, as speeches go.  It’s a hard act to follow.  McCain will have to be on his game.  And now the Democrats have been introduced to a new, unkown but apparently quite formidable, opponent.  Let the games begin now in earnest.

email wp@beezernotes.com