Brief Notes on the US Economy
• Job Report Expectations – By the time you read this the jobs report will be out. At the time of the writing, it was not yet released but there has been plenty of assessment and anticipation. The assertion was that hiring would have stepped up as the schools started to open and the impact of the surge faded a little. There will be loads of interpretations and analysis over the next few days but one factor will attract the most attention. Why are there so many jobs going unfilled? There are basically three answers. The first is that many of the jobs on offer require skills that people lack, the second is that many of the jobs do not pay enough for people with mortgages and families and other expenses and the third is that retirement has pulled tens of thousands of experienced people out of the workforce and replacing them is tough. The number one means by which companies are filling their employment needs is by poaching workers from one another.
• Slow Process – The bottom line for the US government is that it is designed not to work very well. From the very beginning the decision was made to stress representation over efficiency. The three branches of government are supposed to be suspicious of one another and to exert control. Each can undo the work of the other and they do. In other democracies, the ruling party controls nearly everything and the executive barely notices the legislature as long as they hold the majority position. That is efficient but can lead to the tyranny of the majority. The US is convoluted and confused and rarely exhibits even a semblance of unity but that reflects the diversity in the population as a whole. When there is a decision reached it can be assumed that most everybody agrees – as rare as these occasions are.
• Global Tax Deal Gets Closer – The majority of the largest economies have been supporting some kind of global minimum tax as they have become very weary of watching their biggest corporations dodging their tax obligations by setting up in low tax haven countries. They make their money in these bigger nations, produce there and in all relevant ways they operate in these richer nations. The global minimum is designed to curtail the practice but the tax haven states have been against it for obvious reasons. The major tax haven for most has been Ireland and now they have decided to support the idea and that clears a major hurdle. The idea is for a 15% minimum but there are plenty of steps and details yet to be completed.
Brief Notes on the Global Economy
• China Moves to Boost Coal Production – The showdown between climate change and energy production was always anticipated and this year it has arrived. The winner is clearly energy production. After a ferocious effort to convince the world that China takes climate change seriously the country has now made an abrupt shift and is radically boosting the use of coal. Chinese coal is among the worst varieties in the world – high sulfur brown coal that pollutes. The Chinese have been denied their usual supply of cleaner coal from the US and Australia and have turned to their own supplies and that means considerably more greenhouse gas. The bottom line is consumers and industry have rejected paying extremely high prices for energy and have demanded more output – regardless of what this means to climate goals.
• “Zero Covid” Strategy is Being Abandoned – Many nations made a bold assertion just a few months ago. They declared they would pursue a “zero tolerance” strategy regarding the pandemic. This would mean lockdowns and tight restrictions until the virus was eradicated. The problem is that epidemiologists have always asserted this is not possible. Viruses do not work that way – they mutate and evolve and survive. There is no eradication – just management. New Zealand, Vietnam, Singapore and others are now shifting to a strategy that focuses on minimizing the threat without destroying the economy. Emphasis on the most vulnerable, vaccines, providing medical care for the afflicted and understanding that Covid will always be with us.
Surprise! The Politicians Are Not Planning to Destroy the Economy After All
In many ways the last few weeks have seemed like a really bad Hallmark movie. Not the kind that leaves one feeling all warm and fuzzy inside but one that mimics the kind of false drama that typifies the offering. In the Hallmark version we know there will be a ten minute period where we wonder if the heroine and hero will really get together but we know full well they will in the end. The Congressional version has both sides threatening to ruin the credit rating of the largest economy in the world, destroy the livelihoods of thousands of people working for and with the government and plunging the economy into yet another recession. We know everything works out in the end for the Hallmark bunch but we worry that our elected leaders may not be able to set aside their political wars. As expected, the decision was made not to destroy the country after all – at least that is the direction the Senate now seems to be heading in. There appears to be a deal on the table that will extend the debt ceiling into December and then we can go through all this again.
Analysis: For those that want to pore over the gory details of this move there will be plenty of analysis in the days ahead but I want to look at a broader issue. The way that this issue has been handled of late is absurd and I have made that point many times (and I am not alone). It is basically too late to address the core issues that should have been dealt with during the budget process itself. And there are certainly core issues. In the most basic of terms the government spends too much money and raises too little revenue. One or the other of these realities has to change and that is what the fight is always about. One group (usually the GOP) wants to attack the spending side and the other group (usually the Democrats) wants to attack the revenue side with higher taxes. The majority of economists and analysts point out that solving the debt issue will require both – it is far too big a problem to be dealt with by either approach alone.
The bulk of government spending is tied to four categories accounting for more than 75% of the budget. Only 33% of the total budget is considered discretionary. The BIG four are well known by now – Social Security accounts for about 25% of the budget, Medicare and Medicaid account for about 28%, the military takes around 16% and interest on the debt takes another 8%. Every other category of government spending has a share of less than 2.0% (at most). The bottom line is that cutting spending enough to affect the debt would mean going after some very sacred cows and there has been very little enthusiasm for attacking Social Security, Medicare, Medicaid or Defense spending. Cutting EVERYTHING else would barely make a dent in the debt (which is now 110% of the US GDP of over $24 trillion).
That leaves the revenue conversation and that is every bit as awkward. The US is not a low tax nation compared to many in the world but neither is it a high tax country. The corporate rate right now is a little below the average of the OECD nations and the proposed tax hikes would push that rate to slightly above that OECD average. The US is a bit more reliant on income taxes than many nations as others have turned to VAT taxes, consumption taxes, sales taxes and the like. The US not only has to consider hiking taxes to pay for what it wants but needs to examine how it taxes. Much of the current system is a penalty for success – the higher the income the more one is taxed and that would seem to mitigate against making that additional money.
At the end of the day, there are two approaches to setting a budget and neither has been adopted by Congress. The first is to decide what all one wants to do as a government, add up the costs of doing all this and then setting revenue systems to pay for it all. This may end up with taxing people at a 70% or 80% rate if everything that can be thought of is to be financed. The other approach is to determine how much money is available and set spending accordingly. To be honest this is the way that most of us budget. We know what we bring home and spend accordingly (except when we pull out the plastic). The government would declare how high taxes would be, determine other revenue streams and then set spending accordingly. Low taxes would mean reduced services from the government and that would include cuts to the Big Four. The current system employed by Congress is the equivalent of using one’s MasterCard to pay the Visa bill and then deciding to cancel the account before the vendors get paid. That would land us in jail but seems the preferred plan for Congress.
Transitions are Not Easy
At the same time that the latest energy crisis has burst on the scene and roiled markets all over the world, there have been any number of summits and meetings focused on the future of alternative energy. Does this crisis slow down or speed up that transition? Perhaps both.
Analysis: On the one hand, it is obvious that alternatives are not near the point where they can shoulder the bulk of the energy load. Part of the natural gas crisis in Europe is due to the fact the winds have not blown this year and output from the wind farms has been 20% of what was expected. Fossil fuels will account for 70% of global energy even into 2050. On the other hand, the issues of climate change are real and the burning of coal, gas and oil creates the greenhouse effect that affects the climate. Progress has to be made on alternatives. The question is how to maintain both systems simultaneously. To reduce dependence on fossil fuel means developing everything from reliable battery storage (to accommodate the whims of nature) to expanding the installation of these alternatives. That requires a reduction in the expense of these installations. This has been taking place but slowly and it will be a while before these can be constructed without extensive government support of one kind or another. The average person wants power when they need it and at a price they can afford.
Did the Russian Strategy Work?
It would seem so. As quickly as the gas crisis started in Europe it has started to calm down and in both cases the actions of the Russian government was the trigger. The surge in the price of natural gas (more than a 500% hike) was due in large part to the refusal by Russia to ship the gas it had promised to Europe. The vast majority of the gas that fuels Europe comes through the two major pipelines originating in Russia. Nordstream One is in the north (naturally) and to the south there is the Druzhba (most inaccurately named “friendship”) pipeline. When these were constructed, there was debate over whether Europe or Russia was the more vulnerable. The Europeans became very dependent on Russian gas but the Russians were not able to ship the majority of its gas anywhere but Europe. The assumption has been that Europe would always be able to buy from somewhere else if need arose but in reality, that is not always as easy as it sounds.
Analysis: Russia wants to build a second Nordstream pipeline and the Europeans have been dragging their feet on the permissions needed. The decision to withhold gas was an overt threat designed to spur the Europeans to grant that approval. Europe had assumed that it was somewhat immune to this kind of bullying as they had alternatives. There was all that investment into wind power that would substitute for gas and other fossil fuels. The US had promised to supply the LNG needed to offset Russian supplies. All seemed to be playing out as planned until this year and the absence of wind. The supply from this alternative was less than 20% of what had been expected and the US LNG producers decided to ship more to Asia as these buyers were offering more. Once again, the Europeans were in need of that Russian gas.
After letting the Europeans twist in the wind for a few days, the Russians came to their “rescue”. Putin declared that Russia was prepared to stabilize the market that he destabilized and the world expressed relief. The bigger lesson here is that Europe and by extension the world remains vulnerable to this kind of manipulation. Russia wields its energy position like a club and has never been shy about forcing the world to react in ways that benefit Russia. The rest of the world needs to determine what it plans to do about it. There will certainly be more development of alternatives but this year made it clear that reliability is an issue. The US will have to be more reliable in its own right – delivering on those LNG promises.
Olaf Gets the First Shot
The inconclusive German election did not really produce a winner but there was very clearly a loser. The Christian Democrats took the biggest hit as they lost enough seats to land in second place in the Bundestag behind the Social Democrats but both are at about 25% of the vote. The Germans now face a period of coalition building and Olaf Scholz will get first crack. His effort has been dubbed the traffic light coalition due to the three colors of the three parties involved. The Free Democrats are used to this game as they are often part of coalitions but this is new territory for the Greens and they are really the key player now. The big question is which Green leader will be the one in control.
Analysis: Annalena Baerbock has been the dominant personality through much of the election and at one point it appeared she had a shot at being the Chancellor before some of that popularity faded. She is co-leader of the Greens with Robert Habeck. They differ considerably in terms of their approach with Baerbock seen as the pragmatist and Habeck as the purist. If this was to be a “Jamaica Coalition” with the CDU/CSU she would be the clear choice as the center right party would be unwilling to work with Habeck but the combination with the center left gives Habeck a better chance. Baerbock remains the better known and more ambitious of the two but she will need to tilt more towards the purist positions in this coalition.
Right in the middle of this coalition debate comes the energy crisis and that will test the attitude of the German voters. The major reason for the shortage of natural gas has been the manipulation of Russian supply but the failure of the alternative energy plan has played a role as well. There has been little wind this year and the power from wind farms has been 20% of what was expected. Pushing for even more dependence on this kind of source will be tricky as people will be looking at extremely expensive power and unreliable delivery of that power. The people that will suffer most will be the poor as they will have to choose between eating and heating. Given the fact Greens want to deal with both climate change and poverty – they face some very hard choices.
Armada Strategic Intelligence System Starts to Show Some Weaker Numbers
The most recent data from the Strategic Intelligence System is showing some signs of weakness as the pandemic threat reignites around the world. This is consistent with many of the global economic assessments released lately. The projections are still showing progress but it is not as robust. Check this out for yourself, the latest issue has been released. Your two-month trial is absolutely free – no obligations at all. Simply go to www.asisintelligence.com and engage with us. We continue to tweak the report with every issue – adding the content that readers have requested.
Nothing focuses the mind like dependence. The issue of energy is now front and center in Germany and for the most obvious of reasons. The Germans are the dominant buyer of Russian natural gas and they are facing massive price hikes. The future of the relationship between Russia and Germany now depends on what happens with gas.
What We Are Watching – From the Black Owl Report
$197 a Barrel. There was a statistic released yesterday comparing natural gas price inflation and crude oil prices. The highest per-barrel price we have ever had was in June of 2008 when it officially hit $139.96 a barrel (at closing). With that as perspective, there was a statistic released in the UK showing that the natural gas equivalent price today in crude oil would be $197 a barrel (to equate the rise in natural gas price to what it would be in the per barrel oil price). Just imagine what $197 a barrel per oil would do to gas, diesel, heating costs, etc. That’s what natural gas prices in Europe and China are doing to any industry reliant upon it. US natural gas prices are still below brief peaks that we saw in 2008, 2005, and 2000, but European and Asian natural gas prices are breaking records.
Go to www.armada-intel.com/trial for more.
The Great Debate – Feline vs. Canine
As all readers of the BIB (alert and otherwise) are aware – I am a cat guy. This affords me the opportunity to engage in conversations regarding the merits of cats and dogs. The primary argument that is used to convince me of the error of my ways is the unyielding affection that dogs lavish on their people. The running to the door, the tail wagging, the happy faces and so on. We all know the reputation of the aloof cat who scarcely seems to acknowledge the human unless they are operating the can opener. These are myths I say!
I returned home last night after nearly a week on the road. The felines did not exactly race to the door but they expressed various levels of happiness that I was back in the fold. Especially Scoot. She has always been “daddy’s cat” and proceeded to follow me everywhere I went. If I sat down for a second, she was in my lap and dutifully brought toys. She is still hovering this morning and has been sprawled on my desk. Seamus is the “Big Kitten” and has been a bit more subtle but he went to all his favorite lounging spots with the expectation of attention and his purring was enough to rattle the windows. Smoky is Mr. Dignified but even he watched me intently until I came over and he started to purr and murmur before I even touched him. Spike was sacked out but when he woke, I instantly got his patented “high five” gesture. All four milled around me all night. Granted, the feline is not as exuberant as their canine counterparts but one can tell they miss the humans in their lives. I am told they only react because of food but that is a myth as well – I am not the human that feeds them. Gay is the person they associate with that task. They bug her at feeding time of course but also rely on her for a place to plop when it is nap time. The reality is that we are their “clowder” and they prefer it when we are all together. By the way the term clowder derived from clodder and that means a “clotted mass”. That seems apt when I see them all huddled together on the bed when winter arrives.