Obama’s Economic Policy

Can you believe that winter is officially over? Wow, it was a cold couple of months. Makes you want to say, "So much for global warming."

Except it's not global warming anymore. Now it's called "climate change." Y'see, the cold winter wasn't a sign of warming. It was a sign of global climate change. Got that? Mankind is burning too much fossil fuel, goes the thesis. So the cold gets colder. The hot gets hotter. The wet gets wetter. The dry gets dryer. And the confusion gets what? More confusing?

So is this game rigged? No matter what the evidence is, goes the argument, just pay no attention to the man behind the curtain. It's all climate change. And that, of course, means that the government knows best. Especially when a certain class of people ― with the right policy credentials ― are running the government. As in the expression, "Trust us. We're experts from the government. We're going to help you." Or as the narrator used to say at the beginning of the show The Outer Limits, "There is nothing wrong with your television set." Or as the cops say as you drive past a crash scene today, "Move along, folks. There's nothing to see here." Yep. No looky-loo. Just climb aboard the Climate Change Railway Express. No peeking while we raise your taxes.

Decades of Malinvestment Become Apparent

Meanwhile, over the past winter, the economy was in the tank. The deep troubles got deeper. It makes me recall many of those hard times stories I used to hear from family and friends about the Great Depression. It makes me glad I listened.

This past winter, it seemed like all those decades of what the Austrian economists call malinvestment finally found a place in the light of day. But it's not as if the whole tale were some sort of state secret, like the Venona files at the National Security Agency or something. Really, the nation's industrial and productive decline was fairly clear all along if you knew what you were seeing. The problem has been hiding in plain sight since August 1971, when President Nixon killed any semblance of a gold-backed dollar.

Or it's kind of like Peak Oil. M. King Hubbert drew the fundamental Peak Oil graph back in the 1950s. Heck, I heard Hubbert give his speech in fall 1977. I saw Peak Oil in action back when I was working at Gulf Oil Co. in the late 1970s. It was no shock to me, at least, when the world's crude oil output curve finally maxed out in 2006.

What? Nobody told you that the crude curve maxed out? Hey, the world's marginal oil output is now mostly natural gas liquids. It means that we're blowing down the gas caps.

It's why I like resource and energy companies, companies that bring real stuff to the surface. It's why I'll keep writing about energy and resources in a publication like ESI.

Obama's Economic Policy

I try to avoid getting too "political" in these pages, aside from my rants about issues affecting energy policy, resource policy and the like. So today I'm just going to quote my friend James Howard Kunstler, a longtime Democrat and supporter of Barack Obama in the recent election.

Kunstler just published his comments on the Obama appearance on the CBS News show 60 Minutes on Sunday, March 22. According to Kunstler, Obama "may perfectly represent the majority who elected him…because he also appears to be in full-commanding denial of the realities overtaking our American experience. Those realities include the fact that we can't possibly return to the easy-credit and no-money-down 'consumer' economy, no matter how many nominal dollars get shoveled into the fiery furnaces of banks too big to fail."

After describing the economic policies coming out of Congress and the new presidential administration, Kunstler continues: "Lending on the scale that became normal over the last decade is, for sure, the one thing that we will not recover. We turn around in 2009 to find ourselves a much poorer nation than we thought we were a year ago, especially among that broad range of formerly middle-class wage-earners who lived so luxuriously until yesterday. The public can't process this reality, and the president, for all his relaxed charm, is either not ready to articulate it, or can't process it himself."

Kunstler describes the process of the Fed releasing new currency ― created out of thin air ― to buy up Treasury debt. He comments: "It would be sententious to explain how this destroys currencies, but wherever 'monetizing debt' has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence."

In my view, Jim Kunstler is exactly on target with his comments. I'm watching the shenanigans in Washington with something approaching utter fear. It's why I'm recommending investments in gold and energy plays.

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Spend, Borrow, Tax, Inflate

I'm truly worried about our future. The things that are going on in the U.S. economy are not sustainable, and I don't just mean "happy motoring" into the Peak Oil future. The whole economy is on the edge. I don't see anything on the political or policy horizon that offers any semblance of hope. Nothing. It's just spend, spend, spend. Borrow, borrow, borrow. And tax, tax, tax.

What's in all of this for you? What's in it for me? A lot of inflation, most likely. That's why you need to buy gold with 5-10% of your portfolio. And have more of your portfolio in good, solid mining firms.

Building on Kunstler's comments just a bit more, the Obama economic policy assumes that someone out there will still buy U.S. Treasury paper. But will that happen? The best customers for U.S. debt are distinctly unenthusiastic about adding to their holdings.

The Chinese already own a trillion dollars or so in Treasury bills that are depreciating in value. Besides, China needs a continent full of new infrastructure, plus social spending for 1.3 billion people. And don't forget the new navy China is planning, with which to police its interests from Africa to the central Pacific Ocean and onto South America. All of this will sop up funds China once used to buy U.S. securities.

Another large traditional customer for U.S. debt is Japan. But Japan is running a current account deficit. It lacks the large numbers of dollars to recycle.

In the Middle East, the petro states are no longer receiving a flood of dollars from high-priced oil ($147 per barrel last July). Don't count on them to buy up U.S. Treasuries.

The bottom line is I don't know ― and I don't know anyone else who knows ― where the buyers will come from to absorb all the new debt that the Obama and congressional spending plans are going to generate. Something has to give. It's going to be the long-term value of the dollar. I expect to see a lot of fuel poured onto the fires of inflation.

Lots of responses again, so less from me and right to it…

"Please stop whining about all the great free stuff you give us. We all know that there are no free lunches. Your Whiskey and Gunpowder and other Agora 'freebies' are paid for by the subscribers to your paid newsletters (including myself).

"Your daily missives are appreciated for the perspectives they give us readers and the occasional gem which helps us with our investing strategy. For that we thank you but please stop saying that it is 'free'.

"If you are suggesting that those who do not buy any of your services get W&G for free, consider the costs of having to wade through any of your issues with exposure to the barrage of products for sale. It is the price we pay for the service you offer."

You're welcome.

"Dear Gary:

"Perhaps 'the socialist' has confused peace of mind and bondage. Or perhaps they are one and the same to him. He seemingly cries out for bondage so that peace of mind is obtained. I'm sorry, fella, you're worthless - to yourself and to everybody else. You've worked for the government - producing nothing (economically speaking) for your entire 'career'. You've been a parasite on the productive masses. You have absolutely no right to open your trap regarding capitalism - you have absolutely no experiential knowledge of it!

"You're obviously full of fear (find God - it'll help) and willing to trade your freedom for bondage - for some contrived and false sense of security. I recommend you move to Russia - should be nirvana for someone of your ilk.

"It takes strong MEN of will and courage to live free and strive to live free. Calls for government support and help don't come from MEN - they come from the weak and cowardly children who haven't been weaned. GROW UP - it is still available in this country to stand and live free. Grow up and become secure in yourself and stand on your own two feet - and be a MAN. Then maybe you can have an opinion on the economy - and it certainly won't be the crap you're spouting now. Have a nice day - and shut up!"

Ouch. That is harsh…but thanks for the backup.

"It is written in the Book of Amos, 'Can two walk together, except they be agreed?' The answer should be obvious. (That is why it is called a rhetorical question.) For those who think Socialism is good, might I suggest that we would both be happier if you were move to a socialist country and leave ours alone? If you don't, then sooner or later we'll be fighting each other with more than just words.

"And speaking of words let me offer this little bit of common sense. If someone has an idea and turns it into a profitable business, we say that they were able to capitalize on their idea. We don't say they were able to socialize on it. If you can understand why that is, then you can understand why socialism can never succeed over the long run.

"I close with one of my favorite quotes:

"'When the people fear their government, there is tyranny; when the government fears the people, there is liberty.'"
― Thomas Jefferson

Amen. And now the requisite dissenter from our ranks…

"Regarding the letter at the end of this newsletter,

"The industries which created much wealth in the US are or were socialized - agriculture, military and defense, transportation. The idea that the US is 'marching towards socialism' is a farce. The US has practiced socialism in one form or another from the beginning of the 20th century. Thank goodness.

"The fact that so many decry the socialization of health care, for instance, simply exposes their ignorance. The reason government is good for certain aspects of civilization (sorry, Gary) is that those aspects are far larger than any one person, family, or city. Think about the US highway system, built on free land (from who? the government, technically the Native Americans but I digress). Health Care. Education. Vaccinations. Mind you, I'm not saying the government always performs these tasks well, but that is often due to the fact that its hands are tied by those that claim they shouldn't be shouldered with these responsibilities. So the USDA is in charge of regulating the food supply, but is given only a fraction of the funds and manpower necessary to do the job. Then it is conveniently pointed to as an example of a failed government.

"If each and every person was responsible for each and every aspect of our lives, we would only have time to inspect each plant we picked over for bugs. Collective responsibility is inherent in any large society; indeed, it is the defining quality. Only in the United States, with its large swaths of empty land, can citizens delude themselves into believing they are cut off from the rest of society while driving on a road paved by someone else, in a vehicle built somewhere else, using fuel refined from natural materials extracted elsewhere, expelling pollution whose effects will go far beyond the lone driver's worldview.

"BTW, I enjoy your newsletter for its unique point of view and snappy writing even if I rarely agree with it. Know thy enemies..."

Reader, you misunderstand.

I never conceded that the interstate system, health care, and public education were good things. Allow me to address highways again very briefly.

Rail was expanded by private industry and it was a lot more energy and cost efficient than the current government-propped system of individual car ownership and highways. I'm with our good friend James Howard Kunstler on this one. Highways are the concrete manifestation of collectivist misinvestment. But don't worry; pretty soon everyone will be clamoring for a decent, working rail system again.

And whence the idea that capitalism means a breakdown in specialization and trade? It nourishes these things.

We agree on this, however; the nation-state and the empires they grow into wouldn't be possible without the sort of centralized control that is beyond the purview of the capitalism that builds cities and regions. If you want empire, you have to push aside monkey wrenches like capitalism, liberty and justice.

We'll return to this conversation on Friday with the inestimable Bill Bonner.

A Shooter sent this in just in time for today's send and to show that I'm not the only one who sees value in the city-state…

"I have a home in South Florida and one in New Mexico. It's a plane ride through one stop to change planes in DFW. But two distinctly different worlds far as Socialism versus Individual Capitalism are concerned.

"The urban centers of America are definitely collectivist. My theory: the whole system hangs on a thread. One hurricane, one epidemic of the flu brought in with Canadian tourists, even an overly long and large traffic jam because electricity failure shut off the traffic light system and you have total chaos. Hence, urbanites pray for a Nanny State to save them. Urban living has dampened the ability to think fast while standing on one's own two feet.

"A further theory on the future of America is that those of us who plan on surviving the coming economic crises will be living in City-States, something along the order of Ancient Greece's Athens and Sparta model. To survive, the City-State will become self-contained and individual, with trading options between the City-States.

"Hey, sounds like shades of the Tenth Amendment"

I love it. Thanks for writing in. And nice timing.