Professor Elam

Friday Feb 12 2010

In Tipping Point, Malcom Gladwell concludes
that big events can start in a small way. This can work positively. New York
starts enforcing payment of subway tokens and crime recedes, at all levels. Or
it can work negatively, teenage pregnancy becomes the new normal and no one
does much about it. Nassim Taleb in Black
Swan suggests that unexpected and unusual events are not as unusual as one
might think. We are there, now.

Tipping
points abound, rather like flocks of Black Swans. The population of Greece is
half that of Texas. Its Gross Domestic Product at $334 B is about one fourth
that of Texas at $1.2 billion. But it has failed to meet the financial
requirements of being a member of the European Economic Union, EU. Greece, and
Portugal, Ireland, and Spain, have exceeded their debt to production ratios.
Ie, hey Mom we broke the bank.  Before joining the EU, Greece, ala Argentina, would have just
printed more money, eventually devalued the drachma, and paid off in cheaper
currency.   It might be a
pariah ala Argentina for a few years but hey, Citi has to lend to somebody. Now
Greece cannot print Euros so it goes begging for help. Yes, European bailouts
are on the horizon. But of course, Greece is just leading the pack so to speak.
All the Euro socialist  economies
do the same thing, soak up about half their productive resources and re
distribute the wealth. Sensing that upper confiscatory limit on wealth
creation, Europe settles under the USA nuclear umbrella to enjoy a latte at a
fashionable sidewalk café.  But,
how much debt can be minted to save every country in this shape?  Dubai actually issued bonds by the way
to obtain its $10B rescue.

Meanwhile,
the states of the United States are in the same position. California is 13% of
the USA GDP while Greece is a far smaller component of Euroland.   Our point is that California is
in dire straits from Sacramento to the large cities of San Francisco and Los
Angeles and even to bankrupt Vallejo.   The promises on current wages given sagging sales and
property taxes cannot be met. And the promises on defined benefit plans, (see
GM) certainly are out of the question. Nevada is considering closing the UNV
Law School, out of money.

We
wish we could say that the members of government unions have read Gladwell and
Taleb and are acting responsibly. But this is not a column of fiction.   Instead like the spoiled NYC
garbage workers of 1976, they are demanding ever more.

Now
comes word that even the White House admits the Federal Government will never
run a balanced budget again. Ever. 
Again ignoring the Black Swans landing on the Potomac, a $1.6 Trillion
deficit is planed. That might work short term if there was buying power for
that much debt. But alas, US Households do not have the spare change and the
Chinese are saying no thanks to another helping of soon to be down graded US
junk bonds. Indeed, Marc Faber just this past week predicted a USA default.
Moody’s , never early to the debt downgrade party, even warns that the USA AAA
rating is in doubt.

In
the meantime the irony is that eh US buck is attracting funds as a ‘safe
haven.’ This is because it is more safe than the Euro but not safe as in well,
if you had other choices….

The
result is that short term a dollar rally took oil down to the low $70s. Oil
popped up  as the dollar ran into
resistance this week.  But like
Freddie Krueger the dollar is not finished with its run. We still expect oil to
decline to the $60s.

And
then?  Well the only final option
is that investors and we use that term advisedly, will demand a greater rate of
interest on US debt. Bernake suggested he will raise a half point and the
Chinese are tightening bank reserve requirements.   When does US Debt get to its interest rate tipping
point?  We do not know but will
attempt to keep you posted.

When
that happens, expect a late 1970s replay all over again. Commodity prices will
soar, including oil.   Oil
prices will not be soaring on demand which is down already, but on a sea of
depreciating dollars.

All
this may sound a bit much for a family newspaper in West Texas. But, I find
that when I delivered a talk on oil in West Texas, well even the janitors and
waiters sat down to listen.

Western
Civilization began in Greece, It may wind down there as well.

More
from Dennis  at www.professorelam.typepad.com