Sunday Morning Economics - Debt Ceiling Simplified

It is factual to say the our burgeoning federal debt is a consequence of budget choices made by both Democrats and Republicans.  It has been a bipartisan endeavor to borrow money to finance expanded federal spending, underwrite the indirect costs of tax cuts, maintain social safety nets and expand assistance during recessions.  It is an oversimplification to suggest that growth in spending is the sole domain of Democrats or cutting taxes is the sole domain of Republicans.  

Democrats and Republicans mutually engage in both pursuits.  

Recent history suggests that the largest drivers of our accumulation of debt has been the federal response to the economic downturns of the 2008 financial crisis and the 2020 pandemic crisis.

You may recall that when Obama took office in 2009 he inherited a recession from Bush.  In response, he persuaded Congress to authorize $787 billion in stimulus spending and tax cuts.  Safety-net spending continued at higher levels over the ext few years as the economy slowly rebounded.

After COVID spread across the globe in 2020 leaving floundering economies everywhere in its wake Trump persuaded Congress to authorize a much larger aid package exceeding $3 trillion.

Biden ascended to office in 2021 and signed into law an additional $1.9 trillion in stimulus.

It would be fair to question the efficacy of individual components of all of the foregoing.  Both parties continue their finger-pointing.  And economists disagree amongst themselves.  Nevertheless, there is general agreement that in the face of a serious economic decline federal spending (and its resultant borrowing) to protect citizens, businesses and stimulate the economy is a good thing.

There is also general agreement - amongst economists anyway - that recent inflationary pressures can be laid at the feet of flooding the economy with all of that liquidity.  But I digress.

So, is it a small matter to assign blame to individual parties or administrations for the debt?  Of course not.  Like I said at the outset this is bipartisan.  The deficit increased by roughly $12.7 trillion under the administrations of Bush and Trump.  And an additional $13 trillion under the administrations of Obama and Biden (so-far).

Of course, these are simply the raw numbers and do not account for the deficit impacts of policy decisions that persist for many years after presidents depart.  Nor does it address the fundamental principle of matching spending with revenue.  In years of extraordinary spending demands my own household may exceed its revenue resources.  But subsidizing a lifestyle solely with borrowing is reckless and fraught financial planning. 

The important thing to remember is that we got here largely as a consequence of the actions of the four most recent administrations.  As you witness the current drama remain mindful that any newfound spine for deficit spending is coming from many of the same members of Congress who sat idly by and with nary a whimper raised the debt limit three times while the former guy was in office. 

Sure, they want to blame everything on the current guy.  That is theatrics and politics.  I get it.

I'll conclude this post with an observation and admonition.  Failing to raise the debt limit does nothing to control spending for the simple reason that the money has already been spent.  Getting your undies in a knot for all the stuff they've already bought doesn't do anything to stop Congress from spending the money from the get-go.  It may keep your base in a near-state of constant agitation and near-erotic arousal but when you pick it apart it's conflated virtue-signaling.  Sure, I admit to being raised in a simpler time; but I learned this:

Paying your bills is virtuous.

Playing with dynamite is dangerous.

You're welcome.

And stay-tuned.....

Energy Independent?

A funny thing happened on the way to the FB page in the last couple of days. There has been a marked increase in chatter about how Donald Trump made us energy independent and how Joe Biden erased it. Once again I am reminded that FB is a fertile petri dish for lazy partisan economic thought. And Zuckerberg doesn’t much care about which side of partisan divide you dwell. It’s all click bait. *Disclaimer: I own FB stock. Please, PUHLEASE, click to your heart’s content.

 

I spent almost four decades making arcane economic concepts easy for lay-people to grasp and understand. I was good at it, built a successful investment advisory business, made a lot of friends and retired. I am told I even saved a marriage. My business partners continue the line of succession today along with the fourth generation of many of the very first clients. But I digress. The point of this post is that if I had clouded my professional judgment and advice with partisan rancor I would have been out of business in fairly short order. So I am going to put my advisor hat back on for a spell as this is the stuff retired financial silverbacks love to expound-upon. It’s free too as I’m no longer licensed to bill you for it. You can stop here or choose to keep reading. You pick. I recommend you share this with your own trusted financial advisor for a second opinion. Indulge me the access to your valuable bandwidth.

 

The truth of the matter is that in the natural order of the oil business we import oil from other countries each and every day. Unlike rare art works or collectibles oil is a fungible global commodity. It is universally interchangeable and trades freely between willing buyers and willing sellers. If we import a million barrels of oil and export a million barrels of oil our net dependence or independence remains unchanged. Nobody will give a tinker’s damn.

 

It is a fact that in 2019 the net imports for crude oil flipped from positive to negative. By that measure alone (excluding natural gas, coal and renewables), we became “energy independent” insofar as oil consumption is measured. Donald Trump was president when this happened for the first time in October 2019.

 

This trend towards independence began under George Bush II, continued under Barack Obama, Donald Trump and now Joe Biden. The policies of the former and current presidents bear no direct responsibility for this trend.

 

Hydraulic fracking is responsible for this. Yup, fracking.

 

It is instructive to know that it was under Obama that legislation was passed into law allowing producers to sell crude oil for export. Heretofore, only refined products like gasoline or diesel and kerosene could be exported. Opening-up the markets for domestic producers of crude oil was a pretty big deal as it allowed access to global consumers for front line drillers and not just refiners. This both extended and expanded the fracking boom.

 

It is no great secret that Biden has embraced policy that could negatively impact domestic oil supplies in the future. However, the surge in pricing that we were witness-to last year was largely a consequence of a COVID-induced drop in production (supply) that began in the spring of 2020 long before Trump left office. The 2020 drop in production was initially five percent. In the eyes of most people 5% might not seem like much but it happens to be more than three million barrels per day (BPD). Consumption (demand) during the pandemic recession declined by 3% and as a consequence our energy independence began to shrink.

 

So, the short answer is that we maintained a margin of energy independence (albeit smaller) going into 2021. Demand fully recovered last year while production continued to lag with the following result: Smaller Supply + Increased Demand = Higher Prices.

 

By the close of 2021 production reached 11.7 million BPD. While this was still a million BPD below 2019 levels it was a million BPD higher than levels at the close of 2020. This was evidence of a recovery.

 

As further evidence of a turnabout the number of rotary oil rigs began to recover. At the close of 2019 there were approximately 700 operational domestic rigs. In 2020, that number had fallen somewhere below 200. Oil field services giant Baker Hughes recently reported that the rig count has rebounded to close to 500. As a leading indicator of the strength of the domestic oil business a recovering rig count is exceedingly encouraging.

 

So where does that leave us?

 

At the beginning of the year I blogged about this and my expectation was that as the supply/demand gap closed between production and consumption our independence would recover and consumer prices would moderate.

 

The good news is that according to the US Energy Information Administration  and data just in within the past week; we continue to remain net negative (independent) with regard to imported oil. 

 

 

Does this mean we do not import oil? 

 

Nope. As I pointed out in the third paragraph (above) the nature of the oil business is that you always import oil. The important end-result is net negative. And for the record most of our imported crude comes from our friendly neighbors to the north. Our neighbors also export refreshing Canadian lager to US markets but that is an altogether different discussion.

 

The net negative situation is a good thing as this “independence” most importantly protects us from supply shocks. Furthermore, we retain profits here and they do not go to vain and unholy middle eastern despot kingdoms. Instead they contribute to our own GDP and US prosperity. When energy prices go up it is domestic producers of crude oil, their workers and oil patch states like Texas, North Dakota, New Mexico, Oklahoma, Colorado and Alaska that are winners. This is a good thing.

 

Yet let’s be clear; energy independence as described here does not magically translate to low prices. Anybody that tells you otherwise is peddling economic pornography or hocus-pocus. Go back to paragraph three (above) and be reminded that oil is a globally-traded commodity and is freely-priced. Like all global commodities it is subject to price shocks as a consequence of geopolitical events.

 

No president of any party has the ability to dial-up or dial-down commodity prices any more than they have the power to fix the price of a share of Apple stock. Don’t take my word for it though; Hugo Chavez tried that years ago and look where it got Venezuela. A vast failed socialist state.

 

If energy prices spike as a result of war and the disruption of European energy supplies it will likely not have outsize influence on our longer term overall growth. Nevertheless, you and I will not be happy with the price at the pump. And Old Joe Biden will be blamed for this.

 

Because that’s the way politics works, not the way market economics works.

 

PS – If anyone wants to blame any of this on shutting down Keystone XL – fight me.

 

Energy Independent?

I am witness from time-to-time of individuals who state a belief that the Former Guy made us energy independent, and now under the Current Guy we have somehow immediately lost that energy independence.

To be clear, presidents cannot and do not decree energy prices, production, dependence or independence. Global markets and supply demand forces are responsible for this. That said, I know that most of you reading this want easy answers to complex subjects. I get it. And the easy answer is to point to the Current Guy's hostility to the oil and gas industry and say: See. It’s all his fault! The actual answer is more complicated. Allow me the opportunity to explain.

First, a few words about what constitutes energy independence – something that most individuals see only through the lens of oil and natural gas. A more accurate view would be to account for all of our domestic energy production; oil, natural gas and coal and renewables. Then subtract our net energy consumption. If you only consider oil and natural gas those sources represent only 68% of our energy consumption. Thus, if you observe our net exports going positive the conclusion is energy independence. If our net exports go negative the conclusion is dependence.

The truth of the matter is because oil is a fungible global commodity we import oil from other countries each and every day in the natural order of the oil business. That reality is not going to go away. All that matters is if we import a million barrels of oil and export a million barrels of finished product our independence is basically unaffected.

It is a fact that in 2019 the net imports for both crude oil and finished products flipped from positive to negative. By that measure alone, we became energy independent insofar as oil consumption is measured. The Former Guy was president when this happened for the first time in October 2019. 

Second, if you look at the chart (above) the trend towards independence began under the Former Former Guy. Alas, the policies of the two prior presidents bear no responsibility for that trend.  Neither of them get credit.  Hydraulic fracking is responsible for this.

Nevertheless, it was under the Former Former Guy that legislation was passed into law allowing producers to sell crude oil for export. Heretofore, only refined products like gasoline and diesel could be exported. Opening-up the markets for domestic producers extended the fracking boom benefiting front line producers and not just refiners.

Lastly, it is a fact that the Current Guy has embraced policy that could negatively impact domestic oil supplies in the future. However, the surge in pricing that we are witness-to today is largely a consequence of a COVID-induced drop in production (supply) that began in the spring of 2020 long before the Former Guy left office. The 2020 drop in production was 5%. That happens to be a drop of more than three million barrels per day. It has not yet recovered. And while consumption (demand) during the pandemic recession initially declined by 3% our energy independence began to shrink.

So, the short answer is that we maintained a margin of energy independence (albeit smaller) going into 2021. And since then demand has fully recovered and we now find ourselves with this: Smaller Supply + Increased Demand = Higher Prices.

The final answer to the energy independence question won't be known until all the data is in for the full year of 2021.  Then we will know we've lost our energy independence for the year. I’m not being a smart-ass but if it hasn’t it will largely be a consequence of domestic oil and gas production continuing to lag pre-COVID levels. As the gap closes and production more closely matches the demand needs of a recovering economy our fleeting dalliance with independence will likely return and consumer prices will moderate. That is my expectation.

 

Delving Into the Divide

At a Marin County, CA fundraiser back in the spring of 2008 candidate Barack Obama took a stab at explaining the vast cultural gap that separates Turkeyfoot, PA  from Marin County.    

You go into some of these small towns in Pennsylvania, and like a lot of small towns in the Midwest, the jobs have been gone now for 25 years and nothing’s replaced them, Obama said.  And they fell through the Clinton Administration, and the Bush Administration, and each successive administration has said that somehow these communities are gonna regenerate and they have not.   

And it’s not surprising then they get bitter, they cling to guns or religion or antipathy to people who aren’t like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.

 – April 6, 2008    

It seems like a million years ago - yet how prescient was that?  However crudely Obama stumbled into this – Donald Trump picked it up and ran with it.  All the way to the White House. 

I may loathe Donald Trump (the person) but I absolutely get how his base feels.  Yeah, I get it.  It is real.  And the more I read those words the more unsettled even I can get.

Delving Into The Divide

Since the drone strike on January 3^rd that killed Qassim Suleimani the Trump administration has offered multiple and ever-changing rationales for the attack. 

This isn’t rocket science gentle readers.  The actual justification for this attack can be found in old tweets of Trump predicting Obama would attack Iran because he was an incompetent negotiator trying to get reelected. 

I

It would have been a simple matter to bask in the afterglow of eliminating a bad actor responsible for hundreds, upon hundreds of dead and maimed service members and innocent civilians. 

The truth is Trump thought it would be good for his election.  

End of story. 

Move along now. 

Nothing further to see.

AI

If you’ve heard or read about technologies that use facial recognition, allow cars to drive themselves and systems that can detect cancers better than a human doctor you’ve heard about artificial intelligence or AI.     

China said in 2017 that it was laying the groundwork to become the global leader in AI by 2030.  And if you follow the money – by the end of that year 48 percent of all of the world’s AI venture capital went to China alone.  Startup companies in China raised $4.9 billion in 2017 from only 19 investments. In the United States $4.4 billion was raised from 155 investments. 

Several other advantages also belong almost exclusively to China in the realm of AI. The most significant is access to large amounts of data.  China doesn’t have the same respect for individual privacy as most countries and has made no secret of collecting data (including facial recognition) from its ginormous population.  I’m not suggesting that the US should surveil its citizenry like China does but it is worthy to take note of the fact that while the Trump administration says they have placed a priority on advancing AI technologies there has been no commitment to funding it. 

You can learn more here. 

Enjoy this short video showcasing AI and stay tuned…..

Uncharted Territory

Hard to believe we spent the final six years of Obama's time in office playing a game of chicken over shutting down the government and flirting with default.  All over purported concerns about our nation's fiscal future.  None of it meant anything.  The Trump budget is now expected to push annual deficits over $1 trillion within two years.

Republican control of government has now produced a ten-year outlook likely to push publicly held national debt close to $30 trillion by 2028. Debt as a percentage of the economy would be the highest since 1946 and perhaps the highest ever recorded - depending on how much of the tax bill is extended.

With total debt climbing to 100 percent of GDP one can only imagine the consequences.  Higher interest rates?  Competition crowding-out private investment?  Economic stagnation?

Uncharted territory.

Tanning With Your Lottery Winnings

In case you’re wondering about who the apparent winners and losers will be following the repeal of Obamacare  you should start taking careful notes.   Here’s a start.  

In the winner column you will find the Tanning Bed Industry.  Yessir, it is told that the 10% excise tax imposed by the ACA - as both a revenue source and to discourage indoor tanning - has led to the closure of as many as half of the nation’s tanning salons.  

This critical dearth of artificially-imposed dangerous UV should begin to reverse very soon. Nevertheless, If there isn’t a tanning bed salon opening soon on a corner storefront near you - President Trump says to use orange spray-on tan.   

In the loser column are the lottery winners.  Pages upon pages, upon pages of language in the repeal bill are devoted to ensuring that lottery winners would not be able to avail themselves of Medicaid coverage.  Medicaid is for poor people - not for sudden millionaires. 

You can thank the enthusiastic Rep. Fred Upton (R-MI 6^th District) for his legislative vigilance on this.  Bravo.   

Of course, people of wealth or common sense (or both) don’t play the lottery.  And they’re not generally Medicaid beneficiaries either.  Oh well.  

You can learn more about the winner and loser scorecard here.

Rope A Dope

This morning I watched former National Intelligence Director James Clapper on NBC's Meet the Press.  He denied President Donald Trump's (heretofore unsupported) claim that the Obama administration had wiretapped Trump Tower before his inauguration.   He said this:  "I can deny" the existence of a court order allowing the FBI to tap Trump Tower under FISA (the Foreign Intelligence Surveillance Act).    

How does this business of wiretapping occur?  There are two routes.

First, if some nefarious criminal behavior is suspected the government must approach a judge with probable cause that a wiretap will uncover necessary evidence that a wiretap-eligible offense has, or is, occurring.   

Alternatively, if there is probable cause that an individual is a spy or agent of a foreign power or a suspected terrorist a FISA court judge must issue the order.  If the target is an American citizen the attorney general has to give the OK.  

The bottom line is wiretapping is complicated and cannot occur at the whim of a sitting president.  Given these substantial hurdles one has to wonder what is going thru Trump’s head or what evidence he has to support the drama surrounding such serious claims.  

What was unsaid by Clapper is interesting in that his comments did not rule out the possibility of Trump's communications - or those of his aides - being sucked-up by other surveillance operations.  

Consider this.  Was there an unrelated surveillance program that collected data sourced in Trump Tower as part of an investigation targeting someone else?  Suppose there are other foreign targets that the FISA court has already approved for surveillance; and Trump-related web browsing and telephone traffic was incidentally collected as a consequence.  Might information collected by the casting of a net at a target who coincidentally was chattering with someone in the Trump organization be fair game?  Watching this develop is worth the time.  If you consider the fact that President Trump has access to more data than me or anybody reading this post there might actually be something to this.  Consider the possibility of preemptive tweeting.

And all of this drama has upped my purchase of popcorn and red wine.  The entertainment value is priceless.  Classic rope-a-dope.