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A Bearish Outlook for 2009

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The end of the cheap energy era will announce itself as the end of conventional "growth" and the shrinking back of activity, wealth, and populations. Contraction will come as a great shock to a world of conventionally programmed economists. They will toil and sweat to account for it, and they will probably be wrong.

The "era" of cheap energy never even existed. I don't even know what he means? Oil? Because the times of cheap oil celebrated its funeral in 1979 -

We have been creating and demanding more energy exponentially since the Industrial Revolution. Coal, Oil, Gas,

Uranium. We haven't even began to exploit the latter to its full extent while there are even coal deposits untapped.

I've just come from Brazil. Its socialist, one would asume by extension, environmentalist government, and populace, was PROUD of its offshore drillings and its expanding economy (credit free!). Huge pipelayers docked within the most beautiful natural reserve island I've seen, only added to the beauty of the scene.

I can't imagine the outrage of the nation that first found a use for petroleoum when faced with candidates in both tickets opposing further national drilling.

I can't tell if the American economy will contraoct. After all, and in the long term, America is an exceptional civilization that allows innovation as no other place on earth does. Who could have predicted search engines and a long tail economy?

What seems sadly true however, is that this is time for revenge. And all parties involved seem eager to go on with the redeeming procedure. After decolonization America, the one truly beneficious empire, is being erected (by the Muslims with explicit sanction from Multiculturalists at home) as the straw man that will pay for Europe's crimes against savagery.

If America's going to contract economically it's because the victims are so eager to get to the altar.

My motto for the new year: "no more crybabies!"
But one is about to assume office!

It all makes perfect sense.

One thing you can be sure about, the World economy is not contracting.

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I think it's really tough to predict how things will go, because one is primarily trying to guess what various politicians will do. I cannot begin to guess for 2009, but my guess for the next 5 years or so is that the economy will keep trying to "correct", and -- on balance -- politicians will fight the correction. So, in real terms, I expect a stagnant-to-slightly-downward medium-term; at the same time, I assume the government will inflate. So, I assume that we will see a slightly upward move in nominal terms. Together, I assume the most likely scenario will be "stagflation". [To visualize how low it can go, rent Deathwish :) ]

Of course, if it begins to turn out differently, I'll change my outlook.

Things could be worse than I expect if the government does more than simply handle our current economic problems badly. They could add completely new strains on the economy. Three possibilities are: "universal" health-care, union card-check, and global-warming restrictions. I do expect a lot of rhetoric on these, and some moves. However, if the government makes a serious change in any of these three areas, I'll have to take my assumptions down a notch.

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You see, the only way to make economic predictions is based on Government intervention. I could perfectly predict how the North Korean economy will go... we can all do that. In a truly free market it would be impossible, or it would relegated to the difficult but slightly more scientific job of calculating speed growth trends in microprocessors - and beyond.

Obama has promises change. The best thing that could happen is that he's just another politician, and therefore the promise is a lie. But if he's a Kennedy, then he'll have to play one of those cards. But since he's obviously pragmatic, he'll probably play a little bit of each hot issue.

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You see, the only way to make economic predictions is based on Government intervention. I could perfectly predict how the North Korean economy will go... we can all do that. In a truly free market it would be impossible, or it would relegated to the difficult but slightly more scientific job of calculating speed growth trends in microprocessors - and beyond.
I think the highest variability (using a 5-10 year horizon) would not be in the North Korean/Soviet Russia situation, nor in the fully free economy. Rather, it would be in the mixed economy where there is a lot of freedom, and yet the government has the ability to change (and is likely to) some important rules of the game. What you have in this type of situation, which is not present in the other two extreme cases, is a higher likelihood of structural changes. Edited by softwareNerd
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The "era" of cheap energy never even existed. I don't even know what he means? Oil? Because the times of cheap oil celebrated its funeral in 1979 -

Energy is cheap and plentiful these days, never mind oil prices. Just think of how much energy you make use of directly during the average day. Your car and appliances use a lot of energy. If you add indirect use, like what was needed to produce and deliver all you own, the amount is staggering. And rather than break you, that much consumption of energy makes your life more prosperous.

Regarding oil prices, remember that in the mid-80s a barrel of oil could be had for as little as US $10. And even recently when the price of a barrel went way over US $ 100, that merely made people reduce their oil consumption, not eliminate it entirely. Not to mention oil is now hovering around US $40 per barrel.

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The one thing that seems most likely about the near-term is that the U.S. government is going to spend a lot of money on "infrastructure". The incoming President seems to be concentrating on his plan to spend about $1 trillion, in the hope of "creating jobs". There does not appear to be much opposition to this idea. Unlike the $700 billion TARP, this spending will be positioned as help for Main Street. There will be people who oppose it, but I think it's a very good bet that it will pass.

There are three possible sources for the money:

  • Inflation
  • Debt financed domestically
  • Debt financed by foreigners

There is some intellectual support for the inflation route. The typical Keynesian argument is that we need to provide the economy with a shot of extra money. From the left, Nobel winner Krugman complains that the 50 governors are acting like 50 Hoovers. From the right, Bernanke favors some degree of inflation as well. He thinks of himself as a "student of the depression", and believes that Hoover should have inflated. Finally, there are some people who say that the U.S. has needed to cut back on real wages ever since the dot.com bust; but, since wages are "sticky on the downside" in nominal terms, it's politically easier to cut back in real terms via inflation.

Financing debt domestically is another option, but the least likely. Most people who matter realize that it will simply take resources from one area and deploy them elsewhere. (Inflation does the same, but is much harder to trace, and takes a while to act.)

Financing debt externally is a likely option. Many governments have faulty views on economics -- the U.S. is not alone. Many governments will see the purchase of U.S. debt as a way to support the dollar. China, for instance, has briefly paused its recent policy of letting the dollar slide against the RMB. If they decide that they can live with the extra inflation, and that they simply have to subsidize their exporters, they might extend the pause. In terms of the real flow of goods, they will continue to send consumer goods to the U.S., and will use the proceeds (via the U.S. government) to employ people in the U.S., creating U.S. "infrastructure". This option could keep price-rises in check, and give us a nice little boom-let, while we all evade the answer to: "what's next?" Nevertheless, with the world being what it is, and with no other country being ready to step up, the U.S. could well cash in (once more) on its brand image as world's "reliable super-power".

I guess the U.S. will use inflation - -as the Fed indicated recently -- until prices start to rise. Then, they will switch to debt, and the rest of the world will happily oblige.

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To put it in simple terms, the source of our current economic problems is the fact that there is excessive debt at all levels of society, from individual all the way up to government. A debt problem can't be fixed with taking on more debt, it's mathematically impossible.

Bernanke is trying to inflate right now, but his problem is that the debt is unwinding(inherently deflationary) faster than he can print. Obama is going to try to push through his spending bill, but there's also the distinct possibility that the Bond Market puts the Chrysler building up his ass if he tries.

The ugly little secret for TPTB is that they don't nearly have the power they wish or most people think they have; for example, contrary to popular opinion, the Fed doesn't set interest rates, the market does. Sure, he can influence them, but if the market want to go in an entirely different direction it will. Recently when Bernanke lowered the Fed target rate to "between zero and .25 percent" from 1 percent, it meant nothing, as the market rate was already at around 15 basis points, or .15 percent.

.Govs can propose all the spending they want, but if the bond market says "I don't think so" then it ain't happening.

Here's a very good explanation for what's happening and why it won't work, and quite possibly will end up in a Bond market dislocation. http://market-ticker.org/archives/709-Why-...-Cant-Work.html

Edited by eesmith4
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