Saturday, April 29, 2006

A simple question

I hear all these voices condemning illegal immigration, and many of them I recognize from years past on other subjects. And so I have to ask...

If you're so opposed to illegal immigration, why were you so angry when Elian Gonzalez was sent home?

Sex Sells

Posted originally as a comment at Balloon Juice.

I suspect that of all the scandals out there, this is the one that’ll do the worst damage to the Republicans this cycle. For what it’s worth, I think it’s not the most threatening to the nation. I am angry at officials taking bribes, and I’m concerned about the potential blackmail
issue in national security positions, but other than that it’s not as dangerous as the NSA or the outing of the CIA agent who appears to have been responsible for intel about middle eastern (to include Iran) nuclear capabilities or the decision that torture’s ok or the ability to ignore habeus corpus or all the other things that can be wrapped up in “the unitary executive” position.

All that said, again I think it’s the most devastating. And the reason is that sex sells. Ask most people in the US what the main point of Clinton’s impeachment was about and they’ll talk about the illicit sex – it was about Monica. (Oh, yes, it was about lying – lying about Monica and the illicit sex.)

Every congresscritter who has been in that hospitality suite over the last 15 years – of both parties – is going be tarred with this brush. So too will any administration official or appointee who’s been through those doors. “I was only there for the poker, then I left early,” will be true of some but heard from many. And legally many will get away with it. Politically, however, it’s going to make the case for the Democrats. “Republicans, the party of corruption” is the battle cry. And corruption can be accepted if the party’s competent, but we’ve got Iraq and Katrina and the slow recovery and a host of other things that say things just aren’t doing so well.

No, this is the one that’s going to make the public take notice – it’ll be the seed crystal that makes the whole batch come together against the GOP this year. Yes, some Democrats are going to be in the mix, but the Dems aren’t in power and the Dems aren’t the ones who’ve displayed (or at least appeared to display) arrogance and incompetence. The GOP defenders will name a name – a Mollohan – desparately trying to claim that one balances a host of others – a Ney and a Cunningham and a Delay and …

Last week I thought the Dems still could fail to take either much less both houses of Congress. Now, I think the GOP will have their work cut out to keep either house. And it’s all because this lesser scandal includes sex.

And sex sells.

Wednesday, April 26, 2006

outline of conflict

I am 95% confident that the United States under President Bush will attack Iran. I am 90% confident this will happen prior to the national elections in November. This attack will be air dominated (aircraft and missiles) , and will strike key infrastructure and communications assets. There will also be strikes against every site involved in Iran's nuclear program regardless of significance.

I am about 50% confident that the attacks will also include ground forces. Their intent will be to attack the coastal plains from the Iranian border to Jask so as to seize and secure both the primary oil production sites of Iran and to secure the Straits of Hormuz against Iranian action. I expect the US Army to move south once crossing the Shatt al Arab (mouth of the Tigris/Euphrates), while the straits are seized by marines. Defined this way there is a region from Bandar e Kagan to Bandar e Lengeh which will be seized solely to conjoin the two and provide an avenue of mutual support. There are islands in the straits and northward into the Persian Gulf that will be attacked and probably seized by ground forces as they contain military facilities and forces.

I am, I regret to say, about 15% confident that the United States will include the use of nuclear weapons in the attack for two critical portions of the attack. First and most effective is the production of an EMP near high-density urban areas. Second and less effective is their use to destroy deeply buried and reinforced nuclear assets (facilities, not weapons).

While there are a number of consequences of high probability of the attack even excluding the ground forces and nuclear attacks, there are three consequences that are inevitable.

1) Iran will declare war upon the United States and any who ally themselves with that nation against Iran. A formal declaration of war creates numerous opportunities in the global political arena, though any in particular being seized or effective is subject to debate. That said, this fact drives both of the subsequent two consequences.

2) Iraq will be forced to declare a) alliance with the US; b) alliance with Iran; or c) Neutrality. Both the latter put the US in the position of attacking Iraq to keep forces uninterred and active while operating from Iraq. The first, however, allows Iran to conduct significant (though probably "low intensity") actions against the US in accordance with international law. Which in large part means they do not have to operate through cutouts.

3) For one to two weeks, there will be no oil shipped through the Straits of Hormuz. And for the subsequent several months the shipments will be through a declared war zone. This means insurers will require a premium for transit of goods through a war zone. Some shippers will accept and pass on this cost. Others will decide to use their tankers in other locations. Both actions will result in crude oil - if it re-attains the same rates of shipment that existed pre-invasion - costing significantly more.

Basically the plan intends to shatter and suppress the current regime, and create the opportunity for rebellions to rise and flourish. Followon actions will be to replicate the Afghanistan war's period of success with our aerial and specialized support of local leaders opposed to the enemy. The belief is that most of the people of Iran will abandon their leaders when they're shown to be powerless, and that they'll - if not rise up and support the rebellion, at least avoid interfering with it's success.

I expect a successful shutdown of communications and infrastructure. I expect some of the tribes on the borders of Iran (both physically and philosophically) to rebel. I expect the plan to fail in its objective as the majority of the nation rises up not in rebellion but in support and anger at the United States - the Persians are an ancient race who have long exemplified the principle of "Brother may fight Brother but an outsider faces both."

If the US uses ground forces to seize the coasts, I expect a massive callup of all (remaining) reserves and guards to assist in holding the ground. Given this administration's past record, I expect this callup to begin some time after the attacks are launched, both to maintain secrecy and because of an underestimation of enemy capabilities and the need for boots on the ground. I do not expect a draft, not within the first six months, though it has a high probability in many of the possible longer-term consequences.

If the US uses nuclear weapons, I expect the majority of the world to call for the President and all commanders responsible for the actual deployment to face trial for war crimes. Depending on the subsequent acts (or failures to act) of the people and congress, the nation could become a pariah equal to that held by North Korea and (once upon a time) by South Africa. Nuclear weapons carry an emotional value that outweighs their actual battlefield effect, and all the negative values are directed at the user of the weapons.

It is April 27th, 2006. I expect this attack to happen before November 1, 2006.

I hope I am wrong. It will not destroy the United States, but it will change it drastically. And I would rather not go through international and local consequences.

Peaks, Nukes, and Iran

Let's take a meander.

Let's put aside for a moment the question of whether Iran wants nuclear weapons. Instead, let's return to the fact they've built a nuclear reactor - or rather, more nuclear reactors - and their original stated purpose. That is, to provide power.

Now first I see the need for a digression. The Bushehr reactors are PWRs (Pressurized Water Reactors) - thermal reactors. Avoiding all the technicalities, a critical point to make is what these reactors are NOT. They are not so-called breeder reactors. A broad breakdown of reactors is whether they're fast-spectrum or thermal-spectrum reactors. The former CAN but do not have to be breeders. The latter cannot. Which means that the Iranians did not make the Bushehr reactors for the purpose of making nuclear weapons.

umm, a digression from the digression. Iran has a breeder in Esfahan - the IR-40. That's tiny and would take (as I understand) a long time to make enough plutonium for a bomb -- and again allegedly is inspected frequently and still isn't making it. And Iran is building another breeder, this one at Arak, which could make plutonium a lot faster. But Bushehr isn't a breeder even though it's the one that's got all the noise and focus, and so I return to the main path.

A question that came up frequently was, "Why would Iran - an oil-heavy nation - want a nuclear power plant?" That was usually the reasoning behind claiming it was weapon related, but I've alread chased that digression. Instead I'd like to examine two reasons in a bit of depth.

The first reason is simply economic. There are four big powerplant systems in the world: Natural gas, Coal, Hydro-electric, and Nuclear. (Yes, there's diesel as well, but it's not as efficient.) As a rule, Natural gas is last choice - its clean, but it's far less efficient. Which probably isn't that big a deal for a nation that is one of the world's largest exporters of natural gas, except every cubic foot used at home is a unit not sold abroad. And more significantly, Iran has a LOT of coal powerplants.

Why is that significant? Iran imports coal, mostly to power the plants. Oh, it produces its own, but it produces about half of what it uses. A nuclear powerplant in operation means a coal plant can be shut down - or at worst another coal plant doesn't need built - which reduces (or doesn't increase) the coal import requirement. So building a nuclear plant means Iran saves money - big money. And it reduces need to rely on external providers for its energy requirements. (Ironic, isn't it?)

I think it extremely likely that Iran was being 100% truthful when they said they needed the power the plant would be providing. I'm not certain that was ALL the reason for building it, but the statement itself wasn't false.

But I wonder, while I'm at it, if there isn't another reason besides replacing coal and gaining practical experience in nuclear technology. I wonder about peak oil - yes, that bugaboo again. It's time for speculation, really, though I think it worthy of thought.

Consider that about two years ago sweet light crude production appeared to peak. Consider how vague the OPEC nations - especially the middle eastern members - were about what was available. Consider the possibility (speculation) that the owners of the fields knew that the downturn of production was a lot closer than they were telling anyone.

Now let's assume you are one of these nations - Iran most likely, but there are others. You know -- KNOW -- that within the next decade the supply of petroleum is going to decline. Not go away, just quit being as cheap and plentiful as it is now. What do you do for your nation's benefit? There are a couple of things for which "build a nuclear powerplant" is an answer. As already mentioned, reducing the need to import energy sources is a good thing. Equally important is at least maintaining money from exports - and the less you're using at home the more you can export. If the grand total production is declining, this extends how long exports can be maintained. Please remember that I said natural gas was not a good choice for powerplants. But it's frequently used for other things - things like household heat and cooking - that electricity from a powerplant can replace.

I wonder, then, if Iran was thinking that peak oil is closer than we know, and that's why it's building (built) a nuclear powerplant - preparing for crisis/opportunity?

By the way... Saudi Arabia has spent BIG bucks for offshore drilling capabilities just in the last year. And Kuwait has been discovered to be investigating both offshore platforms and alternative powerplants (though nuclear doesn't seem to be one of those alternatives). I wonder...

Tuesday, April 25, 2006


I stumbled across this blog-post recently and thought it worth reporting. I want to verify and validate more completely, but the preliminary review of its original sources and some other comments in other places since it came out support the position.

Simply stated, it appears OPEC peaked in production of sweet light crude in 2004. And nobody is picking up the slack.

As L-, er, Hydrajax reminded me in comments to another post, the casual assumption that it just means more difficult extractions are made economically viable is a potentially false path -- dollars is one thing, but energy spent getting the stuff from source to market better be less than the energy brought to the market or it's a loser's game. I know that processing of sour heavy crude is more difficult (read, more energy intensive per output) than processing of sweet light is, but I don't know where the break point might be. Oh - except I stumbled across a report from the EIA (sorry, no link) that among other things differentiated between refineries for sweet/light and sour/heavy -- the desulfering (among other things) requires additional equipment and a modified process that's a waste at the plant for the good stuff. And not all our refineries (which barely exceed our demand - when operating at full) are set up for the sour heavy stuff. Again, more details are needed, and I'll be checking it out over the next few days.

But the initial thought is that we're on the downside, just don't know it yet.

Oh - the source plus a couple of other places tend to agree that the clear demarcation point is going to be 2007-2008. That is, that's when it's going to be obvious just like the US peak in 1970 was obvious in 1971. Again, some of the Peak Oil stuff feels overly apocalyptic, so I'm automatically inclined to take it with a grain of salt. But not toss it out the window.

Friday, April 21, 2006

debunking FairTax, III

Ah, that shadowy underground economy. Stealthy criminals slipping through the cracks, carefully making fortunes while our tax engine goes on oblivious. Those neighbor kids with their lawn-mowers...

Neighbor kids? Lawnmowers? Yep. I think the most intellectually dishonest section of Boortz and Linder's book is this part. They cite a study that says the amount of money not going into the tax coffers is about 10%, then jump into a discussion of criminals who like to carry $100 bills and drug dealers and all that. Of course, what the study points out is that MOST of the crime is people not reporting every dime they made. If you mow the neighbor's lawn in the summer and he uses the big snowblower on the walks in the winter, neither of you probably paid any taxes. Yet the IRS says you're both supposed to hand the recipient of your labor (and the government) a 1099-B that includes the fair market value of the labor done, which the recipient then counts as income. It goes on a lot, and is usually not reported. It's the lion's share of the underground economy - unreported labor and 'In-Kind' exchanges. Fortunately, FairTax has a solution. You no longer have to fill out the form and give it to your neighbor for them to pay income tax. Instead you calculate fair market value and pay the government 23% of that - you pay, not your neighbor.

done laughing yet? ok, let's go on...

I assume you can see the two FairTax claims this destroys. First, that FairTax will eliminate the underground economy. Because right, the kids are going to raise money for a car-wash and then send 23% of their earnings to the government. (Yes, that counts as well.) No, the underground will keep right on ticking.

The second claim destroyed is that it'll eliminate the IRS. Actually, perhaps we'll remove the IRS. But we still have to send the taxes to some agency, and the government is going to want to ensure we send all 23% which means investigators, and they'll need a support network. And don't forget the folk who have to make decisions of Solomon - remember the working from home bit? How much of your electrical bill should contain an embedded tax, and what proportion should be free of such?

But in the last post I said I'd mention not only the underground economy, I'd also discuss scams. Note that scams mean more rules and investigators to counter. If you think it's going to be easy...

Some scams are going to be subtle and narrow. You use 10% of your house as office but claim 11%, and variations on that theme. More blatantly, you make up a business that absorbs most of your expenses. hmmm, I'll be a professional blogger, selling adspace and my collected works. OK, now my computer and my internet connection are at the reduced rate. Given the nature of blogging, which means a lot of things that happen to me can be listed as part of the job, well, most of the things I do are tax-exempt. They're research. Sure, it can be countered. I can get audited - oops, IRS again. By the way, substitute freelance journalist for blogger. The rules are already in place for them for income taxes, and they're rather complex as you might imagine. Doing it as sales tax isn't going to make it less complex.

Or here's a nifty one. There is no tax on used goods, only new. So I buy used junk and refurbish it and sell it. Is that a scam? maybe. But it means I completely bypass having to pay the tax. So how do I make it a scam? I buy office equipment for my office - a business expense. I "use" (keep) the equipment for a week. I sell the stuff as used goods - no tax, essentially new. A variation? OK, how about those wonderful dealer plates on cars you see running around. The dealer buys the cars as they currently do (They're usually franchises, not subsidiaries). Every member of the staff, however, is required to drive lot cars, and to do so for a period of at least a week. Now I count the car as "used", and put it on the used car lot. I can sell it for what I paid plus up to 30% more and STILL sell it for less than the schmuck selling "new" cars. Oh, wait, that's too blatant? OK, let's lease cars instead. A monthly lease is probably good enough. Since I'm going to make 30%, I can afford to lose money on the leases and their tax (rents - especially of new goods - are 'end-user retail'.)

OK, one more thing and I'll be done. Off the scams, back to the underground, and specifically to criminals. We're going to catch those criminals. They buy something and the people/company from whom they buy pays the tax. Right? Wrong. Ask yourself a silly question - why do these criminals use cash instead of checks and electronic transfers? Why, because cash can't be traced and doesn't raise flags about unreported income. So, you're a car dealer. And Joe Smith offers you a slice above your normal profit but will pay cash, all you have to do is fudge the sale. So Joe Smith pays 85 instead of 100, and you get an additional 8. Hide it? Call it leased for a while (heck, do the paperwork), then move it through returned, used-car inventory, and sold used goods. use 3 of that extra 8 to 'legitimize' the lease because you only pay 23% of the money recieved (lease agreement) not the total value of the car. That way your books are clean in addition to the profit you made.

Other criminals who still won't pay taxes? Burglars (selling used goods).

So let's recap. Fairtax won't eliminate the need for an IRS - heck, it won't make the rules any simpler. It won't give everyone all their money. It won't cause the tax-shirkers to pay their fair share. It's not simple (once you look into it). It's not workable. It's not fair.

Don't fall for the scam. Repeat after me:

"If it sounds too good to be true, it probably is."

debunking FairTax, II

I should have pointed out that according to the FairTax authors, the workers get to keep all their pay. This means that the cost of workers to the employer doesn't decrease - he can pay the government the withholding, or he can pay the worker.

This is important because of the rebuttal I sense coming. Basically, if you chain the full 23% reduction in costs, everyone comes out ahead - or so the argument goes. And they're right.

If our example wholesaler can cut ALL the costs by 23% and cuts his gross income by 23%, his profits increase by about $200 per month (from about $7500 to $7700). Which means our retailer can sell his goods at the original price and get $7700.

As I just demonstrated, however, what FairTax giveth it taketh away. Either the employee gets to keep what he's paying in income taxes OR the employer can reduce the total cost by 23%. Let's return to our wholesaler. Of the $90,000, 1/3 or $30,000 is employee pay and - according to FairTax - irreducible. So for him to reduce his gross by 23% - to $77000 - and make even the $7500 after-tax profit he had before he has to reduce the remaining $60,000 of costs to $39,500. That's a deduction of over 34%. 23% allegedly comes from the cut costs further up the chain, and another percent or two comes from no longer having to pay FICA matching - let's be generous and call it 2 percent. That's 25% savings from FAIRTAX, which leaves our employer having to find someplace to cut another 9%. Or he can just leave the sales price high enough to earn the same profit - which means the next link up the chain doesn't get a full 23% reduction in that cost as well as not getting 23% from employee expenses.

There's one more place where costs won't reduce - I want to get this here so I can move to other subjects. That's real estate - EXISTING real estate sales - and more specifically ongoing charges for current mortgages and rents.

If a landlord is running on a (allegedly typical) 5% margin, he simply cannot cut his rent by 23%. But with FairTax, rent's an end-user good. Which means the landlord has to pay 23% of what he brings in to the government. He's got to either get the mortgage payments he is making to the banks reduced, or he's got to increase rent. I think we can picture the fun of increasing rent by 30% (to get the embedded 23% taken care of). And the banks aren't going to reduce the mortgages. Oh, let's be fair - in most cases the bank can indeed reduce the mortgage payment by 23% and still get back more than they loaned. But the monthly dollars in runs into our wholesale/retail problem above -- reduce the money we bring in but not a big chunk of our costs means we start losing money.

And what about the fun of the bank determining if the building to which the mortgage is applying is a retail (taxed) or wholesale (untaxed) property? I'll get into this scamworthy opportunity in a bit, but at this point the bank is tasked with determining the government's authority to take. And to continue review in case part of all of the building changes status (home-based businesses being the basic example here). That means the bank needs MORE people to do the investigation and paperwork - more costs against less income.

It's an irreducible flaw. Businesses lose profits. If your income is from owning a business, you don't get the money you used to get, and in fact go broke. OR -and more likely - you maintain your profit margin which causes everything to jump in price. Most people get to take home more money, but at the same time the price of everything jumps. I believe that's called inflation, though I admit it's driven a bit differently than classic economics patterns it.

I think the next debunk will be the underground economy and other scams. Bear with me, though, as I'm beginning to get some anger and frustration on other topics I want to discuss.

Wednesday, April 19, 2006

debunking FairTax

I recently got into an argument about FairTax - the proposal for a national sales tax to replace "all" other federal taxes, written by Boortz and Linder. I remembered I have my own barrel of ink, so I'll spill a bit here.

As folk may recall, the authors make several claims about their proposal. What I thought I'd do is take most of them on, but only one per post. No, sometimes I have to take on a couple as they're intertwined. Today's writing is such as case, but I think it is the one most damning to their proposal. You get to keep all your pay, and it does a better job of making EVERYONE pay their fair share.

Let us begin by setting up a sample company. Most details don't matter, but the ones that do are:
The company grosses $100,000 per month;
The company nets $10,000 per month pretax;
The company has ten employees, each of which have a gross paycheck of $3,000 per month. They're claiming four dependents on the withholding form, which has a total of $337.83 withheld each month. (OASDI $186.00; Medicare $43.50; Federal Tax 108.33.)
The company has to match the FICA (OASDI and Medicare), that's $229.50 more per employee in expenses.
Finally, our $120,000 per year profit puts us in the worst tax bracket (if we tripled our gross our tax rate goes down - another post). We'll pay $22,250 plus 39% of 20,000 or another $7,800 or a total of $30,050, giving us an annual profit of $89,950 after taxes. Our monthly profit after taxes is $7,495.83 (rounded), with the monthly tax bill being $2,504.17.

Now let's apply the FairTax proposal. The first thing that happens is that the company quits paying everyone's federal taxes. That's $337.83 + 229.50 for each of our ten employees, plus another $2,504.17. We gain $5,675.80 per month. And we have our first conundrum - do we keep it as more profit, or do we give it to the employees, or do we pass along the savings to the next level. Offhand, I believe that what would normally happen is a combination of all three - the company gets a bit more, the employees get a 'raise' in their takehome, and the overall cost goes down. But there's this fly in the ointment, and it's our new fact to add. Specifically, are we retail or wholesale?

Let's assume for the first example that we're wholesale. Since we're not selling to the end user, we don't charge sales tax. In this case the preceding options are as already stated - we can split everything three ways. Again for easy math let's share equally, which means the company's gross sales are $98,108 and change, but our employees take home an extra $184 apiece and the company (meaning me, the owner) keeps an extra $1891. And everyone is happy, right?

Wrong. What if we're retail.

Remember that we no longer pay $5675.80, so we start with a profit margin of $15,675.80. But the FairTax says that 23% of our profit - our "embedded" tax - goes to the federal government. That's a bill of $23,000, giving us a NET LOSS of $7324.80 - neither the customer nor our employees nor we get to keep ANY of the money. Oh, wait - our costs of goods reduced, so maybe we made it up there. Oops, we already decided that everything was so good that the total reduction was 1.891% (1,891 out of the original $100,000). Since our payroll related costs are (now) $26,621.70, our other costs before this began were $63,378.30. The reduction is a whopping $1,198.48, meaning we're STILL short over 6,000.

But, says the FairTax, Everyone should pass along their reduction. Sorry, folk, that only works if EVERYONE passes it all along, and even then it's suspect. Go back up this post, and notice the total savings of our wholesale company. $5,675.80. That doesn't make up for the $7324.80 increased loss.

Our company goes broke. But the wholesale company - at least while we're still selling to the retail company - gets to give everybody more money. Bottom line, the FairTax puts companies out of business unless everybody earns less money.

And that's just a bit different from "you get to take home all your money." Unless, of course, they're being disingenuous -- after all, you get it all, it's just less than it was when the Feds took a Federal Income Tax withdrawal.

Thursday, April 13, 2006

What are your plans for next year?

Or more scarily - what do you expect to do after we attack Iran?

hmmm. Let me get that one out of the way. I expect the US will attack Iran within a year. Mainly, I expect it to happen before the 2006 elections, but I can see it being delayed till March of 2007. While I could stop with "that's my opinion and if you don't like it quit reading," I feel you're adult enough to deserve an explanation. Besides, it's simple:

Bush is not a nuance kind of guy.

Every defense I've seen about the discussions require the president to be operating with finesse and nuance. If the president were Clinton or Gore or Kerry or McCain it might be possible, but not Bush. Bush has stated quite plainly that he wants Iran to do two things: dismantle their nuke development (power and weapon both); change the way their regime works. Neither is going to be done willingly by the Iranian leadership. And compromise isn't likely - compromise is a form of nuance and Bush doesn't do nuance. Furthehr, Bush has made plain that either you win or you lose -and partly winning is losing.

So, we're going to attack Iran. The question is when. For that I'm not being real subtle either. Bottom line, every time the President has beat the drums of war his popularity has gone up. The GOP's election coordinators have made it clear that the plan is to ride Bush's coattails (or else, in some cases). It helps if the wearer of the coattails is flying high, and that brings us back to the bounce from the drums. And after that... In addition to Bush not being nuanced, he's not real patient. Suggestions that he delay some of his failed initiatives - social security for example - were completely ignored.

So much for the digression, back to what I really wanted to discuss. Economic wobbles.

When the US attacks Iran we can count on the price of oil spiking. How much and how long depends on whether oil gets stopped but the spike's inevitable, and at this point I think $100 per barrel is the minimum. The ripple effects are: Gasoline and natural gas prices climb. That's going to have some impact on everything manufactured with petroleum products (fertilizer and plastics) and on everything transported from plant to store (everything, pretty much). Also, I expect to see... call it inflation panic. Regardless how bad it looks, everyone's going to start by assuming the worst. The immediate and obvious things will be the attempts to hoard gasoline and other stocks. Not quite so swift and obvious will be the people who go into hunker-down mode. The ones who are on the edge credit-wise, who will decide its time to bail. Foreclose or abandon some things, perhaps a general bankruptcy, either way they'll tighten their belts and close their wallets.

I think the first result, overall, will be inflationary. But it gets wild from there. See the tightened belts above, and consider the housing situation. Pretty much most economists and market watchers think the housing market is, at best, saturated if not in a full-blown bubble. A tightening of belts makes housing collapse in on itself, which is deflationary overall. Want to start riding the headache I've been chasing? What do you get when you have major inflationary and deflationary drivers in motion? What are the results if they're left in balance (cost of gas driven items goes up, money available goes down)? My answer? Stagflation.

My guess is that the fed declines to ride the balance and instead decides denying one or the other problem - stagnant economy (especially the suddenly growing unemployment rate) or inflation. Based on comments and discussions when reviewing the late 197os, I'm guessing they decide stagnation is worse, and push to print more money. Note that word "push". One glaring weakness of the fed is that it has one tool - interest rates. They're not really that high, yet. If they're not high enough - if they can't be cut enough - then the fed loses control. I suspect they'll ask the treasury department to just flat-out print more money.

So to some -and yes I've been superficial - competing inflationary and deflationary pressures whipsaw us for a couple of months till they stabilize in a stagflation. At that point if not before the fed starts slashing rates again, accepting high inflation so as to spur economic growth. Inflation isn't as ugly as deflation in its effects on businesses and employees. It's not good or pretty, just less ugly. caveat - all else being equal. Hyperinflation's something else again and requires serious re-examination.

Again, I don't know how deep it'll go. For what it's worth, despite all the economic bad news and poor fundamentals of our nation, I think we're still pretty strong. At worst we hurt a lot. I don't see total collapse in any way or fashion, though. Just some rough riding for a couple of years.

So what do we do about it in preparation? I'll be doing the following things.

I've set up so that the day we actually invade I buy gold and silver. Actually, I'm buying some gold and silver now (yes, at ~$600 per ounce). The day this happens I expect I'll be lucky to catch it at double the previous day's price, and I'll still consider that a bargain. I'll buy literally as much as I can while still keeping my cash accounts (bank, investment organ, that sort of thing) open. And it's distinctly possible that I'll buy gold with every earned dollar that isn't going directly to paying a debt within a couple of days. I figure for at least a few months I'll be better off buying it, then selling it a couple of weeks later for the (relative) net profit. When things look stable I'll stop that plan.

I'm also reviewing my job and its likelihood of continuing. That for me is very high. Oh, I've little doubt my duties will change - we'll probably have to cut some people and everyone pick up the slack. But it'll probably stick. Even better, it's not likely to see an attempt to cut wages during the brief deflation/stagflation period. Now it'll lag on the inflation side which sucks, but I can still get a jump on it all.

And my debt load is low. Literally less than a third of my takehome pay is tied up in paying off debts. While things might get tight for a while waiting for wages to catch up with cost of living jumps, I'll come out the winner on the loans. An important point here is that my loans are in fixed rates - they can't jump with changes in the prime. Credit cards? Clear and paid off every month. If you're carrying cards and can't get them cleared that way, consider a debt consolidation loan with a fixed rate. And then burn your cards. [As an alternative, lock them in a safe deposit vault. If you have to have them you can get them, but they're not available for 'ooh that looks good how much sold' events.]

I've been building my capabilities at some production and labor skills (I'm a service person). It's not a major moneymaker, but it's stuff that folk are willing to purchase even in hard times. I'll be making and selling in the rough times.

I've also prestocked some household goods. A "storm pantry" of food and basic goods to buffer any rough rides is, I think, mandatory. I recommend groceries for a month minimum if you're in my situation. It doesn't have to be an intensely varied selection, just something to get you through the rough. I will point out that some people recommend even more, but most of them are also planning for near-apocalyptic situations. If you think you could be out of work for six months then six months of standby food is probably a good idea even with unemployment benefits - because that's another wage that'll seriously lag inflation.

Back to investments, I expect most of the companies in which I hold stock to have a serious decline in earnings and stock price. However, I'm also confident they'll all ride the storm. I've some money in bonds as well. I'll point out here that it's the US that's going to take the brunt of this storm, but it's going to splash on every country in the world since we're the number one customer. Pick a foreign stock or bond by all means, but try to be aware of that company and nation's US burden. I just don't expect anyone to come out smelling like a rose, only that some will hurt less than others. For the record, I like Canada and I like Switzerland with almost no reservations. Others have problems OR I've not done enough research to be comfortable.

Getting a handle on inflation and deflation

This isn't the "upcoming post" of last post's mention. Instead it's an attempt to educate - myself as well as any readers. Inflation and deflation are confusing, and a lot of people mix cause with effect with, well, an inability to grasp what's happening. I'm going to start with analogy, but I'll try not to stretch it too far.

Instead of money, we're going to consider shares in a company. There are 100 shareholders, each with 100 shares for a total of 10,000 shares. Each shareholder's worth is 1% of the total

If we inflate the number of shares available - say, we add another 10,000 shares - the practical value of each share is less. It used to take 5001 shares to win a vote. Now it takes 10,001. Now it's possible that things will balance - that each shareholder will get 100 additional shares for a total of 200 shares. It still takes 51 voters to win the vote, but they need to use 10,200. That's inflation - still the same share, but more actual pieces.

Let's say that we cut the shares in half - deflating the total. Now the win needs just over half of 5,000 shares, which if everyone has equal shares means it needs 'only' 2,550 shares. The price of a victory is now 2550 instead of 5100 - we've had a 50% deflation.

Now that doesn't look to bad, does it? Unfortunately it's not that simple. The first complexity - and in my opinion the greatest one - is that we have more than one thing, and these things change at different speeds. I won't bother stretching the above analogy. Instead we're going to jump to the 'hard' one to understand - deflation - and how it hurts.

We own a business. It makes widgets, and we have a 10% net income margin. That 90% is (for ease of this exercise) broken into nine elements each costing 10% - 1 set of wages (production staff and sales staff), 1 for each of 5 parts, 1 for building and 1 for equipment, and 1 for utilities (power, water, gasoline for transporters, etc.) My wages are an annual contract, three of my parts are ordered and billed quarterly with the other two are monthly, the building and the equipment are long-term payments (greater than five years), and the utilities are can adjust with 30 days notice. For simplicity, we've started the clock for all these at the same instant. And each adjustment is going to be for full deflation - that is, each of the above parts of 10% become 9% at the appropriate time.

Deflation of 10% strikes - people are only willing to spend 90% of what they were spending per widget.
The first month I make 0 - I'm still spending 90 but only getting 90. Month 2 (perfect world) all the monthly expenses adjust. That's two of the parts and the utilities. Expenses of 87 means I make 3. Months 2 and 3 are each another 3 profit. Starting month 4 I get to adjust the other three parts - 84% expenses make profit up to 6. I have no more increase till next year when I get to try to persuade my employees to take a cut. It's a perfect world, they agree, and I'm making 7. That's 7 on a gross of 90. If I was rolling half back into the company and living on the other half, I've gone from 5 to 3.5 - still more than my employees make, but a 30% cut in pay for a 10% deflationary period.

And that's a simple example with everyone agreeing to adjust in timely fashion.

Now, a key thing to point out above is that eventually everything adjusts. Reality is that the adjustments are going to vary in time and degree. Conventional wisdom is that those to whom money is owed (and yes, this includes employees owed wages) benefit from a deflation. Reality is that this is true only until the adjustment occurs AND so long as the person owed is able to retain the difference. In other words, let us assume George makes $2000 per month (after taxes). If George is paying $1000 in rent and $200 in utilities and $250 for a car plus $50 for gas and $400 in groceries and (finally) $100 in entertainment, he's spending it all. It's likely the purchasing power of his income toward entertainment will increase more, which means he can buy more for the same $100, the same for a bit less, or save for rough times. Rough times? What if his income is adjusted before the rent and car are adjusted? Using the easy 10% math, he got a whopping $1 from utilities, then his wage went and dropped to $1800, and even if he buys NO entertainment he's looking at $1900 in out-flow. Yes, cut the groceries - hopefully they'll adjust soon so he can get $330 worth for his $300, but that may not be soon.

Do you begin to see the pain? It hits the business, and it hits the wage-earner. And some folk have such a narrow margin, or they've too much in costs that can't or won't be adjusted for the change, that they lose money. Something has to give, whether it's George just selling the car or giving up and declaring bankruptcy.

Know what? I'm not going to do this exercise for inflation. We've been living with that for, well, since before WWII. It's been with us so long we take it for granted - cost of living just goes up a bit, and our wages keep pace, and so we spend about the same proportion of our wage on the same stuff more or less, and gripe at the lag from cost of living increases to wage increases.

There are more complexities and issue, but I think I'll stop there. That's deflation and its ills. And, subtly, the good - if you're holding or owed a non-adjustable amount more than you owe then your relative wealth (purchase power) increases. Big if there.

Guessing the housing revaluation

Yes, I think there's a housing bubble. Or to be a bit more accurate, there are a lot of bubbles in the US of varying size, most of which are at least somewhat connected. That's a bit different than the stock bubble which was basically over one area. But I digress.

For the decades prior to about 1996, median new house prices tended to increase in line with inflation, adjusting for size of the house. (A 2000 square foot is worth more than 1500 square feet regardless of inflation, and median house sizes have been creeping up as well. But I'm going to ignore that for a now.) In 1996, median new house prices increased at levels well above the rates of inflation - nationwide at about double the rate, and some places at rates... right.

Anyway, I have an idea as to where we'll see housing prices go when the bubble(s) pop. Find the price of comparable property in 1996 and add 34%. 34% is 3 percent inflation per year for 10 years compounded, and gives us a decent ballpark. Add1 percent per year the house was built after 1996. So if a house was 100,000 then it's probably "worth" 134,000 now. If a house which in 1996 would have been 100,000 was new in 2001, it's got a nominal base of 139,000 - 34% plus 5%. Is this perfect? no. Is it a workable guess? I'm going to run with it.

Nationwide, new house prices have increased some 55-60% since 1996. That means nationwide we're looking at about a 20% drop - or stagnation in growth till the "natural" price catches up. If, that is, the bubble pops. And in a 'perfect' world.

Personally, I think the actual adjustment will depend on the severity of the pp. If it's a pinhole leak - in most ways the ideal solution - what'll happen is that house prices will increase at rates less than inflation. And - I think - they'd not bottom at the 'natural' price but rather a bit above it. On the other hand, if the prices deflate - go negative - it'll definitely reach the natural rate and probably go a bit past it, only to climb again. Again the extreme is a severe plunge - say, 50% of total cost in a quarter - in which case the climb back will stabilize below the 'natural value'.

How severe is the pop going to be? That's the big question, really. In my opinion it depends on how many distractors are going on at the same time. The more balls in the air, the more likely this one gets dropped when something else gets priority. I've more on that in an upcoming post.