Beyond Economics

The End of Growth and Time for a New Era

QE: How does the Fed do it?

A student sent me a clever YouTube video cartoon trying to explain QE2. It scores some points on Bernanke, the Fed, and Goldman Sachs but either intentionally or unintentionally confuses demand-pull and cost-push inflation to push its point of view. It is nevertheless very entertaining.

QE Explained / A Response

I was left left with the question that is the title of this post and found this, which seemed to sum it up nicely: (From: Quora.com)

Why does the Fed buy treasury bonds through Goldman Sachs instead of from the treasury?  How did this happen?

Vince de Baca, AB Econ from Princeton, Wharton MBA
AB Econ from Princeton, Wharton MBA Economics

  • The Fed buys securities from banks to inject liquidity into those institutions to ensure a low cost credit supply and bank liquidity.
  • If the Fed bought from the Treasury, the funds could only be used to close fiscal deficits, not having the same benefits to the financial sector and economy at large (eg lower interest rates, bank solvency).
  • Also if the Treasury exclusively sold bonds to the Fed, it would diminish market confidence in the dollar and likely create inflationary expectations.
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How Companies Bypass the U.S. Corporate Income-Tax Rate

China, Electric Cars, and the Future

Coda - Chinese electric car to be built in US


With all the hand-wringing in the business press about China manipulating its currency, we may be missing the big picture. In a recent op-ed piece in The New Your Times, Thomas Freidman (The World is Flat) calls attention to how China is aggressively investing in the future. Thankfully, the US government helped save GM from itself and we at least have the Chevy Volt, which could be a game changer in its own way.


Their Moon Shot and Ours
By Thomas L. Friedman, 9/25/2010

China Inc. just named its dream team of 16-state-owned enterprises to move China off oil and into the next industrial growth engine: electric cars.

China is doing moon shots. Yes, that’s plural. When I say “moon shots” I mean big, multibillion-dollar,25-year-horizon, game-changing investments. China has at least four going now: one is building a network of ultramodern airports; another is building a web of high-speed trains connecting major cities; a third is in bioscience, where the Beijing Genomics Institute this year ordered 128 DNA sequencers — from America — giving China the largest number in the world in one institute to launch its own stem cell/genetic engineering industry; and, finally, Beijing just announced that it was providing $15 billion in seed money for the country’s leading auto and battery companies to create an electric car industry, starting in 20 pilot cities.

Not to worry. America today also has its own multibillion-dollar, 25-year-horizon, game-changing moon shot: fixing Afghanistan.

If we both now create the market incentives for consumers to buy electric cars, and the plug-in infrastructure for people to drive them everywhere, it will be a win-win moon shot for both countries. The electric car industry will flourish in the U.S. and China, and together we’ll tackle the next challenge: using auto battery innovations to build big storage batteries for wind and solar. However, if only China puts the gasoline prices and infrastructure in place, the industry will gravitate there. It will be a moon shot for them, a hobby for us, and you’ll import your new electric car from China just like you’re now importing your oil from Saudi Arabia.

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Gulf Oil Leak News, Images, Data, and Diagrams – 7/5

For More Technical Information and Updates

Atlantic Tropical Storm Forcast

A History Presidential Promises About Energy Policy
(From The Daily Show, 6/16)

Diagram of Relief Well Drilling Operation

First (large) diagram shows approximate scale for depth operations. Second (smaller) diagram shows current progress as of 7/5.

6/6 Update: Capture underway

The first image is the #4 cap before being placed on top of the BOP after the shear cut several days ago. The second image shows the cap in place with oil and gas escaping. Capture rates will be reported every morning. It was 10,000 BPD (barrels per day as of 6/6). This could be anywhere from 1/2 to more than 2/3 (BP’s CEO says “vast majority”) of the approximate total flow from the BOP, depending on what original flow estimate you use, ranging from 12,000 to 20,000. The maximum capture is 15,000 with the single existing recovery ship. More accurate estimates should be available soon, taking into account the increased flow from the full release (not limited by the kink) and also the increase that might occur from a relief of back pressure. The trick now is to increase the capture rate carefully to the maximum possible without sucking in sea water, i.e. there will, by necessity, have to be some oil escaping since there is not a tight seal. There is still the option of trying the diamond cut again to get a tighter seal. Note: the third diagram shows the contraption above the cap. Remember that there is a pipe within a pipe.

6/3: Fine Cut Fails: Back to Top Hat

Yesterday, the first cut of the major length of the riser pipe using the large “shear” cut method was successful. This took weight off the entire contraption. During the second cut at the top of the 5-story BOP (blowout preventer), the finer “diamond” cut saw jammed but was then freed. However, BP has now given up on the finer cut and will have to use the more crude shear cut method to remove the riser pipe. This means that they cannot get a nearly tight seal using the LMRP cap. They will now have to go back to the more open Top Hat device.

The bottom diagram shows the LMRP (Lower Marine Riser Package) Cap procedure. Also shown is a smaller BOP. BP has now been told by the government that they cannot attempt to install a second BOP because of problems within the current BOP. As a result of the failed top kill effort, it is not entirely clear how oil is making its way through and which systems within it are working. There is a risk that trying to block the current BOP with might create pressure within that could cause the entire unit to blow and release even more oil. Thus, the capture attempt that is underway until the long-term relieve wells can be drilled.

General Information Sources

How will the Gulf oil situation affect oil prices? Here is one take from Business Day at The New York Times:

Deepwater wells in the Gulf produce around 1.3 million barrels a day, against total global output of roughly 85 million. A two-year moratorium on new drilling would reduce potential output by only 300,000 barrels a day in 2015, the International Energy Agency calculates — a piffling 0.4 percent of current world production. Oil titans in the Middle East could easily pick up the slack. Saudi Arabia alone has four million barrels a day of spare capacity, PFC Energy reckons.

The fate of deepwater drilling in the United States does, of course, matter much more to the likes of BP and Exxon Mobil, which are shut out of many of the world’s biggest oil fields by national oil companies. But the United States government can afford to wait until oil majors show they know how to plug a deepwater well. America’s army of auto-crazy drivers won’t suffer.

Oil Flow Rates and Natural Seepage

BP initially claimed that only 1,000 bd (barrels per day) were being released. This was soon upped by the government and BP to 5,000 bd, a figure that was used for weeks even though some scientific observers estimated numbers in orders of magnitude higher. An internal BP memo from the 1,000 bd days was relased by Ed Markey today that indicated BP thought it was 14,000 bd even back then. BP is now claiming to be capturing about 15,000 bd with little visible reduction in the apparent flow rate. (It’s hard to say, other factors might also have increased the flow once the riser was cut. Nevertheless, BP has certainly underplayed this all along.

This diagram, in a post from The Oil Drum, compares natural seeps to “normal” oil spills/leaks which occur from oil exploration and drilling. For the Gulf of Mexico, natural seepage is about 2,700 bd, which may be the source of some of the stray tar balls and distant plumes and sheens. (So BP may be technically correct to claim that not everything is from the leak.) However, given the proportions shown in the diagram, normal spill rates would be only about 260-270 bd compared to to the at least 15,000 bd that BP is now recovering which may or may not be making a significant dent.

Technical Update Video
Although produced on 5/24, this is an interesting explanation and animation of the various methods that have recently been tried and will be tried in the next few weeks. It is from BP and contains some expected spin, but nevertheless it is very educational for those interested in the technological and logistical complexity.

BP’s Now Failed “Top Kill” Plan
On Saturday, the Top Kill method was abandoned after three days of intensive efforts including 16 Junk Shots (sending pieces of debris such as shredded tires into the blow-out preventer to try and jam it up).
Diagram from the latest issue of The Economist (detailed explanation)

Oil in the Marshes

More Images of the Disaster
This is an amazing set of pictures, both horrific and beautiful at the same time.

Other Videos & Illustrations

Unconventional Natural Gas: A Game Changer?

Perhaps. You may have heard about hydraulic fracturing (“fracing”, pronounced “fracking”) and horizontal drilling, a technique to release natural gas trapped in hardy shale-rock formations. These sources of natual gas around the world have been known about for some time but not thought to be economically viable. This article from The Economist has major implications for geopolitics, climate change, and energy independence based on both the quantity and location of these unconventional reserves.

NIMBY and environmental concerns may be a contraint. The Comments at the bottom are worth reading and provide both support and skepticism.

An Unconventional Glut
Newly economic, widely distributed sources are shifting the balance of power in the world’s gas markets
Mar 11th 2010 | HOUSTON | From The Economist print edition

The availability of abundant reserves [of unconventional natural gas] in North America contrasts with the narrowing of Western firms’ oil opportunities elsewhere in recent years. Politics was largely to blame, as surging commodity prices emboldened resource-rich countries such as Russia and Venezuela to restrict foreign access to their hydrocarbons. “The problem is, where do you go? It’s either in deep water or in countries that aren’t accessible.” This is forcing big oil companies to get gassier…The oil majors watched from the sidelines as more entrepreneurial drillers proved shale’s viability. Now they want to join in.

[One] idea that would have ramifications for the global oil sector is to gasify transport. T. Boone Pickens, a corporate raider turned energy speculator, has launched a campaign to promote this, and has support from the gas industry. All this is some way off. The coal industry will not surrender the power sector without a fight. The gasification of transport, if it happens, could also take a less direct form, with cars fuelled by electricity generated from gas.

A gasified American economy would have profound effects on both international politics and the battle against climate change. Displacement of oil by natural gas would strengthen a trend away from crude in rich countries, where the IEA believes demand has already peaked as a result of the recent spike in oil prices.

But two factors could reverse the picture again. The first surrounds the uncertainty about how fruitful shale exploration will be outside North America. Second, there are reasons for caution above ground, too. Despite natural gas’s greener credentials than oil’s or coal’s, shale drilling has critics among environmentalists, who worry that water sources will be poisoned and landscapes despoiled.

Bill Gates, Climate Change, & Conservation

In a recent article in The Huffington Post, Bill gates suggests that we should focus on innovation rather than conservation in order to bring about the CO2 reductions needed to stave off climate change. I think he does make some good points here.

Why We Need Innovation, Not Just Insulation (1/20/2010)

If the goal is to get the transportation and electrical sectors down to zero emissions you clearly need innovation that leads to entirely new approaches to generating power.  Should society spend a lot of time trying to insulate houses and telling people to turn off lights or should it spend time on accelerating innovation?… you can never insulate your way to anything close to zero no matter what advocates of resource efficiency say. You can never reduce consumerism to anything close to zero…In fact it is doubtful that any such efforts in the rich countries will even offset the increase coming from richer lifestyles in places like China, India, Brazil, Indonesia, Mexico, etc.

With that kind of clarity, people will understand the need to get to zero and begin to grasp the scope and scale of innovation that is needed…There just isn’t enough work going on today to get us to where we need to go.

What I am afraid of is that Gates’ point will be misinterpreted and misused. Americans, especially, are afraid that the implications of climate change mean a great sacrifice in our way of life. I think that this is why the denial campaign has been so successful of late. If climate change isn’t really happening or is a hoax, we won’t have to change afterall. However, when it soon becomes unavoidably obvious that the earth is warming and the climate is being disrupted, the denial campaign will change its tune and latch on to part of Gates’ logic, i.e. that conservation won’t actually help very much so let’s just wait for a technological fix or geoengineering to save us, no point in undue sacrifice.

This article from TreeHuggar makes a few other countervailing points.

Bill Gates’ Vision of Combating Climate Change is Mostly Myopic (1/21/2010)

I’m not sure any advocate of energy efficiency would say it can get you to zero emissions…What some of the most vocal of them do say though is that we could reduce electricity demand by 34% through efficiency improvements in the United States. That alone could replace 62% of coal fired electricity.

…there’s a huge difference between a standard of consumption based on human need and ecological sustainability and the dominant paradigm of consumerism-based, aggregate-growth-fetish culture spreading around the world.

The scale of the conjoined issues of climate change, peak fossil energy, population growth, biodiversity loss, and natural resource overconsumption are such that even those of us who deal with them on a day in day out basis have trouble grasping the big picture all at once…We’re talking massive paradigm shift, behavioral changes, economic changes, even changes in consciousness I’d argue, to deal with them.

…but there is no one solution…no silver bullet.

Wall Street Bankers Pretending to be Clueless

1/14/2010 – From the testimony of four of the nation’s top bankers before the Financial Crisis Inquiry Commission charged with determining the causes of the nation’s financial debacle.

Whatever we did, whatever the standards of the time were, it didn’t work out well.
– Lloyd Blankfein, CEO – Goldman Sachs

Somehow we just missed that, ah, you know, that home prices don’t go up forever.
– Jamie Dimon, CEO – JPMorgan Chase

These guys either take us for fools or are willing to look stupid themselves. They did get ot climb ack into their limos and laugh all the way back to their banks and bonuses. You can see these statements and more in a segment of the Colbert Report from Thursday night. It leads into a satire on derivatives. Very funny and clever.

The Word – Honor Bound (7 minutes)

Your honor was so precious to the banks that they bundled it with other people’s honor, cut that into securitized honor derivatives, and sold it to Wall Street honor speculators…until the honor bubble burst…but, that doesn’t mean that they are responsible.

Public Discourse: If Socrates were alive today

Socrates in America: Arguing to death
From The Economist – 12/17/09

This article comments on the sorry state of discourse in politics and public policy in America as it might be seen by Socrates if he were around today. For those who are interested, the full article provides a primer on the life and times of Socrates (Athens of the fifth century BC).

[Socrates] life…was dedicated to the love of wisdom…It was [he] who made the momentous “turn” of Western thought away from speculation about the composition of the physical world and towards the liberal questions of morality, justice, virtue and politics.

Socrates would…interrogate America’s politicians, talk-radio and cable-television pundits in search of honest discussions that lead to truth, and thereby expose their confusion, contradictions and ignorance. He would avail himself of America’s…freedom of speech, and simultaneously be horrified by the speciousness of the speech that Americans choose to make.

Visiting America today, Socrates might have dropped in on last summer’s “town hall” meetings, in which members of the public allegedly came to debate the reform of health care with their elected representatives. Socrates would have beheld hysterical firebrands shouting that America’s president and senators were Marxists, Nazis or both.

In America today, Socrates would recognize sophists and rhetoricians in partisan spin doctors such as Karl Rove and David Axelrod or equally in talk-show hosts such as Sean Hannity and Keith Olbermann. [Suggesting that] a master rhetorician unqualified in medicine could get himself elected as surgeon general over a qualified doctor who is not rhetorically gifted.

What is missing in both public and private discussions of political, economic, and social issues:

Socrates’s alternative was “good” conversation or dialectic. To converse originally meant to turn towards one another, in order to find a common humanity and to move closer to the truth of something. Dialectic, in other words, is decidedly not about winning or losing, because all the conversants are ennobled by it. It is a joint search…He hoped to bring all involved to a higher state of awareness.

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What Would Andrew Jackson Do?

Today, some of us, myself included, have tolerated the disturbing policy response so far in the hopes that this was a necessary step for achieving a long-term solution. But as a recent WSJ article “Loopholes Lurk in Bank Bill” highlights the red flags all over proposed legislation, there does not seem to be any substantial source of opposition to banking interests in Washington. While certain individuals are fighting tirelessly, this is the exception rather than the rule.

In a recent Bloomberg opinion column Cowboy Banks Get Big Bucks as Indians Get Little from Ann Woolner

 Over here you have the bazillions of U.S. bucks doled out to Wall Street’s cowboys for reckless conduct that wrecked the world’s economy.Over there you have a $3.4 billion federal settlement with people from whom the U.S. had been essentially stealing for more than 100 years.

To seek what was owed them, American Indians spent 13 years in court where judge after judge decried the government’s gross mismanagement of their funds and “mendacity” in litigation.

And yet it took that long for the Justice Department to step up to the plate and agree to pay more than a pittance.

If the Indians had been AIG, the $3.4 billion settlement announced this week would have been many times larger. The real AIG — insurance giant American International Group Inc. — sopped up $180 billion in government aid after helping to create the economic havoc felt around the world.

The Indians sought no bailout, no handout when they filed suit in 1996 to claim royalties due them for oil, gas, timber, mining and grazing rights to lands allotted them under an 1887 agreement with the federal government.

I would just like to take a moment to look back to our seventh President of the US, Andrew Jackson. While he may have been a son of a gun, we knew what we were getting. He was a fierce opponent of the bankers and fought to take them down. He stood up for those he swore to serve (so just the whites) and although he did a terrible job once he defeated the Second Bank of the US, at least he never backed down and got the job done.

While Andrew Jackson was a Native-American slaughtering racist, EVEN HE REFUSED to bow down before the banks. Nowadays, our political leaders continue to treat American Indians like dirt, AND NOW they don’t even have the courage to stand up to powerful interests. JUST FANTASTIC!

I would argue Andrew Jackson was a product of his time to a certain degree, the biggotry, prejudice etc, but if our current leaders are also a product of their era, what adjectives come to mind?

I probably shouldn’t go there!

Here’s an interesting Andrew Jackson quote:

I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin!

You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, I will rout you out.

 

How Goldman Sachs and Wall Street Pull the Strings

These are two lengthy but very readable articles from Matt Taibbi in Rolling Stone that I posted on in August but want to highlight again now.

The Big Takeover The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution (3/19/2009)

It’s over — we’re officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.

The Great American Bubble Machine From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again (7/13/2009)

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.

Here is an extended excerpt on Bubble #6: Cap and Trade

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