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Bailouts In Brief

As the headlines continue to herald one multi-billion government payout after another, I thought it would be interesting to total them up. Luckily for me, CNNMoney already took care of it - listing the program, amount promised, and amount allocated thus far. The results are quite staggering.

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You Can't Inflate a Burst Bubble

Commentary on the state of the economy:

Perhaps some of these steps were necessary. But taken as a whole, these extraordinary measures point to a bipartisan Washington culture that's unwilling to let go of the past.

Peter Schiff of Euro Pacific Capital put it well last Friday: "Jobs must be lost in the service sector so that labor can be reallocated towards goods production. Asset prices, for both stocks and real estate, must decline to levels appropriate for current circumstances ... By postponing these adjustments we merely assure an even more painful transition in the future."

Now that the housing bubble, stock market bubble and commodities bubble have popped, the market is trying to adjust to non-bubbly conditions. Laws and regulations that interfere with that process can delay that adjustment and prolong the recession. (If a failing business is artificially propped up, valuable resources are being wasted rather than being used for productive purposes.)

Plus, the money for these bailouts has to come from somewhere. Last month Bloomberg News put the tab so far at $9.7 trillion, enough to hand each U.S. household a check for around $92,000, or pay off 90 percent of home mortgages in the country.

That money, of course, will come from taxes. We'll borrow some from China, the largest foreign holder of Treasury debt, with the promise of paying it back with interest. Some will come from the Federal Reserve printing it, a move that devalues the greenback and leads to taxation through inflation.

At some point, though, the bailout costs will simply become too immense. George Mason University economics professor Russ Roberts wrote this week: "We can't keep GM and AIG and Fannie and Freddie and every insolvent bank and every mortgage afloat. It can't be done. It's not a strategy. It's just desperation to avoid pain. We're going to have to start letting them fail. Sooner is better than later. Otherwise, we continue to throw good money after bad."

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Key Concept - Ricardian Equivalence

Ricardian Equivalence is an economic theory that postulates debt-financed government spending will leave demand unchanged. It suggests that it does not matter whether a government finances its spending with debt or a tax increase, the effect on total level of demand in an economy will be the same.

According to the theory, the public will save any excess money received to pay for the inevitable future tax increases. In an extreme case, current generations will save the money and bequeath it to future generations to pay the bill.

The theory, developed by the 19th century political economist David Ricardo (who also was a pioneer in the description of comparative advantage), rests on several key assumptions:

1. A perfect capital market - all players can borrow or save as much as is required at a fixed rate which is the same for all persons at a given date
2. Fixed government spending path
3. Inter-generational concern - The increased taxes may not be paid by the current generation. Current individuals would need to have concern for their descendants.
4. Rational citizens

Obviously these are assumptions that are on shaky footing in our current world, which tends to cause the theory to lose some validity. Since the theory doesn't hold up completely, government stimulus plans can affect the economy, and may explain standard Keynesian theory where bond financed spending has a bigger effect than tax financed spending.

However, while perhaps not perfect, it certainly can explain some behavior that will temper the effectiveness of government stimulus programs. Many people use their stimulus checks to pay down debts, thus leaving more ability for payment of future tax increases.

It also brings up moral issues about financing current spending by writing debt to be paid by future generations that have no say in the process. Even if issuing debt does give an increase in demand for the economy, the recipient of the benefit and the payer of the debt should both be willing participants.

Refs:
wikipedia, investopedia

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7 Dollar Gas?

Here's a little more pessimism for you. This report, by CIBC World Markets, predicts $150-200/barrel oil and $6-7.00 gasoline in the next two years. The report also predicts that these prices will remove millions of cars from the roads; primarily older, less fuel efficient vehicles owned by the poor.

As gasoline prices climb inexorably, American driving habits are going to have to undergo a massive change, mimicking the driving habits long adopted by Europeans who have faced much higher gas prices. Average miles driven will likely fall by as much as 15%, while the market share of light trucks, SUVs and vans will be literally halved, reversing the trend of the last fifteen years. But the most fundamental, and unprecedented change will be in the number of vehicles on the road.

Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today—a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks (see pages 4-8). Many of those in the exit lane will be low income Americans from households earning less than $25,000 per year. Incredibly, over 10 million of those American households own more than one car.

Soon they won’t own any.

The article also touches on alternatives, mainly public transportation. We in America have loathed public transportation. There are many reasons for this. For one, we enjoy our freedom...to travel when, where, how and with whom we so choose. As this luxury becomes more expensive, many of us will no longer be able to have this freedom. The question then becomes, "Will we have any alternatives?".

Is this a realistic estimate? While $7 per gallon gasoline prices certainly took people off the road in Europe, you cannot simply impose Europe on America. Most
Europeans have access to public transport by virtue of the broad infrastructure policies European countries have pursued. In marked contrast, America built massive highways and freeways for a population that owned and used their own cars to get around.

Hence we must narrow our focus on those Americans where a European style shift in driving habits is currently feasible. People can’t simply abandon their cars if they
have no other means of getting around, particularly in terms of getting work. There must be at least a public transport alternative.

I agree with this assessment, and also offer this observation. Sure, we have invested heavily in roads rather than rail...we have made our bed and now must lay in it...but, population densities are much higher in Europe. We can leverage public transportation in high density areas, but the rural poor will have much fewer options. Well managed, sensible public transportation should be part of the solution, but it will only be a portion. We must employ a wide range of alternatives to keep our nation strong.

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Economic Stimulus Package

If you filed a 2007 tax return and didn't make too much money, you should be getting a check from the IRS very soon (or already have). I've been thinking about ways to spend mine. It pretty much breaks down into two categories, Save or Spend. I've tried to think of ways to spend that would actually stimulate 'y/our' economy, and/or stave off the LE. Most could be considered investments, for what it's worth.

Save (not much fun, but probably the best bet):

1. Pay off debts (higher, revolving interest first, of course)
2. Start or increase emergency fund
3. Retirement account

Spend (I guess what we are 'supposed' to do):

1. Replace your most used light bulbs with CFLs (compact florescent lamp)
2. Get a Scangauge II
3. Plant a fruit bearing tree in your yard (or two, check the pollination requirements)
4. Start or expand your 'victory' garden
5. Replace an old appliance that you hate with a new Energy Star one (old fridges, washers and freezers are a good choice)
6. Upgrade your ride
1. Late 90s/early '00s econoboxes are more likely a better economic solution than a new hybrid (link for good used FE cars)
   
2. If you really want to get into hypermiling, get a manual transmission
7. Look into solar power generation or hot water heating for your home (or other alternate energy sources)
   
1. There are many govt (fed and state) incentives now
2. I'll post more on this at a later date
8. Heat your home
   

Or you could always get a Wii...

Any other ideas?

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$4 Gas

I apologize for the rather long note, and this may not be news to you, but I thought I'd summarize some things that have caught my attention the past few months. If you are ahead of the curve already, my hat's off to you.

-You may (or may not) have heard rumblings in the press that gasoline will reach $4.00/gallon in the near future.

http://seattletimes.nwsource.com/html/politics/2004250068_bush29.html

-You also may have heard that even at current prices, folks are having to cut back spending in other areas to cover fuel costs. This, in turn, is not helping our economy that is already saddled with high consumer debt, low personal savings, and a slumping housing market.

http://www.nytimes.com/2008/02/27/business/27gas.html?_r=2&scp=2&sq=Jad+Mouawad&st=nyt&oref=slogin&oref=slogin

-You also may (or not) believe in Global Warming, i.e. Climate Change.

http://www.climatecrisis.net/

-And finally, you may remember that we are in several wars and other conflicts around the globe, most of which are being contested within very close proximity to most of the world's known oil reserves. And most of those said oil reserves are owned by folks who don't really like us (Venezuela's Chavez, Iran's Ahmadinejad, etc.)

So we've got:
An economic dependence on a finite fuel source that is in more and more demand every day...
That could be causing the end the world as we know it...
Most of which is controlled by dictators, despots, terrorists and a coterie of other ne'er-do-wells...

While complex problems rarely have simple solutions, lately I have begun to get interested in things that can be done about them.

Now, it's easy to blame the big fish, (Exxon/Mobil, Bush, OPEC, Auto Companies) and give up, but I realized that the main part of the problem was closer to home...

It's me.

Maybe not totally me, but all the 'mes' that make up America and use all this once cheap gas.

I drive about 35-40 miles per day commuting round trip in mostly stop-n-go city driving conditions, and my 2002 Taurus is EPA estimated to get 18/25 mpg for city/hwy. I would tend to get about 250 miles per 12.5 gal tank for around 20 mpg. After pondering all these problems I began to wonder if there was a way that I could reduce the gas I was consuming, obviously with as little inconvenience as possible. I, like most people, do not like to be inconvenienced. I remembered seeing a portion of a t.v. show about a guy who could get over 100mpg out of his hybrid. I was reasonably skeptical at the time, but I remembered he said he had techniques to increase fuel economy for any type of vehicle. I began to do a little googling to see what I could find.

I found 'Hypermiling', the study and practice of achieving higher than EPA estimated fuel economy for any vehicle.

Hypermiling includes very basic and somewhat obvious techniques such as conservative acceleration and increased tire pressures...as well as some advanced maneuvers that allow even more savings.

"Beating the EPA, the Why's and How's of Hypermiling"

The main points:
1. No rapid acceleration
2. Drive the speed limit
3. Anticipate traffic slow downs/stop lights (i.e. don't accelerate into a stop)
3. Maintain proper tire inflation
4. Don't idle excessively or unnecessarily
5. Don't run accessories unnecessarily

Nothing too crazy, really. (Some of the advanced techniques I would consider to be more trouble/work/dangerous than any increase would warrant, however)

My first tank after beginning to incorporate these very basic techniques I went 276 miles on 12.6 gallons: 21.9 mpg...nearly a 10% increase. With some practice (I admit slower acceleration can be difficult to learn) and some other experimentation, my last tank took me 304.4 miles on 11.6 gallons: about 26.2 mpg...about 30%! I also hope to continue to optimize several areas and improve even more. Here's a link to my mileage log:

http://www.cleanmpg.com/index.php?page=garage&displayunits=MPG(US)&viewcar=917

Anyways, a 20%-30% decrease in fuel costs equates to several hundred dollars per year for me.

12.5 Gal/week @ $3 * 52 wks = about $1950/yr => 25% of $1950 = about $480.
12.5 Gal/week @ $4 * 52 wks = about $2600/yr => 25% of $2600 = about $650

To some, 500 bucks may not seem like much over the course of a year, but keep in mind that the tax rebate checks they are sending out in a few months that are supposed to keep us out of recession are not much more than that...even before you get taxed on them next year...and before we all pay back the interest to the Chinese.

If you start running the math for modest fuel economy increases for millions of drivers at even higher fuel costs...the savings for the country would quickly shoot into the billions, perhaps hundreds of billions.

Now I'll be the first to admit there is no such thing as a free lunch. It is taking a bit of time and effort to study and implement these techniques. But just give 'em a shot for a tank or two. I found myself more in tune with the road, more alert to traffic, and actually less stressed. Surprisingly, since most of my driving is stop and go anyway, my commute time is nearly identical. You'd be amazed at how many people will quickly dart around you towards the next red light, just to have you coast right in behind them, just in time for the light to turn green.

Maybe you already do all of these techniques naturally, and limit your driving to the bear minimum already.

Perhaps I had a real 'lead foot' as they say, and maybe others wouldn't get the same results that I have so far...but I'd like to think I'm not too far off from the average driver.

Perhaps it may be too much to ask for the 'ugly American' to turn off his SUV and walk in to McDonalds rather than idling in the drive-thru, or get off the cell and see that the light is red up ahead.

But I'd still consider myself a proud 'ugly American' and I think given the proper motivation, we can do great things.

So I'm asking you to give it a shot...maybe even log on to www.cleanmpg.com and graph your progress. Above all, just think about efficiency a bit and you'll naturally find some areas that are easy to correct.

Thanks for your time

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