Iowa Update

Getting close to the early primaries, so time to update my forecast. Michelle Bachman has faded from the front spot in Iowa and Pawlenty has dropped out of the race. Herman Cain was the flavor of the month but now Newt Gingrich is surging. I am still waiting to see who Mike Huckabee will endorse, but for now my prediction is: 1st: Newt Gingrich 2nd: Ron Paul 3rd: Mitt Romney 4th: Rick Perry The top two spots could easily be switched. Caucuses are more susceptible to influence by enthusiastic voter which Ron Paul has in abundance. The support for Gingrich is weak and most as an alternative to Romney. Still, so long as Romney runs a respectable third, I don't think Iowa will hurt him. Romney does not seem comfortable being the front runner despite his lead in fundraising and endorsements. He is the marathon man; simply outlasting his competition. It is likely that Michelle Bachmann and Gary Johnson will drop out of the race after the caucus, though Bachmann may hold out through the New Hampshire primary. Rick Santorum may drop out but is more likely to go on the New Hampshire.

The Real Choice about the Debt

A vote for default is a vote for higher taxes.

While it is currently true that government revenues exceed interest payments, once a default occurs interest rates will rise. As soon as interest payments exceed government revenues, because the spending on the remainder of government (defense, border patrol, state department, Federal court) can never go below zero, the only recourse left would be to raise taxes. Even printing money would be ineffective because interest rates would only rise higher because of inflation expectations.

Confusion about the 14th Amendment

There has been much discussion about the coming debt ceiling limit deadline to avoid a default by the U.S. government. Capital Gains asks "Is August 2 Or July 22 The Day The Government Turns Into A Budget Pumpkin?" People seem to be confusing two different concepts: "default on" and "abrogate".

To default on debt means not paying the debt in the time and amount originally agreed to. To abrogate debt means to repudiate or reduce the amount of the debt. Section 4 of the 14th amendment clearly prohibits abrogation of the debt. I do not see any restriction on defaulting on the debt.

The point is that some in Congress are talking as if not raising the debt ceiling would result in abrogating the debt. After a default, the debt will still be there and much harder to repay as lenders would be reluctant to extend us the money to even rollover the existing debt.

Let us hope that wiser heads prevail in this discussion.

A solution

As suggested on Hoocoodanode:
National Mortgage loss recognition act of 2011:

All current, non-modified mortgages originated in 2006 or 2007 owned by a privately issued MBS shall be written down by 5% of principal value or $20,000, whichever is less.
Mortgage owners, or servicers as their agents, may request an appraisal of the property, prior to the writedown. If the appraised value of the property is greater than the principal value, no writedown need occur. If the appraised value is less than the principal, the principal shall be written down to the greater of the appraised value or 95% of the remaining principal.

This would speed up the process of clearing out the overprice mortgage loans. By reducing the principal value of the mortgage, the MBS would gain transparency and thus become more liquid. It will also bring some homeowners into positive equity, meaning they are free to sell the house or possibly refinance. Even if they don't have positive equity, the amortization of the loan would be accelerated by the writedown and they will reach positive equity much sooner.

Preliminary Primary Forecast

Now that the Republican nomination field is mostly set (except Sarah Palin hasn't announced she isn't running), I can make an initial forecast of the Republican nomination.

Iowa Caucus
1st: Michele Bachman
2nd: Tim Pawlenty
3rd: Mitt Romney
4th: Newt Gingrich
Assumption: Mike Huckabee will endorse Tim Pawlenty before the Iowa Caucuses.

New Hampshire Primary
1st: Mitt Romney
2nd: Ron Paul
3rd: Newt Gingrich
4th: Michele Bachman
Wildcard: will the Tea Party voters make a strong showing in New Hampshire or will more traditional conservative dominate? I'm guessing the latter.

South Carolina Primary
1st: Mitt Romney
2nd: Michele Bachman
3rd: Tim Pawlenty
4rd: Newt Gingrich

I still expect Romney to be the nominee but the question is how long the nominating contest goes on. I expect it to whittle down to Romney vs Bachman fairly quickly. How long Michele Bachman can resist the pressure to fall into formation?

Bring home the troops.

It is past time to remove U.S. troops from Korea. Sixty years of war is enough. South Korea is a developed country, with strong trade ties to China, the real threat in the the region. The South Korean Army is strong enough to handle the threat from the ramshackle DPRK Army, even without China's likely opposition to any substantial attack by the North Koreans.

The U.S. could save money by moving the troops back to the U.S. and putting them in the rotation to serve in Afghanistan and Iraq. Given all the various missions the U.S. military has been given, our present forces have been stretched thin. It is not realistic to trim defense spending unless we also begin to prioritize missions and trim those that are less pressing.

Half baked idea

Having gone through a round of brinkmanship on the budget without accomplishing much, we should consider how to approach the underlying problem. While people always think they are paying too much in taxes, that is not the root cause of the current struggle. After all the budget didn't decrease spending very much, since increases in defense spending offset most of the drop in domestic spending. The problem is that people don't want their taxes funding certain spending.

Here is a proposal to address that. Congress could create a National Endowment for Defense and Security and a National Endowment for Poverty Reduction. Taxpayers would then be able to donate money (minimum $200) to the endowment of their choice and get an 80% tax credit. The endowment money would be invested in 10-year TIPS or equivalent and the interest from those securities would go directly to programs for that area, bypassing the appropriations process.

This would mean that taxpayers can choose to direct their tax dollars. So if a person didn't want his money going to poverty programs, he could donate to the National Endowment for Defense. Or if they object to defense spending, they could donate to the National Endowment for Poverty Reduction.

Notice this doesn't decrease their taxes, it actually increases revenue. But it does decrease the amount of money that Congress has available to appropriate. Most people would not donate and simply allow Congress to allocate their tax dollars. But those who want to direct their tax dollars can pay up and know what purpose their money is supporting.

Populism in the Arab World

It was only on February 17 that Libyan protesters staged a "Day of rage" against the rule by Colonel Gaddafi. I admit I thought it unlikely that they would be able to succeed against the ruthless regime. But now we have reached an end game with most of the country in open revolt and only a few areas held by brute force. What is more surprising is how quickly elements of the regime defected in the face of the determined uprising, including the Justice Minister, the Interior Minister, Ambassadors and the United Nations delegation.

I hesitate to call this a democracy revolt; it is not clear what sort of country Libya will be after Gaddafi has been dealt with. But it is likely that the next government will attend more to the needs of the populace than the current government.

And this is probably the lesson that we should take from these events, that the voice of the people do matter even in an authoritarian government. Certainly, other governments are feeling nervous, as shown by the action taken by the King of Saudi Arabia. But it is too soon to begin looking for the next domino. The two big items to watch for are Iran and China but both governments have a lots of infrastructure and money invested in repressing the populations so it will be more likely a battle of attrition than the kind of sudden protest that worked in Tunisia, Egypt and Libya.

Democracy? in Egypt

Now that Hosni Mubarak has resigned as President of Egypt, many commenters are already talking about the possibility of elections in September. Every time a regime changes the same script seems to be run about returning to civilian rule and free and fair elections.

However, elections are not a sufficient and perhaps not even a necessary condition for Democracy. The rush for elections demonstrates an impatience quite at odds with the lassitude of efforts to push the previous regime towards Democracy. Quite evident, the hunger from “Western” governments is not for Democracy but for Stability. Fake elections are seen as an expedient towards returning to business as usual.

The most robust policy in the long term is not to seek Stability but to encourage Vibrancy. A central component must be to ensure a variety of voices have access to the media. Either state supported media must give equal opportunities to all parties or multiple competing private channels must be licensed. An independent judiciary must be capable of holding government accountable for corruption and for violation of human rights. Only with these elements can a sustained, and perhaps messy, national debate allow people to hear and decide the options for their future.

The recurring refrain is that elections will inevitably lead to fundamentalist Islamic rule. Chancellor Merkel heads the Christian Democratic Union; does that make Germany a Theocracy? The parties that contest a free and fair election must reflect the character and culture of the country in which it is held. An aversion to Islamic parties that lawfully compete in the electoral process is purely xenophobia.

In the end, Democracy must be tailored to each country; and only the citizens of that country, in a careful and negotiated process, can bring life to the aspirations for a freer and fairer country. Those who have already trod this path can offer advice about the pitfalls of this path, but Democracy can only be claimed by the courage, patience and wisdom of the people, Allah willing.

Budget myth

In a Washington post story about Obama's strategy for the next two years, there is the statement:

Unlike the federal government, states must balance their budgets.

This does not mean what most people think it means. It does not mean that states must raise more in taxes than they spend. It merely means that legislators have to say where the money they intend to spend is coming from. It may come from taxes; it may come from reserves; it may come from issuing bonds.

But state don't actually know how much they will raise in taxes, often the project revenue is optimistic. When revenue falls short of projections (as happens during a recession), the state will spend from reserves if they have any. One of the issues with the current downturn is that states are reaching the bottom of the barrel of reserves. This is why Illinois is simply not paying vendors on time. When the money comes it, they write a check.

The only difference between the Federal government and state government is that state legislatures have to explicitly vote for a bond issue, where as Congress implicitly authorizes bond issues when they pass appropriations bill or continuing resolution. The debt limit legislation is completely redundant. If Congress want to limit the deficit, they should simply cut spending.

Budget Conscious

Paul Krugman has been criticizing President Obama for enacting a much too small stimulus package. Dr. Krugman's take is that Obama is appeasing the Republicans and not willing to admit that his strategy last year was a mistake. But I think Dr. Krugman is wrong, I don't think the size of the stimulus package was the result of strategy, I think it was a deliberate policy choice.

President Barak Obama is a budget-conscious socialist. The giveaway was his appointment of Peter Orszag (a budget hawk) to the head of the Office of Management and Budget. Too many of the choices that the President has made have been seen as concessions to the Republicans rather than penny pinching by the President. President Obama wants Universal Healthcare but only if wasn't too expensive. Contrast this with President Bush and Medicare part D.

Time to be Presidential

Many people forget that Barak Obama was just a few years ago, merely a state legislator. It was only 2005, not quite six years ago, that he first came to Washington as a Senator. While in the Senate, he was mentored by some of the old hands there, including Senator Ted Kennedy, Senator Robert Byrd, Senator Tom Daschle and Senator Harry Reid. If Senator Reid loses his re-election bid, as most polls indicate, none of the people listed will be in the Senate next year.

When I look back at President Obama's first two years in office, what strikes me is how passive he has been. The stimulus bill passes was quite tepid; the signature Healthcare Reform was left to the hands of the Democratic leaders of the House and Senate and only rescued by Presidential action when the election of Scott Brown threatened to block it. The Financial Reform bill was also quite mild, partly because of intense lobbying by the banking industry but also because the attitude in the Whitehouse was "We need a bill but we don't care what's in it." In many ways, we've experienced two years of Senator Obama instead of President Obama.

With the departure of Rahm Emmanuel and Larry Summers, the Clintonite aspects of the current administration will likely fade and we will see much more of Obama's style of leadership, if he has any. The founders of the country created the office of the President because they felt that the country couldn't simply run on auto-pilot. We are still waiting to see of Barak Obama is up to the job.

Terrorist Free

Most gas stations in the U.S. sell three blends of gasoline. The regular is an unleaded low octane blend, usually the cheapest of the three blends. The premium blend is a higher octane fuel required by high performance engines that use a higher compression ratio. The higher octane prevents premature combustion at the higher pressure. The third blend is a left over from the days when gas station sold an older regular leaded blend in addition to the unleaded regular required by cars with catalytic converters. This tends to be a blend with an octane rating between regular and premium, without any particular reason for being sold other than the infrastructure for selling three blends exists.

Instead of selling a middle octane blend, gas stations should offer a blend that is only refined from North American crude oil: a Terrorist-Free gasoline. They should be able to charge a higher price than regular gasoline. This blend could have a higher octane and more additives, in fact it could be the exact same formula they sell now but with the paperwork to prove that it was refined from Crude Oil pumped from the U.S., Canada, or Mexico.

Just as consumer can choose a dolphin-safe tuna or a conflict free diamond, they should be able to prefer domestically produced gasoline over gasoline that may or may not be made from imported oil.

Marketing should be simple:
Help bring the troops home; buy terrorist-free gasoline.
If you want energy independence, just pay for it.

To the oil companies, I say, “Give America a choice. Sell Terrorist Free gasoline at every gas station.”

Energy Independence Now

While I am not friend to government spending in general, I do believe it makes sense in some cases for government to make investments that provide indirect benefits to the whole population.

One such investment that makes a lot of sense is investing in technologies that would reduce our dependence on foreign oil. Many alternative energy technologies exist to produce electricity but we already have relatively cheap electricity, so Photovoltaic (PV) and Wind, while renewable don't increase our energy independence. And while hybrid and electric vehicle will help eventually, turning over our vehicle fleet will take a very long time. We need something that will move the needle of energy dependence much quicker.

We need to invest in

• CNG for commercial vehicles
  
• biofuels from algae
  
• Solar thermochemical production of gasoline.
  

Changing our trains and trucks from diesel to compressed natural gas would lessen oil imports and make better use of a resource that we have in abundance now: natural gas. Much of the 'oil' resources that are available from deep water drilling in the Gulf is actually in the form of natural gas. We need money to encourage the installation of equipment to refuel CNG vehicles, tax breaks for purchase of commercial vehicles using CNG and subsides for converting existing vehicles to CNG. Commercial vehicles are a good focus because they comprise a smaller fleet than passenger vehicles and they tend to use more oil products per vehicle.

The second technology we need to pursue is hydrocarbons from algae. Unlike ethanol from food crops, growing algae doesn't compete for valuable farm land. It is the kind of operation that can occur in urban settings as well as rural. Since a key component of growing algae is carbon dioxide, it can use the exhaust from existing thermal plants to 'feed' the algae. There are also potential to use algae as part of the sewage treatment process to clean the water and produce hydrocarbons as a byproduct.

Recent algae links:

• http://www.brighterenergy.org/16288/news/transport/solazyme-wins-150000-gallon-navy-order-for-algal-biofuel/
  
• http://www.favstocks.com/department-of-energy-announces-57m-for-small-businesses-in-phase-iii-xlerator-program-algal-biofuels-advanced-vehicle-technologies-and-fuel-cells-included/1624809/
  
• http://www.nctimes.com/business/article_243b5d24-6bac-5b84-9ddf-4ce7dd50ba66.html
  

The last technology uses solar heat to power basic chemical reactions, splitting carbon dioxide into carbon monoxide and oxygen. The carbon monoxide can be mixed with steam to produce various hydrocarbons. Electricity can also be produced from the waste heat of the chemical reaction. This is the ultimate solution: Sunlight + air + water = gasoline. The capital costs upfront are large but the running costs are very low, so the fuel produced can be very cheap.

Don't focus on the salaries; invest for the benefits to the wider economy. $1/ gallon for gasoline would create a lot of jobs. The money saved by consumers can either pay down debt or begin a new cycle of consumption. Even small amounts of cheap fuel would drive down the costs of existing sources as countries attempt to monetize their resources while they still can.

We have talked about energy independence for decades and it has been within our reach but we haven't been willing to pay the price for independence. The time to act is now, when we have spare labor and capital available and the cost of borrowing is low. All of the technologies are proven now; there are no new discoveries needed, just investment and engineering stand between us and a future with less dependence on foreign oil.

Thank You

Alaska Libertarians say no to Murkowski Senate Nomination
Yes. We don't need no stinking, big spending socialist on the Libertarian ticket.

Spare a dime?

The Federal Highway Trust fund, which is funded by a 18.4 cent a gallon tax on gasoline, is the primary federal source for paying highway construction and maintenance costs. The fund has been depleted recently both due to fewer miles being driven during the weaker economy and fuel economy improvements.

A ten cent increase in the excise tax would help pay for needed improvements in our infrastructure as well as employ Americans to build things that Americans use. It will also reduce our dependence on foreign oil.

They used to tell me I was building a dream
With peace and glory ahead
Why should I be standing in line
Just waiting for bread?

Once I built a railroad, I made it run
Made it race against time
Once I built a railroad, now it's done
Brother, can you spare a dime?

Test

This is a test. This is only a test. If this has been a real emergency, you would have received instructions for where to tune in your area for further instructions. This is only a test.

Libertarianism

Austerity is the new fashion in politics. The Greeks need it; the Germans want it. Some in Congress feel we don't have enough of it in the U.S.

But no one wants real austerity; just ask the Latvians. What politicians want is the respectability of fiscal discipline without actually asking voters to lower their standard of living. What they are dabbling with is the equivalent of ordering a Diet Coke with their bacon triple-cheese burger. The Senate is considering a $30 billion dollar "jobs" bill. Whether it is a good bill or a bad bill, saving $30 billion in one time expenditures is a paper cut on a $1.3 trillion budget deficit. This is not austerity.

Real austerity can not be a fad. It has to be followed for years before it shows results. In today's "get through the next election" policy mentality; austerity is not possible. The danger is that the austerity posers will prevent government from making the needed investments to fortify economic growth. And economic growth is the best solution to our deficit problem. A side order of real austerity would be nice; but I don't see it on the menu.

Quickie

Signs you may be a Libertarian:

When government says "Don't worry, we'll take care of it.", you have a hard time sleeping at nights.

Anniversary

This week Obama has been trying to tout the success of his stimulus program. As I said last year, the package passed by Congress was too small to have a noticeable effect on the economy. There are very few times when additional fiscal spending can prove effective and now that interest rates are less accommodating, the Democrats suddenly realize that they need to create jobs. To create jobs this year, they need to budget the money last year. So expect to see a lot of expensive and useless election year gimmicks being proposed and some fraction of them being passed into law.

Overall, Obama has been ineffective in his first year in office, but he has exceeded my incredibly low expectations. Hopefully, he is learning the lesson that he can't just let Congress create legislation by itself. This is a President who wants to be liked by everyone, but if he wants the job to get done, he's going to have to step on a few toes. I suspect he will be very polite as he does so.