Inflation Update: January 2012

On a Seasonally Adjusted Basis, the U.  S. Department of Labor’s Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) had increased by only .2% from December 2011 to January 2012. Pundits immediately hailed this number  as proof inflation was under control.

Silly nonsense.

For an economist, the month to month change in the CPI is hardly an indicator of anything. The monthly change tends to be volatile and a one month statistic certainly does not indicate a trend. A far more meaningful statistic is the annual change in the CPI, which increased 2.9 percent from January 2011 to January 2012. Furthermore, the Seasonally Unadjusted CPI increased by 7.4 percent from January 2009 through January 2012.

In the meantime, the BLS Average Hourly Earnings Of All Employees rose only 1.3 percent from January 2009 to January 2012. Do the math. America workers are getting screwed.

And of course, this Administration, like its predecessors, likes to hide the really important stuff. The January 2012 CPI may seem benign, but the “real” cost of living for an average Joe includes elements the BLS likes to dismiss as “volatile”. Like food, fuel and apparel. Food and beverage costs increased 4.2 percent from January 2011 to January 2012. During the time period, apparel costs went up 4.7 percent, and motor fuel prices shot up a wallet collapsing 10.0 percent!

If the price of oil continues to exceed $100 a barrel (WTI), then the rate of inflation will go even higher in 2012. Unfortunately, employee compensation will not keep pace.

TCE

Note: In my opinion, the BLS underweight’s the “real” impact of food and fuel costs on the average consumer – although – to be fair, I don’t know how one could develop a meaningful alternative to the CPI which is – at best – a blunt measure of price change.

Where Is Greece Headed?

Since World War 2, Western Europe has espoused the political concept of Democratic Socialism. The political establishment continued to exist by promising ever greater social benefits. Year after year. By now, health care, education, liberal labor law, subsidized wages, guaranteed pensions, and cradle to grave welfare are considered a right.

Unfortunately, these benefits cost money. More and more money. And when the money runs out (current costs exceed current and future income), and the political establishment is either unable to tax or borrow enough money to sustain its social promises ... the entire political system must inevitably collapse. The people will make sure of that . . . no matter how self destructive.

Which is why the Greek political system is teetering on the brink. Even with the “bailout” loans and the proposed reduction of debt, the Greek political establishment does not have sufficient income to sustain this nation’s social programs.

Collapse is therefore only a matter of time . . . And then what? The disenfranchised will demand the return of their lost lifestyle. They will listen to whomever promises to restore their economic benefits and social status. And it’s unlikely the people of Greece will give up some form of socialism. So. What’s ahead? Some form of socialist fascism? Or fascist socialism? Either one is a dictatorship.

What a shame. It is an irony of history that many consider Greece to be the cradle of democracy. Will it now become the birthplace of a new age of dictatorships? Or will the people of Greece forge a better solution?

TCE

What Is The Real Unemployment Rate?

The United States Department Of Labor (DOL), Bureau Of Labor Statistics (BLS) has released its labor statistics for January, 2012. On a seasonally adjusted basis, the BLS calculated unemployment was 8.3 percent in January. Most media pundits immediately reported the unemployment rate decline is a sure sign the economy is improving. Reference 1.

Not so fast. The “Official” unemployment rate is the lowest possible statistical representation of employment reality. All Administrations in Washington, Democrat or Republican, want to pretend America has a full employment economy. So the “Official” unemployment rate is carefully washed of bad news and calculated to ignore a lot of unemployment pain.

Are there other ways to measure unemployment?

If we examine the BLS Household Data in Table A-15, Alternative measures of labor underutilization, we find the seasonally unadjusted unemployment rate for January was 8.8 percent in Table U-3. This table measures total unemployed, as a percent of the civilian labor force, and is the official unadjusted unemployment rate. This figure is down from an unemployment rate of 9.8% in January 2011.

So far, so good. Things are improving. But how does this unemployment picture compare to a full employment economy? The nominal number of workers who are employed in a full employment economy appears to be just above 66 percent. On this basis the U. S. Labor Force Participation Rate dropped from an annual average of just over 64% in 2006 to a one month rate of 63.4% in January, 2012. This is not a good statistic for the economy.

By this measure, the number of American workers who are unemployed is significantly higher:

242,269,000      Civilian Non Institutional Population               
160,382,000     66.2% Full Employment Economy Participation Rate
153,485,000      63.4% January 2012 Participation Rate

6,897,000          Workers Who Dropped Out of the Labor Force        

13,541,000         Officially Counted As Unemployed                     

20,438,000       Total Americans Out Of Work                       

                              12.74%                                                                                      

If we again examine the BLS Household Data in Table A-15, Alternative measures of labor underutilization, we find the seasonally unadjusted unemployment rate in Table U-6 is actually 16.2 percent. Table U-6 counts total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force. This figure is down from 17.3% in January, 2011.

But for an economist (and most business leaders), the real question is: How has the current economy affected consumer spending? To find out, we have to explore the murky waters of Under employment data. Just because someone is working does not mean they are making enough money to pay their bills.  The largest single category of under employed workers who have a diminished income during a recession are those of us who are self employed, or own a small business.

According to the U. S. Census Bureau, which bases its estimates on IRS tax return data, there are 21, 708, 021 nonemployers (government speak for self employed persons). Included are 19,089,091 Individual Proprietorships; 1,189,998  Partnerships; and 1,428,932  Corporations with no employees. It would appear this characterization is more accurate than the data used by the DOL. Reference 2.

Who are the self employed? We are private contractors, construction workers, skilled trades people, artists, consultants, doctors, lawyers, farmers, accountants, retailers, and so on. Eighty percent of us need to work in order to ensure our families have enough income to meet current expenses.

This is an important number for those who want a true measure of worker income loss.  By my estimate, after adjusting for self employed workers who are not a primary source of family income, it would appear at least 7,055,100 self employed workers and small business owners (32.5%) are living on reduced incomes. (21,708,021*32.5%) Reference 3.

7,055,100   Self employed on reduced income
13,541,000  Counted As Unemployed
6,897,000  Dropped Out of labor Force
2,268,000  Working less than 35 hours for economic reasons
29,761,100  Total Unemployed and Under-employed
   18.6% of a full employment economy workforce

If we add nonemployers with deficient incomes, and workers who are working less than 35 hours per week for economic reasons (Table A-5), to our total underemployment calculation, then 29,761,183 workers have no income, or are struggling to survive on a reduced income. That’s 18.6 percent of a full employment workforce.

There are those, of course, who believe the percentage of self employed workers earning a reduced income is much higher than 32.5 percent In addition, our calculation does not include welfare recipients who have permanently withdrawn from the labor force.

Although counting noses is a viable way to judge the health of our economy, the BLS could do more to calculate total income by class of worker—  including self employed individuals. In the meantime, comparing the current rate of unemployment with the employment characteristics of a full employment economy (12.74%), or the data collected for Table U-6 (16.2%), provide a more meaningful measure of American unemployment pain.

TCE

Reference 1: Data from the Bureau of Labor Statistics (BLS), of the United States Department of Labor (DOL). Labor Force Statistics data is from the Current Population Survey of January, 2012, Not Seasonally Adjusted except where noted.

Reference 2:  Report: Nonemployer Statistics, 2007  Total for all sectors, United States. Self employed and firms without any other employees.  Nonemployer Statistics originate from tax return information of the Internal Revenue Service. For nonemployers the Census counts each distinct business income tax return filed by a nonemployer business as a firm. A nonemployer business may operate from its owner’s home address or from a separate physical location.

Reference 3:  Since there is no reliable data on full time, versus reduced time, self-employment income, we are forced to make our estimates on anecdotal information. The actual number could therefore be higher, — or lower.

Housing Value Crisis: BO Finally Wakes Up!

In March of 2008, I published a proposal to resolve the housing value crisis. (http://www.tceconomist.blogspot.com/2010/11/how-to-fix-americas-housing-mess-and.html) It would have allowed desperate banks to sell their non-performing loans to a property management company, which then assumes responsibility for property maintenance and improvement, as well as rental and sales activity. My proposal would have put thousands of trades people, appraisers, financial workers, and real estate agents back to work.

Now—over 3 ½ years later—BO is finally moving in the right direction. The plan is to convert distressed housing into rental units. According to an article in Bloomberg’s blog (by John Gittelsohn, January 31, 2012) GTIS partners will spend $1 billion by 2016 to acquire single-family homes to manage as rentals. GI Partners expects to invest $1 billion to convert distressed property into rentals, and Los Angeles-based Oaktree Capital Management LP will spend $450 million on similar housing. Several other private equity investment firms are looking to purchase packages of properties. Purchased homes can be held as rentals until the housing market rebounds, or pooled into a REIT for sale to investors.

The Case-Shiller 20 city single family home index was down in November 2011 by approximately 33% from its highest value in 2006. I expect the index’s point loss to exceed 37 percent, and then recover. About 7.5 million homes with a current market value of $1 trillion will be liquidated through foreclosures or other distressed sales by 2016, according to an Oct. 27 report by Oliver Chang, a Morgan Stanley analyst. At current price points, up to a third of these properties could yield an attractive return on invested capital as rentals.

If the Feds include seller financing, rent-to-own, and financing guarantees, then this program begins to look much like my original proposal.

It should be obvious: no bureaucratic government institution can solve what is basically a free enterprise problem. Government institutions are motivated by political expediency, political correctness, internal political struggles, the overwhelming compulsion to create hundreds of unworkable rules and regulations, and layers of human lethargy— all backed by the police power of the State.

Successful free enterprise is focused on objectives, solutions, and accomplishment—all backed by a strong work ethic.

TCE

Winning Means Losing

The economy sucks. Unemployment is ~ 8.6%. Underemployment is > 22% (Note 1). America is living the debilitating misery of chronic recession. The stock market trembles with every European rumor. Fear of economic depression hangs in the air. Washington appears determined to make matters worse. Americans are agitated.

And that sets the stage for the 2012 elections.

Both political parties are slinging mud just as fast as they can. Caustic lies and nasty matter pollute the air. (More global warming?) Republicans are flustered. Democrats are frustrated. For both parties, venomous rhetoric is more important than substance. But while our politicians are preoccupied with smut, many of America’s potential challenges are not even on the election issue radar. Some subjects are avoided because any mention of them would be condemned as politically incorrect. Some of America’s challenges are evaded because meaningful debate would be politically inexpedient. And some are left out of the election deliberations because few politicians understand the subject.

Does that shake voter confidence?

For republicans or democrats, the downside penalty of winning in 2012 is far greater than any upside reward. For the winner there will be continuing frustration and anger. No matter who wins, Washington will still have to deal with chronic recession, a deteriorating situation in the Middle East, determined terrorist activity, incessant civil war in multiple nations, an embarrassingly ineffective and corrupt United Nations, a nasty collection of anti-American politicians, chaos in Mexico, China’s ascendancy as a self-centered political and economic power, a destabilized European Union, government corruption, domestic terror attacks, and escalating domestic anarchy.

Oh. And higher oil prices. And the threat of ruinous inflation.

Does that shake voter confidence?

Obama is pulling American troops out of Iraq. The resulting power vacuum will lead to increased political turbulence throughout the Middle East. Iran is uniting the Shia Muslim population against Sunni Muslims, forming anti-western, anti-Jewish, anti-American alliances, and funding an army of terrorists. Democracy will not survive in Iraq because this region has neither the culture nor the economic basis to support a democracy. Afghanistan and Pakistan will become armed Islamist camps. Islamist influence already dominates Egypt and multiple African nations. Regional war is inevitable. World war is possible.

Does that shake voter confidence?

All the Congressional failures of the last 25 years will come home to roost. The promise of democracy has been debased by ceaseless bickering and a cascade of outright lies. Socialist ideology has weakened America’s financial strength, desecrated the legitimacy of American media, and trashed the financial viability of America’s health care system. Free market enterprise has been debauched by crony capitalism. Bureaucratic oppression routinely sabotages entrepreneurial activity. Legislative confrontation has replaced meaningful compromise. Stalemate prevails over common sense.

Does that shake voter confidence?

In many respects, this is a very strange election cycle. The  next five years could be apocalyptic. Although most Americans can not verbalize the challenges that lie ahead, they definitely know something is wrong. Voters feel helpless. Threatened. Uneasy. Congressional approval is a wretched ~ 19%. Obama’s credibility is sinking.

For republicans or democrats, winning in 2012 means losing. There are no uncomplicated answers to the challenges that lie ahead. Potential solutions will be smothered by the appalling ignorance of ideology. That will force a dramatic shift in political power. The opposition will win in 2016.

Assuming the political establishment allows free elections.

TCE

1. By my calculation methodology, underemployment must include: total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers (Table U6 published by the DOL), and an estimate of those who the DOL would count as employed, but are unable to work full time. Just because someone is working does not mean they are making enough money to pay their bills! 

A Monetary Crisis = National Debt Defaults

Here is a partial list of nations that will find it more difficult to roll over their national debt in a monetary crisis.

Australia

Austria

Belgium

Canada

Denmark

Finland

France

Germany

Greece

Hong Kong

Hungry

Ireland

Israel

Italy

Japan

Norway

Portugal

Singapore

Spain

Sweden

Switzerland

United Kingdom

United States

The Netherlands

In order to create a list like this, we need to review each nation’s current public debt, future debt obligations, and future tax revenue streams:

·         Current public debt is a simply tally of debt obligations already on the books for payment over the next 12 months. Regional and State debt obligations need to be included in this computation because in a monetary crisis, national governments will be pressed to provide aid to defaulted regional and State governments. Think California, New York, and so on.

·         Future debt obligations are those expenses that exceed annual tax revenues. The only recourse for any national government is to either borrow the money or cut the expense. Since expense reduction implies cultural change (or shock), we need to estimate to what extent  strikes and riots will act as a counter to austerity measures. And then we need to estimate if the national government will be able to increase its debt obligations enough to cover any increased expense.

·         Future tax revenues include a projection of current tax policy, the fiscal effect of possible future tax policy (change), and an analysis of future national economic wealth (often counted as Gross Domestic Product). We need to know how a monetary crisis will affect annual economic activity and the concurrent generation of tax revenues.

This is a job for the Cultural Economist. And this is what I did in order to develop the above list of nations. Of course we can only make estimates. How does one, for example, quantify the fiscal impact of a riot? A revolution?

In a monetary crisis, all of these nations have incurred (and can be expected to encounter) more expense than they can easily finance. Although nations such as Austria, Finland, France, Germany and The Netherlands currently have excellent credit ratings, internal cultural change and economic recession will force future credit challenges as they try to finance growing welfare commitments. We will probably muddle through for awhile. But there is a distinct possibility any national monetary crisis will spread like a contagion throughout the world economy.

Let's all hope I'm wrong. What do you think?

TCE

Did the “Stimulus” Help Our Economy?

According to Congressional Budget Office (CBO) estimates, the Stimulus package put together by Barak Obama and a panicked Congress will have “a net negative effect on the growth of GDP over (the next) 10 years." In addition the cost of carrying the debt will “represent a drag on the level of GDP beyond that, if no other actions were taken."

For politicians in Washington who apparently don’t understand what GDP means, you people have guaranteed higher rates of unemployment, and negative to inadequate real income prospects, for most American workers over (at least) the next 10 years.

And you do not have a credible economic plan. In fact, you don’t have any economic plan. The so called “Jobs Bill” is just another collection of transfer payment goodies for your political supporters. It does virtually nothing to create private jobs because it does little or nothing to address waste, corruption, excessive regulation, oppressive bureaucracy, crony capitalism, and a bunch of other issues you people are too disorganized and too faint-hearted to tackle. As a result, your “plan” is to further decimate America’s middle class and create an even greater divide between high and low income earners.

Thank you Congress. Thank you BO. Thank you and your cronies on Wall Street.

TCE

Social Security: False Alarm Or False Hope?

This essay was originally published in April of 2008. Here are excerpts.

A Wall Street Journal MarketWatch column (4/17/2008) by Dr. Irwin Kellner entitled “False Alarm”, concludes Social Security is not likely to run out of money any time soon.

Kellner’s conclusion contradicts the findings of the fund’s Trustees in their 2008 report  “Status of the Social Security and Medicare Programs”.  As described in their summary: “The financial condition of ..  Social Security …. remains problematic. Projected long run program costs are not sustainable under current financing arrangements. Social Security's current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires. ….  Growing annual deficits are projected to exhaust …. Social Security reserves in 2041.”

Furthermore, Kellner’s conclusion also disagrees with the findings of the Congressional Budget Office which estimates Social Security insolvency will occur in 2052. Kellner points out the Fund’s Trustees assume an average annual growth rate of 2.3% per year in making their intermediate projections of American economic growth. He compares this rate of growth with the 3.4% per year America experienced from 1960 through 2005, and concludes the lower figure must be labeled as “conservative”. Furthermore, Kellner believes the Fund’s low cost projection, which assumes an average annual GDP growth rate of 2.9%, is more realistic because (we presume) it is closer to his historical benchmark of 3.4%. With this growth rate assumption, Kellner believes Social Security will never run out of money. There will always be sufficient funds to keep the fund solvent.

I disagree.  Predicting Social Security solvency is not an easy task, and it is not simply a mathematical exercise. We must consider both the economic and the cultural environment within which these estimates are made. By way of illustration, let’s look at two problems – one economic and one cultural.

First.  Conventional economists frequently fall into a credibility pothole because they project the future based on the past. With a little tweaking here and there, they believe the mathematical extrapolation of dead data can be used to predict future economic performance.

But this assumption is absurd. Life is not a catatonic repetition of events and circumstances. Cultures evolve. Lifestyles change. Immigration shifts the balance of political power and changes the economic landscape. Technology creates new products. Technological change destroys old markets. Once powerful institutions stumble and fade away. Life is a dynamic process. Credible economic analysis must be equally dynamic.  

For example, conventional economics does not handle resource depletion very well. Economic theory assumes increased demand will bring about higher prices; higher prices will stimulate additional production; and when production exceeds demand, competition will force prices down. That works just fine if we are forecasting the market for door knobs. It doesn’t work very well if there are serious limits to the addition of new production.

It should not come as a surprise if the average annual increase in GDP, adjusted for inflation, is less than 1% from 2006 through 2030. If this happens, Social Security will be in trouble long before 2041. (From 2006 – 2010 chained GDP averaged .8%)

Second. Conventional economics ignores people. It assumes human behavior will not change much in the future, or at least not enough to alter the results of an mathematical extrapolation based on dead data.

This assumption is also false. If the average annual Social Security payout is $12,000, then a couple can expect to have approximately $24,000 a year to spend (less Medicare). If the median income for an American couple is $48,500, and if we assume they need at least 70% of that amount to maintain their current lifestyle, then they need an annual income of $34,000 upon retirement. To this amount, one must add annual increases to cover the cost of inflation. That means, on average, American couples must fund $10,000 a year, plus additional sums to cover the cost of inflation, from other sources. Since the basis of projected Social Security benefits is projected to decline, and Medicare premiums are projected to increase, the spread between your Social Security benefits and the cost of living will increase over the years.  Because the Federal Government underestimates the rate of inflation, no sane person should anticipate annual increases in Social Security benefits will actually keep up with the rate of inflation.

Unfortunately, less than 50% of married couples (or domestic partners) will have additional income from pensions or annuities. More than 40% of all retirees will see their annual income decline by more than 30%. Really dumb agricultural policy is currently focused on increasing the price of food, and gasoline ain’t going to be cheap.

Baby Boomers (all born between 1946 and 1964) are not going to be happy when they retire and the reality of their desperate financial situation finally sinks in. These people are going to be really, really depressed when they have to sell their comfortable 2400 square foot middle class suburban home in order to scrape together enough money to rent a 420 square foot mobile home, endure unbearable cold in the winter because they can’t afford the cost of fuel, and eat dog food for meat.  No.  Baby Boomers will do what they have always done.

Protest. 

And politicians, ever mindful of the next election, will increase Social Security payments to help them out. That means current estimates of Social Security fund solvency are inherently bogus because they fail to consider the possibility of some unknown, but definitely probable,  increase in benefits.

Conventional economic research frequently yields inadequate conclusions based on irrelevant or obsolete data that has been interpreted using algorithms of questionable relevance. In other words - we play with the numbers. It's a great academic exercise.  Cultural Economists, on the other hand, must have a strong sense of the cultural matrix within which economic phenomena occur. Culture, in this sense, includes everything we are: our political systems,  economic psychology, mores, traditions, sciences, and education. These all play a role in how we make purchase and investment decisions.

As for the Social Security “Trust” Fund, it’s in more trouble than anyone can guess.

TCE

Postscript: Some people mocked me when I published this essay.   No more.

 

How To Fix America’s Housing Mess and Create Thousands Of Jobs

 .    
     I first published this idea in March of 2008. It’s too bad Congress is ruled by people who have absolutely no business acumen. If Congress had acted in 2008, our housing crisis would be (mostly) over. America’s economy would be moving in the right direction.
   
     The fundamental concept is still valid. Will a Republican Congress do any better?
   
     Probably not...  But one can hope for a miracle.
   
     Thanks to Investment Bank amorality and Congressional regulatory failure, our banking system is still saddled with a ton of residential foreclosures and disastrous commercial property loans. Small business activity has been strangled by a dysfunctional banking system. We are headed for another financial crisis.
    
     We need a fix.  Here is an over-simplified explanation of my proposal.
    
     Fix America’s Banking System
     You may remember the Office of Thrift Supervision set up the Resolution Trust Corporation in the 1980s to deal with hundreds of insolvent thrifts. Given its relative independence and management skills, the RTC was able to move quickly to dispose of rotten assets. We can do that again. Allow desperate banks to sell their non-performing loans to a property management company at the lesser of book or market value. This sale could only occur once. The bank balance sheet would carry the sale as an “Deferred Asset”. The Bank would not receive any cash from the Property management Company. Instead, it receives a note for each transferred property and treats the value of the note as a capital investment. That helps to clean up the Bank’s balance sheet and reduces the need to bolster reserves. We presume the Bank could then focus its attention on being an active and constructive part of America’s financial system.
    
     The Property Management Company (PMC) would treat the property as an asset and the loan as a debt. Additional Government loans would provide the capitalization needed for PMC operations until the PMC is profitable. The PMC’s objective is to maximize the return on invested capital by either selling or renting each acquired property. Income from sales or rentals would be used to pay off Bank and Government loans. The PMC takes a percentage fee from realized income to fund operations.
   
     The PMC assumes responsibility for property maintenance and improvement, as well as rental and sales activity. This solves the problem voiced by several Cities that abandoned properties become liabilities to the community because they are targets for vandalism, illegal activity, and neighborhood deterioration. It also increases the availability of “affordable” housing.
   
     We could offer two unique rental contracts as an option.
     1. The renter signs a long term agreement. A portion of each months rent is allocated to a down payment option escrow account. The idea is that at any time, the rental tenant has an option to convert the rental contract into a sales agreement at a pre-determined price. The down payment would come from accumulated funds in the escrow account and whatever other financial resources that are available to the renter at the time. On the other hand, rental tenants who need to move elsewhere could simply give notice, and vacate the property. Funds accumulated in the escrow account would then be used by the PMC to help pay down the loan value.
     2. A new homeowner could sign an agreement wherein the RMC receives a percentage of any gain received when the home is sold. This increases the probability the RMC can recover at least some of the cost basis of its investment in the property, and adds to the flow of funds to repay the RMC’s debt obligations.
   
     Since every real estate market is a little different, we should probably look to the creation of regional and local PMCs, rather than one big PMC. These could, in turn, be under the supervision of an appropriate federal government agency. Non-performing assets can be converted into income producing properties. Additional affordable housing becomes available for low and middle income groups.
   
     Put Thousands Of Americans Back To Work
     This proposal creates thousands of new jobs. Increased loan activity means more jobs in the Finance Industry. Increased real estate activity will provide jobs for thousands of real estate property management employees, and put thousands of real estate agents, appraisers, and loan brokers to work. Property renovation and maintenance will provide jobs for thousands of plumbers, carpenters, electricians, contractors, and maintenance workers. There will be an increased demand for truck drivers and equipment operators. Increased real estate market activity increases the tempo of employment activity at hardware, lumber, equipment, and other supplier companies. Retail sales pick up. Even local coffee shops benefit!
   
     Message to Congress. We need to bite the bullet. Get our economy back on track!
    
     Of course there will be opposition to my proposal from those who have a vested interest in the status quo, those fearful of the outcome, those whose vision is obscured by the fog of ideology, and those who have no clue as to what in hell is going on.
    
     But try we must. And take the bitter medicine. Otherwise, there is no limit to the downside risk. Think stock market crash. Higher rates of unemployment. Destitution. Poverty far worse than the 1930s.
   
     Is that what we want?
   
     Let’s all pray for a miracle. Congress actually fixes the problem.  Before it’s too late.
   
   
     Ron
   
     Reference 1: How To Save America’s Banking System, TCE, March 2008
        
     .

The Price Of Oil: How Much Will It Hurt?

Significant Cultural Change Lies Ahead

Disclaimer - Putting together the research for this essay has not been an easy task. One can not take published data at face value. Some critical data is unavailable. Much of it is untrustworthy. I was thus forced to make many estimates and assumptions. Because of these challenges, the content of this essay can only be taken as indicative of broad trends. The content, charts, tables, statements, comments, conclusions, and forecasts found in this essay are presented without any warranty.

Introduction

   My wife and I were shopping for groceries at our local supermarket. We overheard a woman tell her little boy: “Now that’s all we have to spend here. We still need to buy gas to get home.”

   I wonder how many time a day this same scenario plays out. Food or gas. Food or rent. Perhaps if our people in Washington spent more time at the checkout counter, they would have a gut level sensitivity to the inflationary spiral currently driving food and fuel prices. 

The Issue

   We hear consumers have less money to spend on food, clothing, housing, and discretionary items because the price of oil has risen to ~ $99 per barrel on world markets. That translates into higher prices for gasoline, diesel, kerosene, propane, and heating oil fuels as well as thousands of other products that are either made from oil, or consume oil in the production and distribution of finished goods. Of particular concern is the impact of higher oil prices on the cost of food. The USDA tells us that in 2009, about 14.7% of American households had either low food security (need financial help to cope with food prices) or very low food security (one or more members of the household occasionally do not get enough to eat).

   The Law of Unequal Distribution states there will be an unequal distribution of economic change among the economy's participants. Although there are several different ways to classify people in order to make comparisons, the most common measure of economic change is money. Oil prices are a particularly good illustration of this law because higher oil prices have a serious impact on lower income households. They will pay a higher percentage of their income to purchase products made from oil. But will they really be hurt? Can the effect be quantified? And what is the potential social outcome?

   Intrepid analyst that I am, I plunged into this project with a grim determination. I fired up my trusty spread sheet and diligently searched the WEB for answers. We want to know:

How will rising oil prices impact the lifestyle of American households? 

After days of research and several hundred calculations, I pulled together the following observations.

Motor Fuels

   We start with a determination of how much these households are likely to spend on gasoline or diesel motor fuel, assuming they drive an average of 11,000 miles per year.

   There are approximately 116,500,000 households in the United States. (Note 1) Of these, approximately 79.5 million are family households, and 37 million are classified as “non-family” households. About 92 % of all households (107,180,000 units) have at least one vehicle. Research into the average number of vehicles per household, the average miles traveled for each vehicle, and the probable average fuel economy per vehicle, yields the conclusion that Americans will use an average of 838 gallons of motor fuel worth $3,160 per household in 2011. (Note 2)

   Estimated annual motor fuel costs, versus percentage of household income, are shown for 2011 in the following graph. Households with an annual disposable income of $25,000 have an average of 1.05 vehicles per household, and consume an estimated 385 gallons of motor fuel worth $1,451 per household. That’s just under 6% of household income. Households with an annual income of $50,000 have an average of 1.49 vehicles per household, and consume an estimated 636 gallons of motor fuel worth $2,397 per household. That’s almost 5% of household income. By contrast, households with an income of $275,000 or more have an average of 3.21 vehicles per household, and consume an estimated 1,468 gallons of motor fuel worth $5,535 per household. That is, however, just 2% of household income.

   Higher oil prices translate into an increase in motor fuel costs. After estimating the average number of vehicles per household by income, and the number of miles traveled per vehicle per household, we can plot this increase. In comparison with 2009 (when motor fuels averaged ~ $2.41 per gallon), these costs will be $524 higher in 2011 (assuming an average of $3.77 per gallon) for our theoretical household that has 1.05 light vehicles and an income of $25,000. They increase by an average of $865 for households with 1.49 vehicles per household and an income of $50,000, $1,501 for households with 2.29 vehicles per household and an income of $100,000, $1,857 for households with 2.68 vehicles per household and an income of $200,000, and $1,997 for households with 3.21 vehicles per household and an income of $275,000. (Note 3)

  Of course, if a household with an income of $25,000 insists on driving a vehicle that gets 16 MPG, then its annual motor fuel costs will be a painful 10.4% of disposable income. For households that make $50,000, their vehicle fuel costs would jump to over 7.6% of their annual income. And here is a key point. Households with an income of $50,000 or less account for 49 percent of American households that own at least one vehicle. Obviously, as the price of oil increases, available discretionary spending for other items decreases.

The Hypothetical Family

   Let’s compare how the price of oil affects a family of four that has a disposable income of $25,000 per year, one older vehicle that gets 32 Mpg, and uses either propane or heating oil for household heat. In doing this analysis, we recognize the costs for individual line items can vary widely by household. Taken as a whole, however, these estimated average costs appear to be reasonable for all households in this income bracket.

   Column 1 in the following Table lists the individual line items. Motor fuel includes diesel or gasoline products. Heat costs are an average of propane or heating oil costs for this type of household. Column 2 shows household costs incurred in 2009. Column 3 shows estimated comparable line item costs for 2011, assuming the price of oil averages $99 per barrel.  Column 4 shows the incremental costs for each line item for 2011 versus 2009, and Column 5 shows the percentage increase over this two year period.

   Using data from the Bureau of Labor Statistics Consumer Price Index - All Urban Consumers (CPI-U) and other sources, it would appear the two year rate of inflation from 2009 through 2011 for our hypothetical family will be ~ 7.6%. Sharp increases in the price of fuels and other products made from oil (up about 56%) will be accompanied by higher prices for food (up ~8.8%) and health care (up ~15%). For more on inflation, see Does The Price Of Oil Drive The Rate Of Inflation? on my Blog “The Cultural Economist”.

    Our family will spend $2,062 in 2011 on indirect oil costs. These costs are hidden from the consumer because they are included in the price of the product. Examples can be found in products made from refined oil, processed using refined oil, or transported by fuels made from oil. The largest factor is the role oil products play in the cultivation, production, processing, packaging and distribution of food. Indirect oil costs (IOC) for our hypothetical family will increase by an estimated $216 from 2009 through 2011.
   Direct oil costs for heat and vehicle fuels (HFI) consumed by our hypothetical family, will increase by an estimated $1,113 from 2009 through 2011. Indirect oil costs, plus oil fuel costs, increase by a total of $1,330. Inflation has increased our hypothetical family’s cost of living by a total of $1,900 (7.6%) from 2009 through 2011. It should be noted that the price of oil has indirectly or directly accounted for 70% of this increase in the cost of living. The following graph shows the impact of food and fuel prices on our hypothetical lower income family.

   So. If our hypothetical family of 4 with a disposable income of $25,000 uses either propane or heating oil for household heat, and has one vehicle, and if oil is $99 per barrel, they will spend over $5,150 (~19%) of their income on oil. They spend their money on oil when they purchase products made from oil (directly), or when they purchase products and services that have been produced, processed or transported with oil (indirectly).

   If oil increases to a consistent price of $124 per barrel, then they will spend over $6,400 (24%) of their disposable income on oil products in order to maintain their mobile lifestyle. But is this really realistic? At what point does the cost of owning a vehicle become prohibitive? When does money for food, housing, clothing and other necessities preclude a continuation of personal mobility?

   It should also be noted that the federal government’s poverty threshold in 2011 is officially $22,350. Based on this analysis of the cost-of-living, if oil consistently sells for $99 per barrel, then the poverty threshold is realistically $24,250. That’s ~$1,900 more than the official peg.

   And what about households that use electricity, natural gas, wood, or coal for household heat? As we shall see later on in this essay, they are in better shape financially.... but not by much.

Who Gets Hurt?

   But wait. Aside from lower income working families, students, and welfare recipients, do we know anyone else who is trying to get by on $25,000 or less per year? How about people on Social Security? There is nothing hypothetical about these households. This is reality. Over 10 million Social Security and railroad retirement recipient households have incomes of $25,000 or less. Individuals and couples. Living on retirement benefits and whatever else they may be able to scrape together for income.

   Here is the official story. In 2009, the Obama  Social Security Administration told all Social Security recipients: “”When there is a period of no inflation, the law does not permit an increase in benefits. Based on the Consumer Price Index (CPI) published by the Department of Labor, there was no rise in the cost of living during the past year, so your benefit will remain the same in 2010.” Then in 2010, the Obama  Social Security Administration told all Social Security recipients: “The government measures changes in the cost of living through the Department of Labor’s Consumer Price Index (CPI). The CPI has not risen since the last cost-of-living adjustment was determined in 2008. As a result, your benefits will not increase in 2011”.

   Here is the truth. Increases in Social Security benefits always come after increases in the cost of living. Furthermore, the Department of Labor (DOL) typically underestimates the rate of inflation. The official CPI-U NSA increased by 2.6% in 2009, and 1.4% in 2010. In 2011 it is likely to increase by 3.6% (or more). That’s a 7.6% increase in the rate of inflation. If Social Security recipients needed $25,000 to survive in 2009, then their cost of living will increase between $1,700 and $2,000 in 2011. Over 10 million retirement households are struggling with declining real income.

Total Oil Related Expense Per Household

   Vehicle fuels are only part of the oil price inflation story. America’s 116,500,000 households heat their homes with natural gas (50.1%), electricity (33.5%), heating oil (6.5%), propane (5.6%), and other fuels such as wood, coal, and kerosene (3.4%). Approximately .9% of these households do not have a primary source of heat.

   Assuming the average world price for a barrel of oil is $99 in 2011, we can calculate the national average annual oil consumption cost per household by type of heating. In the following Table, Column 1 lists the type of fuel used for household heat. Column 2 shows the percentage of households that use each type of heat (or do not have any heat). Column 3 lists the number of households by type of heat. Column 4 shows the average annual cost per household, and Column 5 calculates the average cost by type of heat for all households with heat. The average annual cost of fuels used for household heat is $1,217. Total heat, motor fuel and other oil products and services cost – on average - $6,006 per household. But households using propane or heating oil (~ 12.1% of all households) will spend far more than the average – about $7,325. Households with electric or  natural gas heat, (~ 83.6% of all households) will spend less – about $5,699. Households that use wood, coal, or other fuels (about 3.4% of all households) will spend about $6,700. About .9% of all households either have no heat or only use supplemental heat (an electric room space heater, for example). Space heating costs for electric households are less because electricity delivers a lower average cost per BTU of useful heat, and because these households tend to be located in warmer regions of the United States. Recent domestic drilling activity has reduced the potential cost of natural gas.

   The average annual cost of vehicle fuels, heating fuels, and other oil products per household can be graphed by income. At a price of $99 per barrel, households with a disposable income of $25,000 that depend on heating oil or propane for household heat will spend over 21% of their income on oil products. Households in this income bracket that use lower cost heating systems such as natural gas or electricity, will spend over 15% of their income on products made from oil.

   We need to remember, electricity is not really a "fuel". It is a means of moving energy from one place to another. Electricity is primarily produced by consuming coal, natural gas, and nuclear fuels. Hydroelectric and renewable energy resources provide the remainder of America’s electric generation capability.

Oil Expense as a Percentage of Income

   But at what point are households forced to alter their lifestyle because they can no longer afford the price of oil products they purchase? In the following charts, we use household incomes of $25,000, $37,500, $50,000 and $100,000 for this analysis. Most blue collar workers, students, welfare recipients, and Social Security beneficiaries fall within the two lower income levels. According to census data, approximately 49% of American households (~57,000 units) have incomes of $50,000 or less. (Note 2)

   In this analysis, we calculate the average number of vehicles per household, the typical miles per gallon each vehicle gets, the number of gallons of gasoline or diesel motor fuel each household consumes, the cost to heat the household, and the cost of other oil products and services the household consumes. In addition to heat and vehicle fuels, households will directly purchase high oil content products (motor oil, plastics, lubricants, fertilizers, chemicals, etc.),  and indirectly purchase low oil content products and services (where oil products are used in a manufacturing process, agriculture, or the provision of a service).

   Our conclusion? It would appear that if a household is forced to spend more than 20% to 25% of its disposable income on oil products, then it will eventually be forced to alter its lifestyle. It is highly likely oil product consumption will decline if income divided by the household’s cost of living is less than 1 for an extended period of time. As we have seen in our budget analysis, households have to set aside a substantial portion of their income for housing, food, clothing, and other necessities.

Households that consume Propane or Heating Oil for household heat.

   In 2009, when oil averaged $62 a barrel, there was a moderate pressure on households with $25,000 of disposable income to alter their lifestyle. At $99 per barrel, however, households that use propane or heating oil for space heating and hot water will have entered the “red zone”. They will purchase an average of 1,475 gallons of oil products worth approximately $5,315. Direct and indirect oil costs devour  ~21% of household income. At $124 a barrel, the price of oil will force households with a disposable income of $37,500 into the red zone, followed by households with $50,000 of disposable income if oil reaches a consistent $149 dollars per barrel, and households with $100,000 of disposable income if oil is a consistent $174 per barrel. Vehicle ownership will decline, especially among households that have less than $50,000 of disposable income, because that’s the most obvious oil related expense to cut. They drive fewer miles per year, purchase fuel efficient vehicles, and drive their vehicles until they literally “fall apart”. In order to reduce their oil costs, many of these households will also be forced to skimp on heat and hot water.

Households that consume Natural Gas, Electricity or Other Fuels for heat

   The projected pressure on household finances is somewhat less if a household uses natural gas, electricity, wood, coal, or other (non-oil) forms of heat. Households with disposable incomes of $25,000 will have entered the “red zone” by the time oil reaches $124 per barrel. Households with an annual disposable income of $37,500 will have entered the red zone by the time oil reaches $149 per barrel, followed by households with a disposable income of $50,000 at $174 per barrel, and households with a disposable income of $100,000 at $199 per barrel.

   Add it all up. On average, American consumers who heat their homes with propane or heating oil will either directly or indirectly purchase approximately 2,000 gallons of oil with a finished product value of over $7,300 in 2011. Consumers who use natural gas, electricity or other fuels for heat will consume ~1,270 gallons of oil with a finished product value of just under $4,800.

Vehicle Ownership

   Let’s see if we can quantify how the price of oil affects the size and characteristics of the American motor vehicle market. Using the basic data described above, we can develop a profile of probable light vehicle ownership at different oil price points. For this analysis we add together the average the cost of household heat, motor fuels, direct oil product consumption, and indirect oil product consumption, across all households for each income level, and plot vehicle ownership by the price of oil per barrel in $25.00 increments starting at $74 per barrel.  As the price of oil increases, families and individuals are forced to spend a greater percentage of their income on oil products. This decreases available funds to purchase and operate a motor vehicle. As the price for a barrel of oil increases from $99 to $199, projected vehicle ownership among lower income groups declines rather quickly. Although the decline in vehicle ownership does not occur immediately, it would appear lower income consumers will eventually be forced out of the light vehicle market. In the following graph, we show this trend for households that have an annual income of $25,000 $37,500, and $50,000.

   At $74 per barrel, American light vehicle ownership appears to have been 636 vehicles per 1,000 people (assuming a population of 310,000,000 persons), or ~ 197,234,500 units. At a price per barrel of $199, vehicle ownership among the three lower income groups described above will have declined by ~ 56%. Vehicle ownership among higher income groups will decline  ~ 2%. In this scenario (which ignores population growth, and the effect of inflation on other household costs), total vehicle ownership declines by ~ 22% to a total of ~ 153 million vehicles if the price of oil reaches $199 per barrel. American motor fuel prices will then exceed $7.50 per gallon. At this price, it would appear Americans will be forced to reduce the number of light vehicles used for personal transportation to about ~ 495 vehicles per 1,000 persons.

    This projected change in total vehicle ownership by income group is shown in the following graph.

   The following graph shows the associated shift in light motor vehicle ownership as a percentage of the total market.  Households with annual disposable incomes of up to $50,000 currently own about 37% of these vehicles. At $199 per barrel, high oil prices will eliminate about 41 million vehicles as lower income households are forced out of the light vehicle market. Their share of the light vehicle market declines to ~ 21%. Households with incomes of between $51,000 and $100,000 currently own ~ 31% of all light vehicles. This increases to ~38% of the market at an oil price of $199 per barrel. The percentage of vehicles owned by households with an income of $101,000 to $200,000 increases from 22% to 28%, and the percentage of households with an income of over $200,000 increases from ~ 9% to 12%.

Implications Of Higher Oil Prices

   The availability and price of oil has serious cultural and economic implications. At $99 per barrel, at least 25% of American households will be forced to alter their lifestyle. At $199 per barrel, this percentage increases to at least 67% of households.

Cultural

   In Winter, lower income households are forced to choose. Fuel for heat and hot water, or fuel for the car? Food for the table or fuel for the furnace? As oil prices increase, these choices will become more difficult – and depressing. There isn’t enough money. It becomes a challenge to find enough cash to pay for household heat. In some communities, public and private groups help households that consume oil products for heat by contributing to the purchase of heating oil, propane or kerosene. A few precious gallons at a time. Although households that use natural gas, electricity or other fuels for heat, are currently under less financial pressure, they will also be forced to alter their lifestyle as oil prices increase.

   The freedom of personal transportation has long been a fixture of American life. For lower income households, however, this freedom is being curtailed. As the price of oil increases beyond $99 per barrel, the stress of this change will become ever more evident. Vehicle operating costs – including fuel, purchase costs, maintenance costs, insurance and fees - become prohibitive. Oil costs also push up the purchase price of other goods and services. Vehicle ownership will decline. Vehicle miles traveled will decline. Households become more dependent on the local community. It will take longer and be more difficult to commute to work. Declining mobility forces workers to move closer to the place of their employment, even if it means moving into a less desirable neighborhood. Many households living on Social Security can not function without local a public transportation option. Lower income households will need locally available shopping, medical, dental, banking and other services. Local and State governments will have to rethink the placement and staffing of schools, clinics, and public safety facilities.

   Retailers will reorganize the distribution of food and other goods. Think about it. If most of your customers must struggle, or are unable, to come to your place of business, what do you do?

   Personal mobility creates the perception of social equality. The decline of personal mobility will be psychologically painful and socially demoralizing. How many Americans live in substandard housing, but are proud owners of a vehicle? Without a personal vehicle, one feels trapped.... helpless. Expect increasing social discontent and anger as higher oil prices exacerbate the financial divide between upper and lower income groups.

Economic

   It should not be a surprise that most of the economic impact relates to the means of transportation. Moving people and goods. Distribution of products and services. Economies of scale will become far more important. Railroads or highways? Airplane or train? Trucks or containers? Cost per mile of travel. Weight per dollar per mile of travel. Fuel efficiency. Buses and share ride vans are a growth industry. Assume an increased demand for shopping services that bring groceries and other products from the store to your home.

   Aside from occasionally begging a ride with someone else, higher oil prices will force a segment of lower income groups into public transportation. It’s either that or don’t go.  Sure. We are experiencing an intermediate period where lower income people keep their old vehicle until it dies, or make the stretch to purchase an inexpensive (probably used) vehicle that gets great gas mileage. That trend is already in place. But as we have shown in the text and graphs above, the American vehicle market will gradually favor cars, trucks, SUVs, and vans that appeal to the more affluent because these are the only households that can afford the cost of fuels.

   In a nation without enough cheap energy, GDP has to deteriorate. Without assertive and competent government planning, unemployment will increase. Limited mobility makes the daily commute to work an arduous task. Higher energy costs limit business activity. Higher oil prices also translate into higher rates of inflation, especially for the current consumption of food, fuels, clothing, and so on. Despite gradual gains afforded by increases in energy efficiency and “green” energy, America’s economic fortunes are inexorably tied to the availability and price of cheap oil, natural gas, coal, and nuclear power. The disappearance of low cost energy will definitely damage America’s economy.

Government

   Unfortunately, America does not have a credible energy policy. It does not have a proactive energy exploration, production, and distribution strategy. Government is not focused on the need for cheap energy. Instead, America has a patchwork of politically correct, Federal and State energy measures, that guarantee Americans will pay higher prices for gasoline, diesel, propane, kerosene, heating oil, and jet fuel. Public policy also favors higher prices for electricity, thus increasing the cost of electric heat and making electric vehicles less attractive as a transportation option. Federal and State regulation continues to increase the cost of operating of natural gas, nuclear, coal and hydroelectric generation facilities, thus making electric heat more expensive. It would appear our political system is determined to place limits on the supply of affordable energy. For the American consumer, the cost of current consumption (including food and fuels) will go up. That’s called inflation.

   America does not have a credible public transportation policy. Although politicians routinely give this subject the appropriate amount of lip service, the United States does not have a comprehensive strategy for the funding, construction, maintenance, and operation of public transit lines and terminals. Railroad infrastructure and operation has been largely ignored. The integration of public and private systems needs far more proactive attention.

   The United States will have an energy crisis because there is no plan to satisfy America’s need for lower cost fuels. America’s politicians don’t even have the will power to address the issue. Furthermore, if there is an acceleration of oil prices, then welfare and entitlement costs, along with a decline of GDP, will devastate Federal and State budgets. It does not matter. Republican, democrat, socialist or conservative. There will not be enough money to fund the promises of America’s political establishment.

The Bottom Line

  

   As I have pointed out in other essays, oil product consumption is relatively inelastic. Increases in price do not have a direct correlation to consumption. At $74 per barrel, the price of oil has a marginal effect on demand. Most lower income Americans can still afford a mobile lifestyle.

   Oil at a sustained price of $99 per barrel (in 2010 dollars), however, appears to be a pivotal point in the balance of demand versus price. And as the price of oil rises through $149 per barrel (again- in 2010 dollars), a growing segment of the consumer population will not have enough money to pay for all the gasoline, diesel, propane, kerosene, heating oil and other oil products they would like to consume. Further, the use of oil based products for agriculture, manufacturing, and transportation gradually becomes prohibitive. Crop yields per acre will decline, goods will become more expensive, and transportation costs will soar (especially for airline travel).

    Think higher rates of inflation.

   As the price of motor fuels and household heat go up, expect a growing dissatisfaction, frustration and anger with Federal and State politicians who have failed to develop an adequate response to the fuels and mobility needs of lower income households. And the old political solutions may not work. America can not afford the cost of a meaningful personal transportation subsidy, nor can it pay enough welfare to compensate for the dramatic effect of higher oil prices.

   The Law of Unequal Distribution shows us that households with a disposable income of less than $50,000 (~ 49% of American households) will be forced to make serious adjustments to their spending on personal transportation and household heat in order to balance the budget.

   But there is a thin line between having enough cash to buy fuel, and not having enough money to survive from one paycheck to the next. The official rate of inflation masks the real world costs of current consumption because for the last three years they have been lumped with declining asset values to calculate the total rate of inflation.  It gets worse.  Since existing government policy favors increasing the cost of coal, oil, natural gas, nuclear energy, hydropower, and green energy, there is no upper limit to the inflationary impact of these policies.

   How soon will fuel prices become a serious political issue? When does constant exposure to frigid temperatures lead to illness?  Frustration?  Anger? Where is the breakpoint of rebellion? Which political theology will be the most appealing? Which political system is most likely to provide a practical solution?

Speculation and shortages will push up the price of oil. Speculation and surpluses will drive the price down.  But the impact of oil depletion guarantees that the long term price trend is UP.  Obviously something has to give.  The consumer will have to make choices.  Shoes for the kids or gasoline for the car?  Meat on the table or fuel for heat?  Make an impulse purchase at Wal-Mart or pay the rent?  It's going to be rough. 

The folks are not happy.

Ronald R. Cooke

The Cultural Economist

Notes

Note 1: Identifying the number of households is a bit tricky. U. S. Census American Fact Finder data 2005 – 2009 enumerates 112,611,029 households, but indicates the actual number of households can be found in the population survey. The U. S. Census 2009 population data estimates there are almost 130 million housing units, but not all units are occupied. The USDA estimates over 118 million households. I calculated my estimate of 116,500,000 by analyzing the contraction of households caused by unemployment and underemployment. The kids are moving back in with Mom and Dad. Multiple persons are sharing a single household.

Note 2: Please note. We are only counting households that have at least one vehicle for personal use, or personal and commercial use (as one would expect of real estate agents, trades people, and so on). In addition, we need to remember most households currently have more than one vehicle.

Note 3: For this analysis, light vehicles are defined as household passenger cars, SUVs, passenger vans, and pickup trucks with 2 axels and 4 tires that can be used for passenger transportation. Excludes commercial vehicles. Many vehicle estimates are poorly defined and may include motor cycles, motor homes and/or freight trucks. As a result, one can find higher numbers of vehicles in other estimates.

Oil Price Inflation: The Data Problem

Analyzing consumer spending on oil based energy products (as distinguished from common household energy products such as electricity, natural gas, coal and wood) has been a challenge. For example: most homes use more than one fuel for cooking, laundry, heat and hot water. Although surveys have been taken in an attempt to separate fuel use by volume, they tend to limited in scope, and are more likely to reflect the consumer’s opinion than actual fact. There is a conspicuous inconsistency of data definitions among the surveys and tabulations of consumer data. What, for example, is a light vehicle? Does that include motorcycles and Scooters? Golf carts? And how does one differentiate between personal versus commercial vehicles? And how do we count personal vehicles that are also used for commercial purposes?

Increased oil prices will have a marginal impact on organizations that use relatively little oil in the provision of goods and services. We can anticipate financial service, insurance, health care, education, government (excluding military and transportation services), and utility enterprises will experience modest cost inflation as the price of oil increases. On the other hand – depending on their business model - transportation, retail, wholesale, agriculture, construction, and manufacturing enterprises may experience modest to sharply increased cost inflation. These costs, less gains in oil consumption efficiency and changes to the basic business model, will eventually have to be passed on to the ultimate consumer.

Based on these challenges, it has been necessary to estimate certain data points. Although they appear to be reasonable, there can be no assurance as to their accuracy. All dollar estimates are in 2011 dollars, and exclude the effect of other forms of inflation.

 Oil Price Inflation: Sources

The data for this essay has been researched from the U.S. Department of Labor, Bureau of Labor Statistics; U. S. Department of Commerce, Census  Bureau, U. S. Department of Transportation, Federal Highway Administration; U. S. Library of Congress; U. S. Department of Agriculture; and various private institutions.

     

Who Do We Blame for America’s Financial Mess?

First published 10/26/10
Time for a reality check

The traditional checks and balances of America’s financial system have been deliberately bypassed. The Real Estate industry encouraged the production of very high risk mortgage applications. With the full knowledge and support of a two Administrations and a negligent Congress, complicit Banks ignored their responsibility to monitor the credit worthiness of mortgage applicants. Wall Street then sliced and diced these loans into $$ billions of highly questionable securities called Collateralized Debt Obligations. In the process, everyone involved dipped their hands into the cookie jar. Millions and billions of dollars. Get rich selling worthless paper.

But our folly doesn’t end with mortgage market insanity. We have also created a colossal dog pile of derivative instruments tied to thin air, slopped at the trough of greasy debt, and turned Wall Street into a raucous gambling casino.  Financial chicanery has been promoted as “investment”.  Our banking system, which only works if there is an environment of trust and institutional integrity, must now deal with consumers who have an overwhelming fear of deception.

Dare I ask.  Are the we victims of fraud and misrepresentation?  Criminal conduct?   Gonad driven hubris?   Mindless greed?  Or just outright stupidity?

In theory, this financial mess should never have happened. The Bush Administration should have provided the leadership and management necessary to ensure America’s federal agencies were doing their job. And under our “system” of checks and balances, if the cognizant federal agencies continued to screw up, then Congressional oversight should have kicked in to fix any problems.

But the system is broken. Financial ruin is the norm. The stinking sludge runs both wide and deep. Ordinary Americans are being savaged by economic privation.

A Massive Failure Of Federal Governance.

The Bush Administration
At first blush, it would appear the Bush Administration was locked in a state of bureaucratic stupor.  This situation had been developing for several years.  One would think someone on the Federal payroll would notice the smell of rotting value.  Now mind you, I’m just an old middle class American, but just what were America’s Federal agencies supposed to be doing?   Well.   Here is what they claim they should be doing….

The Securities and Exchange Commission
“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

The Federal Reserve
“The mission of the Federal Reserve is to provide the United States with a safe, flexible, and stable monetary and financial system.”

The Department of the Treasury
“Serve the American people and strengthen national security by managing the U.S. Government's finances effectively, promoting economic growth and stability, and ensuring the safety, soundness, and security of the U.S. and international financial systems.”

The Comptroller of the Currency, The Department of the Treasury
The Comptroller of the Currency is responsible for “ensuring a safe and sound national banking system for all Americans.”

Office of Thrift Supervision, The Department of the Treasury
“To supervise savings associations and their holding companies in order to maintain their safety and soundness and compliance with consumer laws, and to encourage a competitive industry that meets America's financial services needs. ….”
“The OTS examines each savings association every 12-to-18 months to assess the institution’s safety and soundness, and compliance with consumer protection laws and regulations. In addition, examiners monitor the condition of thrifts through off-site analysis of regularly submitted financial data and regular contact with thrift personnel. OTS examinations and its ongoing supervisory oversight are tailored to the risk profile of each institution.”

The Justice Department
“To enforce the law  ……  to provide federal leadership in preventing and controlling crime; to seek just punishment for those guilty of unlawful behavior; and to ensure fair and impartial administration of justice for all Americans.”

Now then.  Let us review the above statements of responsibility.  Did these agencies do their job?   Can we trust their judgment going forward?

You decide.

And what about Congress?
Who has ultimate oversight responsibility for America’s Federal Agencies?  Who holds hearings on agency operations?  Who has the responsibility to enact regulatory legislation? Who determines what these agencies are supposed to do and then monitors them to be sure they are meeting their legislative objectives?

Congress.   Republicans and Democrats.  There are two key committees. Let’s look at how they define their responsibility.

House (of Representatives) Financial Services Committee
“The Committee oversees all components of the nation's housing and financial services sectors including banking, insurance, real estate, public and assisted housing, and securities. The Committee continually reviews the laws and programs relating to the U.S. Department of Housing and Urban Development, the Federal Reserve Bank, the Federal Deposit Insurance Corporation, Fannie Mae and Freddie Mac, and international development and finance agencies such as the World Bank and the International Monetary Fund. The Committee also ensures enforcement of housing and consumer protection laws such as the U.S. Housing Act, the Truth In Lending Act, the Housing and Community Development Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Community Reinvestment Act, and financial privacy laws.”

(The Senate) Committee on Banking, Housing and Urban Affairs
“(The) Committee on Banking, Housing and Urban Affairs,  ….. (has responsibility for)  all proposed legislation, messages, petitions, memorials and other matters relating to ….
* Banks, banking, and financial institutions.
* Control of prices of commodities, rents and services.
* Deposit insurance.
* Economic stabilization and defense production.
* Federal monetary policy, including the Federal Reserve System.
* Financial aid to commerce and industry.
* Issuance and redemption of notes.
* Money and credit, including currency and coinage.
* Public and private housing (including veterans housing).
Such Committee shall also study and review on a comprehensive basis, matters relating to international economic policy as it affects United States monetary affairs, credit, and financial institutions; economic growth, urban affairs, and credit, and report thereon from time to time.”

Let us review the above statements of responsibility.  Do you believe Congress did its job?  Did these Congressional committees perform their duties in a responsible manner?  Do you believe they should have been aware of the financial mess Wall Street was creating? Or do you chose to believe certain members of Congress were instrumental in the creation of the housing bubble, the collapse of the financial markets, and the mortgage mess that led America into this recession?


The Real Story

Blame
The Democrats will obviously blame the Bush administration for everything that has gone wrong. They conveniently ignore the fact that Liberal Democrats were in charge of Congress while this mess was collecting in America’s financial toilet. The Republicans, bless their hearts, continue to be totally confused by just about everything. Let’s face it. Neither the Democrats nor the Republicans have enough intellectual depth to even know what questions they should be asking. Even if they had the will. And do you really think  anyone in the Washington establishment will take any responsibility for this massive failure of the Federal regulatory system?

Every American should demand an answer to this one question: Did the Federal bureaucracy fail because it did not have the authority (which infers Congressional legislative failure), or did it refuse to pursue its responsibility (which may infer massive corruption)?   Either way, the Federal Government has effectively transformed $$ trillions of dollars of stinking paper into what will become very suspect Treasury bonds.  New mortgages purchased by Fannie and Freddie continue to increase this dog pile of debt.   Add it all up. Current debt plus mortgage debt. America’s total Federal debt will exceed $12 trillion. That’s $39,400 per American.  Then add unfunded Social Security and Medicare obligations.  NO – we can not afford it.  The only recourse will be a devaluation of the dollar – all accompanied by a sharp increase in inflation, higher unemployment, declining “real” GDP, and the worst personal economic misery our nation has ever seen.

Is this what we want?

Change
We Americans know the “system” is not working.  We know it is incredibly corrupt.  Incompetent.  And totally dysfunctional. The only question is: how long will this go on before we the people are so fed up our nation explodes with anger?

Obama will talk about change.  All political vapor.  He will carefully avoid mentioning our Democratic Congress had multiple opportunities to avoid this mess.  McCain will talk about change. But the Republicans are far too confused to be an effective legislative counterparty.  House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid continue to be models of vitriolic ideology. Don’t expect them to pursue a course of constructive leadership. And what about Senate Banking Committee Chairman Chris Dodd (D-CT)? Or Chairman of the House Financial Services Committee, Barney Frank (D-MA)?  Did they play a key role in creating this mess in the first place? Nancy Pelosi claims "we haven't really gotten the credit for what we have done.” She’s right. These people have demolished America’s economy. We should give them full credit for America’s financial mess.

Are you confident the Washington Establishment will do its job?  Will these individuals put the welfare of the American people before their own personal selfish best interest?

Conclusion

There is absolutely no excuse for the financial carnage that has occurred. Members of the House Financial Services Committee and Senate Banking Committee either knew, or should have known, that America was headed for financial disaster. But instead, our Federal system has failed the American people.  Blame Barney Frank. Blame Chris Dodd. Blame Nancy Pelosi. Blame Barack Obama. Blame the vapid Republican response. But when you go to the polls, remember who is at fault.

 It is unlikely the Washington establishment will fix our financial system because politics and ideology will be more important than decisive action.  That can only lead to ill conceived legislation.  Followed by the misappropriation of funds.  Decisions based on political expediency rather than virtue.  And endless corruption.

It’s time for a radical change in the way we govern ourselves.  If we want effective government, we must establish a better system of management with strong, positive, and constructive leadership.



Ronald R. Cooke
The Cultural Economist

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