Sunday, January 30, 2011

Tech world stunned at Egypt's Internet shutdown

The Egyptian government's unprecedented shutdown of Internet and mobile phone access Friday stunned the world's technology community, which questioned whether the country can quickly recover from cutting such a vital link for commerce and communication.

Wednesday, January 26, 2011

Free Market Energy

By Nick Sorrentino
One of the core principals of conservative political and economic thought is that the market must be allowed to work. When the market breathes innovation flourishes, costs come down, and entrepreneurs and businesspeople can make economic decisions based on what will grow their businesses, not how best to avoid red tape. Businesses rise and fall based on the degree to which businesses can deliver a product that meets a need in the market. This is the key economic principal to which most conservatives say they adhere. Why then do we not insist on a free market in energy?

In the United States the debate over energy usually pits the eco-green-left with it’s desire for increased subsidies for “alternative” energy sources versus those on the right for whom increased oil drilling, the increased use of coal, and the increased development of nuclear energy are perceived as the best routes to solving America’s energy challenges in the 21st Century.

Interestingly both general dispositions have a common thread. Neither approach is based in the principals of free market economics.

This is obviously true for the subsidation of “green” energies. When taxpayers are forced to pay for the development of technologies that are “challenged” in a competitive marketplace, we only serve to encourage resentment among some and to create corporate cultures of dependence. This is what has happened to the ethanol industry over the past few years

What is less obvious is the degree to which even mainstream energy sources are anti-market.

Oil, for instance is held up by many as the source of cheap energy that the market demands. It is true that the market does demand petroleum and lots of it, but the degree to which the current oil market is inefficient and propped by government rules, regulations, tax breaks, and outright subsidies is less understood. Is oil really that inexpensive?

It is easy for most common sense conservatives to see why government mandated, taxpayer funded, solar power farms in the Nevada desert are unwise. It is more difficult to pull apart the web of government favors given to the current kings of the energy industry.

One fairly obvious example however of how market dynamics are tossed aside for the benefit of entrenched energy interests is the BP oil spill of last summer.

One of the reasons things went so wrong in the Gulf last year was that BP was drilling nearly a mile under water without the technology readily available to turn off the oil flow if something went wrong. The risk was immense, but it still made economic sense to pursue such drilling for BP. Why?

There are a number of factors, among them a general upward tend in oil prices and increased scarcity, but most of all it was likely the fact that for BP the endeavor appeared to have little downside and huge upside due to the limits of oil spill liability drillers in the US are subject to.

In a nutshell a driller’s liability in the event of an oil spill is capped at $75 million in the United States, with any spill costing between $75 million to $1 billion covered by a pooled industry insurance regime.

For a well that over its lifetime might generate billions in revenue the economic equation is pretty easy to calculate. Why wouldn’t BP drill in a mile of water? There was almost no downside to the endeavor.

It is true that BP was in fact saddled with a $20 billion bill to be paid out over many years. Also the cost of the debacle in the Gulf to it’s reputation was and is very significant. However as the Horizon project was assessed by BP’s planners and accountants, this extra-legal exposure was likely minimized. A catastrophe such as the one in the Gulf of Mexico last summer had never occurred before.

Had the $75 million limit of liability not been in place it is unlikely that BP would have pursued drilling in an environment as inhospitable as 1 mile of water. Had BP’s exposure been unlimited, as it would be in a free market, or alternatively had BP had to pay properly adjusted insurance premiums to compensate for the risk, the planners and accountants in London would very likely have understood that the potential return on the Horizon well was not enough to compensate for the risk. Thus the pain and economic disruption in the Gulf of last summer would likely have never have occurred. The free market would have saved dolphins, pelicans, and barrier islands, to say nothing of the fishing and tourist industries on the south coast.

The drilling liability cap is a subsidy, plain and simple. The citizens of the United States essentially underwrite off-shore drilling for the oil industry and in so doing we undermine the ability of the market to apply it’s discipline. The upside for BP and it’s shareholders is privatized, the downside is socialized.

Additionaly the oil industry is privy to much in the way of tax breaks. The tax code for oil companies has been written over the last century with a multitude of loopholes.

For instance according to the Congressional Budget Office capital investments such as oil field leases and drilling equipment are taxed at an effective rate of 9%. This is versus 25% on such investments for most other businesses in the US. This break is worth billions to the oil industry.

Add the Herculean efforts made by this country to defend the flow of oil, on the high seas, in the Middle East, in Central Asia, and in various other places around the globe, it becomes increasingly clear that oil is not nearly as inexpensive as many believe. In fact it is the defense of such interests that may actually be the greatest subsidy of all for the oil industry.

According to The National Defense Council Foundation (a conservative think tank based in Arlington Virginia) in their 2007 paper The Hidden Cost of Oil: An Update they found;

“In October of 2003, the National Defense Council Foundation released the results of a year-long review of oil-related defense costs that entailed the most comprehensive analysis of that subject ever conducted. The entire order of battle of the United States armed forces was examined down to the battalion or equivalent level, including close scrutiny of roles and mission statements and unit histories. In addition, the entire Department of Defense budget was reviewed to determine if there had been any extraordinary expenditure that could be directly related to protecting oil supplies.

The analysis concluded that the fixed costs of defending Persian Gulf oil amounted to $49.1 billion annually. These estimated, however were based on data compiled prior to the initiation of Operation Iraqi Freedom. As a result, in 2006, the Foundation revisited the issue to take into account any additional outlays that could be reasonably assigned to the protection of oil supplies.

Based on a review of current circumstances, the initial estimate was increased to $137.8 billion.”

The paper can be seen HERE.

The cost of a gallon of gas is in actuality far higher than $3.00 per gallon.

When the real cost of energy is understood, when “externalities,” that is the hidden costs passed on to others by the oil industry are considered, solar, wind, and other so called “alternative” energies suddenly appear much more economically viable.

But what about nuclear?

Unfortunately nuclear, though less costly in terms of “defense,” is also highly subsidized.

Like oil, nuclear benefits from a government sponsored limit of liability in the event of a catastrophic occurrence.

The Price-Andersen act of 1957 protects the nuclear industry from lawsuits arising from the release of radiation and the harm that radiation causes. Liability of up to $10 billion is covered under a quazi public/private no fault insurance fund, and anything beyond $10 billion is then shouldered by the American taxpayer.

Thankfully as yet such limits have not yet been tested. The 3 Mile Island incident in 1979 incurred about $70 million in total liability. However it is easy to see how in the event of a Chernobyl type meltdown with massive economic disruption how the cost of such an event could stretch into the tens of billions. If that happened the owner of the reactor(s) is currently insulated from claims. The American public pay twice. First, in terms of economic dislocation and lives lost, and then again for the claims that result from the disruption. Again the profits are privatized for the company and shareholders, but the downside exposure is on the American taxpayer.

In addition to the Price-Andersen Act, the nuclear industry is privy to huge taxpayer backed loans given to nuclear energy developers.

Such special government sponsored deals have been widely supported by the Republican Party, despite the fact that they undermine a free market in energy generation.

If we are to have a truly informed debate about how best to deal with energy issues we must take the market skewing special deals that legacy energy currently enjoys into account. Such deals increase the barrier to entry for other energy producers, which then in turn feel they must lobby for special deals of their own to compete. This creates a market in which actors are dependent on government intervention to gain market share. This is what we have now.

If we continue to subsidize energy producers, be they wind, nuclear, oil, solar, or something else we will never have a clear picture of the best way forward with energy .

We must realize the actual cost of energy. We must take into account the cost of limits of liability, defense, and even perhaps most importantly the impact of carbon emissions on the globe.

The legacy carriers may indeed turn out to be the best sources of energy, but at this point we don’t truly know. We should work toward a more transparent and free market in energy. The burden of supporting energy producers of any kind should not fall on the taxpayers. The market should determine the best way forward.

* President Obama in the most recent State of the Union speech rightly highlighted the subsidies given to the oil industry. However he did not denounce subsidies in general, in fact he encouraged the expansion of subsidy support for some. It is not the place of government to pick winners and losers in this writer’s opinion. We should however encourage an increasingly level playing field for energy in general and begin the process of desubsidation of all energy. Not a small task, but a good goal.

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Sunday, January 16, 2011

Where in the world is Tunisia? Carthage in chaos.

As my children gather around their interactive globe this morning I smile. The computer voice asks the question. “What is the capital of Tunisia?” They spin the globe around looking for the answer, find it, and press the right button. The globe was a gift from their uncle and aunt currently in Germany. It has been the biggest hit of Christmas.

When I was a child, and even now, I would fall into atlases and maps. I can remember one atlas from my youth that my parents used to have their friends from other countries sign before they passed out of our lives and back to their home country or some other distant post. I was surrounded by geography, and I loved it.

As my children’s computerized globe asked what the capital of Tunisia was this morning it occurred to me that in the past few days the world has been turned upside down in that country. The former president is now in exile and chaos currently fills the streets. But most Americans couldn’t care less. There is a football game on this afternoon and that is the concern. Why in the world should we care about what is going on in some God forsaken corner of the Arab world. It is Arab right? Somewhere over by Saudi Arabia? Whatever, the game is on.

It strikes me how a country such as ours, with bases in every corner of the world, from Europe, to Africa, to the Pacific, and nearly everywhere else, could care so little about the world beyond it’s boarders.

We are much better than we were. Since the attacks of September 11th 2001 at least a good number of Americans have an idea where Iraq and Afghanistan are. One tends to pay attention to the country to which one is deployed or one’s child is deployed. However I would still bet that most Americans would find locating Tunisia on a map challenging.

We do a very poor job of educating our children of the broader world. In fact I can remember as a child that the first indication of which track a child would take in high school, college or non-college, was whether he or she chose to take history or geography in 9th grade. The college kids took history, the non-college kids took Geography. This struck me as ridiculous then, and even more so now.

One should know one’s place on the globe and how it relates to the other places on the globe, or at least have some sense of this. Why is it that we should we care about little Arab Tunisia for instance? How could this past week’s events in the desert state have any impact on our insulated American lives?

Tomorrow they likely will have none. Whether your team covered the spread this afternoon will impact your next week a good bit more than what is happening on the Arab street, especially if you have money on the game. But in the long run the events in Tunisia COULD impact your life in profound ways. They likely won’t, but they could.

In Tunisia the youth have taken to the streets and have deposed their president for life Zine el-Abidine Ben Ali. Apparently the young people used Facebook and Twitter to organize themselves and focus action. Now the revolutionary sentiment may be spreading to Libya where rioting has broken out, people are communicating via Twitter, and Youtube has just been banned.

Meanwhile Lebanon, Israel’s northern neighbor is again in turmoil (also hard to find on a map,) with Hezbollah, Iran’s resident Shia army in Lebanon preparing yet again for war.

Hezbollah has cheered the events in Tunisia, though the revolution in Tunisia looks to be very much of secular origin. Any chaos in the Arab world is good for Hezbollah is pretty much how they see it.

The Israeli Prime Minister has called for “round the clock” talks on the Palestinian question just as Wikileaks has exposed an implicit alliance between Saudi Arabia and Israel, at least with regard to Iran and the question of Iranian nukes.

Things are getting hotter in an area that is permanently set on simmer.

The events in Tunisia, which seemed to have been sparked by the Marie Antoinette like habits of Ben-Ali’s wife, may herald a period of increased instability in the Arab world at a time when tensions are already very high. If the dictatorships of the Middle East begin to feel that they are under direct threat all sorts of weird things could happen. If Kaddafi falls watch Egypt and Hosni Mubarak freak out.

Egypt is home to The Muslim Brotherhood, the root of Al Qaeda, among other repressed political groups, some good and some bad from a US perspective. Regardless a Cairo in tumult, a Lebanon in tumult, a restless Iran with a proxy army poised on the northern Israeli boarder, and the rest of the regions Arab despots clearing the streets of any protest is probably not the best thing for world peace.

If our leaders decide that some sort of response, beyond the diplomatic kind is necessary in the region knowing that Tunis is the capital of Tunisia probably would be a good thing. I think the kids and I will spend a few minutes going over the Maghreb on the map this morning. Now where is Mauritania?

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Saturday, January 15, 2011

Ralph Nader speaks on FOX about the emerging libertarian-liberal alliance.

This is the most important trend in national politics today.

I wrote about this a couple of months ago, HERE.

Friday, January 14, 2011

2 years of recession is wearing on the middle class. Let the markets correct already!

By Nick Sorrentino

We are at an important point in the financial crisis right now. Interestingly the stock market has climbed and climbed and climbed, which has placated many. It has been the only economic ray of light over the past 2 years for lots of us. Meanwhile many people who long ago cashed out their 401ks because they had to, or people who never had one in the first place are feeling increased pressure.

As of this moment it is estimated that 1 in 8 adults and 1 in 4 children in this country are currently on food stamps. Large numbers of people are living off of unemployment and even off of student loans.

We don’t see soup lines, because we now have virtual soup lines.

Increasingly young people are languishing unemployed. I can think of many households that are now composed of adult children and their parents or parent where 3 years ago this was not the case.

In Europe it’s even worse. In Italy for instance the youth unemployment rate stands at 28%. In Spain some estimate the unemployment rate at near 50%.

House prices continue to trend down. Food prices and gasoline are now trending sharply higher due to a weaker dollar, among other reasons.

People can take pain for quite a long time. They can adapt. They can make due with less. But economic stress causes people to act in peculiar ways.

In another life I worked in the investment world. One of the lessons I took from my time as a financial advisor is that money, if not viewed and dealt with in a healthy way, can do great damage. Nothing will break up siblings like a will written for the benefit of one and not another. Nothing freaks out a parent like a kid defaulting on a loan that parent cosigned for.

When societies feel prolonged financial pain those societies often change profoundly. Often unfortunately these changes are for the worse.

How many people in this country do you think would gladly trade their right to vote, to own a gun, or to come and go as they please in return for a guarantee of a full stomach? My bet is that quite a large percentage of folks would make that trade if given the choice. I am concerned that this percentage is growing as the economy continues to sputter.

Increasingly people have looked to the state for salvation. Who can blame them? It’s very hard to be concerned with freedom when your kids are hungry. When there are no jobs to be had how can you ask someone to get off of unemployment? You can’t.

So what do we do?

At this point the answer seems pretty obvious to me. We need to get lean and mean. We need to let the markets, the stock market, bond market, housing market, etc correct. It will be painful with no doubt. But it will be a short burst of pain, during which we can repent for our economic sins and get back to the first economic principals of this country. We then can then get on with building a new American century.

Or alternatively we can continue on duct taping whatever economic leak looks the worst at the moment until the whole system breaks apart and is then irreparable.

My suggestion will never be heeded of course. There are too many interests with too much power to allow sharp painful correction to happen. Austerity is for the little people, not people who manage billion dollar hedge funds. Right now it is still possible to make quite a lot of money with the fits and starts of the American economy. Not for most of us, but for many who have the power. They will never let the markets correct naturally because the current establishment has everything vested in the old, and increasingly antiquated financial system.

Wednesday, January 12, 2011

Monday, January 10, 2011

Bangladesh Investors Clash With Police as Stocks Fall

Bangladesh police fired tear gas and water cannon to break up violent protests by investors on Monday after stock trading was halted when prices went into free fall.

The benchmark index [.DSI 5420.11 -517.9102 (-8.72%)] shed 9.25 percent in less than an hour of trading, its steepest-ever slide.

Click here for the story.

Sunday, January 9, 2011

Showdown: The Social Conservatives are using GOProud as an excuse to boycott CPAC. The truth is they are afraid that they will lose yet again to RP.

So the social conservatives feel the Grand Old Party slipping from their grasp, and they are not happy about it.

Last year Ron Paul and his people ate the social conservative’s lunch in the straw poll with the Congressman coming in first with 31% of the vote, far ahead of the next challenger Mitt Romney with 22%, and completely smoking Sara Palin who got only 7%.

This year the libertarians are again organizing for CPAC and the social conservatives are afraid they will lose even worse than last year. This is why they are boycotting not because a gay group will be in attendance.

Gays, social conservatives can shun, the liberty oriented conservatives they however can not. There are just too many of us. In fact we likely outnumber the social cons now.

The social cons have for decades sought to take over the Republican Party completely. They now see that though they came close in the early 2000s they have failed, and failed badly.

So that’s why they are throwing a fit and using GOPoud as a scapegoat. The social cons know that they are being left behind by a new generation of libertarian/conservatives who realize that obsession with socially conservative issues is a luxury this country can no longer afford. We need to get our financial house in order and cut the size of government. This is a colossal task and expending energy worrying about states issuing gay marriage licenses is a waste of time and energy.

The dream that rose in the 1970s with Jerry Fallwell’s Moral Majority is now setting and many in the socially conservative camp just can’t come to terms with this. That is why they fear coming to CPAC. The social conservatives might not like the gays, but they quake with fear at prospect of the GOP becoming a liberty oriented party.

I mean, what do the social cons do if that happens? Go back to being Democrats?

Bernanke’s aggressive defense of his quantitative easing policy shows he’s consolidated his power over internal critics at the Fed

Bernanke's performance Friday suggests the academic-turned-central banker has clearly established room to maneuver on policy issues, and to speak his mind on Capitol Hill. Having brought the U.S. economy through the worst economic downturn since the Great Depression, Bernanke’s aggressive defense of his quantitative easing policy shows he’s consolidated his power over internal critics at the Fed, who would prefer a tougher stance on inflation and less attention to job creation. One of his chief critics on the Fed board, Thomas Hoenig of the Kansas City Fed, rotates off the Federal Open Markets Committee this month.

Click here for the story.

Wednesday, January 5, 2011

Private Sector Job Creation Highest Ever For ADP Report

Private sector job creation is a very good thing. It is refreshing to here SOMETHING positive coming out of the private employment realm.

Interestingly the piece sites likely cuts for employees in state and local government in 2011. No cuts for the feds yet though.

Click here for the story.

Sunday, January 2, 2011

Get ready for $4.00 and then likely $5.00 gas.

By Nick Sorrentino

July 11th, 2008 is a very important date in American history. It is the date that crude oil hit an all time high of $147.27 a barrel. Nationally gasoline toped $4 a gallon.

Suddenly one need not be a tree hugger to drive a Prius. SUVs began disappearing from America’s highways. Where was it all going to end?

Housing prices had begun to fall across the board in 2008 but for most people the gasoline run up was the first shake of the economic earthquake to come. For many this was the first time the reality of broader economic issues had made their way into people’s otherwise insulated worlds in a very long time. Suddenly the prospect of loading the kids up in the SUV and heading down to Disneyworld seemed less appealing. That’s to say nothing of the fact that one’s daily 50 mile commute suddenly increased in cost by 20, to 25%.

The run up in oil prices had many causes. To be sure some of it was momentum building on momentum in the markets. This was a factor. But it was by no means the most important factor.

The real issue was the fact that the dollar in 2008 had started to decline in value at a pace that was significantly more than average.

Why would this affect the price of oil?

Simply, oil, like most commodities is priced in dollars. As the dollar declines, the “price” of oil goes up.

Sure there are always supply issues. momentum issues, broader economic issues, and these we are told are what drives the cost of a barrel of oil. They often do in more stable times. But 2008 (really 2007) was the beginning of the end of stable economic times.

As the housing crisis began to take hold in the United States and around the world the dollar looked increasingly ugly. Dollar denominated debt gave little return which made the Greenback less attractive generally and as such the dollar was increasingly questioned as the core component of the world economy for the fist time in 35 years. As the dollar declined, oil, denominated in dollars moved up into the stratosphere.

It came crashing back of course as the pressure of high oil prices accelerated the recession and pushed America over the brink. As the stock market melted down along with other markets around the world there was a rush back to the dollar, as bad as it was, because it was the only perceived safe-haven in the midst of calamity. The price of oil crashed down as the dollar “strengthened" in the Fall of 2008.

This phenomenon is not always one to one. But the dollar crude “mirror effect” is often very close as is exhibited by the comparison chart of the dollar index and crude oil prices in 2010 seen here. The dollar goes up, oil goes down and vice versa.

OK so why are we again looking at the possibility of $4 (or higher) gasoline?

The Federal Reserve is now engaged in a money printing policy, often called “quantitative easing.” What it means is that the Treasury is issuing debt, and because China and Japan and pretty much no one else wants it, the Federal Reserve itself is buying up the debt. The Fed is creating money out of nothing to buy debt that is used to finance the American economy (not forever though.) This pushes more dollars into the world system and as such weakens the dollars currently in the system.

With each passing day this QE policy reduces the value of America’s savings. It makes it more difficult for the poor (and everyone else) to buy food as oil is not the only commodity priced in dollars- corn, sugar, etc are also. Bread, juice, cheese, rice, all become more expensive for the average person.

In other words, because the Fed is seeking to force inflation into the system (by weakening the dollar deliberately) to save a tenuous economic system built to benefit those who have first access to the newly printed money (read the large banks) life for most people is likely to get more difficult in the relatively short term.

The middle class is now presented with a double whammy. The prices of their homes are in decline, and are likely to remain in decline for a good while more. However, at the same time the price of everyday staples is on the incline. The only thing that the middle class can cling to is the fact that at least their 401ks have turned around.

Yet the “flash crash” of last May 6th where 10% was lost on the Dow in minutes can’t give anyone who is paying attention too much confidence even as the market continues a march upward.

In July of 2008 things had not hit the wall yet. People didn’t like $4 gasoline, but they made due. They got to work by putting gas on credit cards to be paid off when things weren’t quite as tight. But as we know, for most people, things only got tighter.

Now after almost 2 years of full blown recession we are again presented with rising oil prices, and much higher gasoline bills, yet this time many people no longer have the credit card to put the fuel on. It was maxed out the last time gas was at $4 a gallon. They are still paying for that gas bought 2 years ago, and the bank that issued the card is likely insisting on a higher rate of interest than they did originally. (Despite the fact that the bank charging this rate of interest was privy to bailout money given at nearly no interest to them.) But many consumers, many who made up the core of the middle class, now have few options in the face of a huge “tax increase” on fuel created largely by the Federal Reserve.

$4 gas was one of the triggers of the Great Recession, now we are revisiting it as much of America is already bruised and battered by the economy. All of those people who have hung on through the past 2 years in neighborhoods built on the far outskirts of major metropolitan areas with long commutes are going to be pushed even further toward fundamental economic hardship. Some will be pushed too far.

What’s worse is that there is now little perception of the dollar as “safe haven” as it was during the first oil run up. Yes, the dollar is still by far the world’s most important currency, and yes the Euro looks terrible, but China is rising. Much of the East is rising. There is a perception that there is a fundamental shift in power happening from America and Europe to China.

China has huge structural problems that may keep it from achieving the success that most of the world thinks it will achieve, but the fact remains that in 2 years China will likely eclipse the USA as the worlds largest economy.

What this means is that a general strengthening of the dollar due to the world being scared out of it’s wits by another rumble in the world economy is much less likely. (Though even now by no means impossible.) As such another downdraft in the cost of oil, and more importantly for most people in the cost of gasoline, is far less likely this time around.

This time, as the Federal Reserve continues to print money to sure up the banks for another quarter, there will be a very tangible result in the lives of everyday people- it will be harder to make ends meet. As Christmas bonuses are handed out at record levels for those who have direct access to the Federal Reserve, most of us will watch the totals at the gas pump creep higher and higher as the weather gets warmer.

That ought to be good for the economy. Thanks Mr. Bernanke.

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Saturday, January 1, 2011

Liberal Blogger Ezra Klein: Constitution "Confusing Because it’s Over 100 Years Old"

This is the LER's 500 post. I didn't realize it until just now but I suppose this story is appropriate.

Linked is a short clip of Ezra Klein a blogger and columnist for The Washington Post. In the clip he mocks the Republican plan to read the United States Constitution on the floor of the House. With a dismissive ho hum he explains that the Constitution is practically meaningless because it was written "over 100 years ago."

Over 100 years ago and that makes it impossible to read? What is it written in Sanskrit? 100 years is not really that long ago. Nowadays it is little more than the average human lifetime. Yet apparently Ezra can't figure out what the Constitution means.

God help us if he actually knew the Constitution is 223 years old. He'd probably say that the Constitution was nothing more that a goddamn piece of paper. Oh wait George Bush said that.

Anyway here's the clip.

Libertarians need to talk to non-libertarians in 2011

About Me

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Nick Sorrentino is the Editor of The Liberty and Economics Review and CEO of a social media management company.