If a Containment Dome Doesn’t Work, Try Screaming

June 22, 2010

Pun level: 0.0 Rhyme level: 0.0 Scapegoating George W. Bush level: 0.0 All in all, a disappointing protest sign.

How many times could you fill the world’s largest supertanker with the oil that’s spilled since the Deepwater Horizon disaster began?

Come on, guess.

Okay, let’s make it multiple-choice. Is it:

  1. 20,000
  2. 100,000
  3. 600
  4. .2

The answer is 4), although that’s using the low estimate. At the absolute most, the oil that’s spilled so far would barely fill the TI Africa once.

Whoever says America’s education system is in shambles is wrong: in the last 7 weeks, we’ve become a nation of 300 million petroleum engineers. Still, that leaves the number of economists dangerously low.

British Petroleum is not evil. Joseph Stalin slaughtered people for the pleasure of it. O.J. Simpson too, on a smaller scale. The worst you can call BP is negligent, and even that implies that there’s no such thing as an unavoidable disaster.

11 BP employees died*, in case you forgot or never knew. Also, now is not a great time to be a shearwater. The human and animal costs notwithstanding, there remains an economic impact. If that sounds crass, denying the existence of said economic impact doesn’t make it any less real or eliminate the need to acknowledge and minimize it.

So let’s pretend that the people who are screaming that SOMETHING MUST BE DONE are willing to replace rhetoric with logic. Here are facts, not opinions:

  • It’s not the worst spill in Gulf of Mexico history. (That’d be the Ixtoc I spill of 1979, which lasted 9 months.)
  • It’s not the worst spill in American history. (Lakeview Gusher, California. 101 years ago. You’ve never heard of it, which should give you an idea of its lasting impact.)
  • It’s not even close to the worst oil spill in world history: we can still thank Saddam Hussein for that. At least Deepwater Horizon wasn’t deliberate.
  • Some people are convinced that there’s nothing the federal government can’t do.
  • Wishing, even demanding, is never enough to solve a problem.
  • BP stock has lost most of its value since the spill began, with a floor to be determined. (“Good! Teach those planet-rapers what’s what!”)

Voluntary exchanges of stock have already cost BP $97.9 billion, to say nothing of the costs involved in cleaning up the mess. If that’s not enough for you, what would be?

Seize their assets!

Their rapidly dwindling assets? To what end? So federal bureaucrats with zero accountability and zero experience can manage those assets? Never mind that BP, as its acronym would indicate, is headquartered in the United Kingdom and harder for the federal government to claim than, say, General Motors.

Wiping BP from the face of the earth would make a bad situation worse. BP has created 92,000 jobs around the world without requiring taxation or a confiscatory stimulus package to do so. Is employment important?

And if BP went broke, then what?

Bankruptcy court!

According to its 2008 balance sheet, BP has $228 billion in assets including $103 billion in “hard” assets – property, plant, equipment etc. Those would go to the highest bidder. Which would be a company that has not only a use for supertankers, rigs, and a distribution network, but the wherewithal to bid for them. Someone like, say, ExxonMobil. Yes, let’s increase the market share of the only company that environmentalists hate more than Amalgamated Lead Paint & Plastic Grocery Bags, Inc.

Solar and wind!

It’ll take more than a blog post to expose the holes in that argument, but for now, there’s no denser and more efficient way to transport potential energy than via petroleum and its derivatives. If there is, whoever discovered it is keeping awfully quiet and must hate money.

Perhaps it makes you feel good to join the “Boycott BP” Facebook group, even though all the BP stations in the United States are owned by franchisees. If you organize a protest, or pull an Ashton Kutcher and draw a connection between an oil spill and a political convention, think about what that does as far as solving the problem.

BP wants to stop and clean up the Deepwater Horizon spill a lot more than you do, so much so that they’re actually putting workers on the job. The next Code Pink volunteer who helps to float a containment boom up the Mississippi Delta will be the first.

Unless you’ve attempted to cap a drilling rig – one under a mile of water – you almost certainly don’t know if BP management is doing a good job or not.

They’re working on it. Sorry if that’s an unsatisfactory answer, but sometimes unfortunate events happen, and maybe laying blame is less important than solving the problem.

Any man-made disaster is like this. Exactly what are you supposed to do with the benefit of hindsight? If doctors didn’t prescribe thalidomide for pregnant women from 1957 through 1961, thousands of babies wouldn’t have been born with deformities. If a series of bureaucrats at the Federal Aviation Administration had refused to prohibit commercial pilots from carrying firearms, the World Trade Center would still be standing, 2743 civilians wouldn’t have been murdered, and there would have been less cause to invade Afghanistan and Iraq.

To write about Deepwater Horizon and say anything other than “hang BP’s CEO by his thumbs” might not be judicious, but there is a larger point. The stock is trading at a 13-year low. (Which might be a great buying opportunity. See here.) President Obama can show all the grave concern he wants. He can temporarily move the White House to Gulfport, Mississippi: it won’t stop the flow of oil. Nor will tarring and feathering BP chief Tony Hayward, to coin a phrase.

Righteous anger works fine when you punch out the guy who slapped your girlfriend. It works horribly with problems that are harder to fix. It takes composure, reason and hard science to make the Gulf of Mexico livable. If you can’t offer any of that, at least get out of the way.

——-

* Adam Weise, Dale Burkeen, Don Clark, Roy Kemp, Jason Anderson, Steve Curtis, Gordon Jones, Blair Manuel, Dewey Revette, Karl Kleppinger and Shane Roshto.

Filed Under: Economy Tagged With: , , ,

Per capita

May 20, 2010

You're just a statistic.

You need to understand math to understand money. Not differential equations or sympleptic and contact topology, but a little rudimentary addition and division wouldn’t kill you. Division alone should get you through this week’s post.

If you want to grasp what the macroeconomic world means to you, both now and in the future, personalize it. Understand that “the government” doesn’t bail out Fannie Mae, or Freddie Mac, or General Motors, or Chrysler, or Goldman Sachs, or Bank of America, or AIG, or Citigroup, or Wells Fargo, or Morgan Stanley, or Capital One. You do. More specifically and accurately, you bail out those companies’ executives and managers, and indirectly, their employees and customers. All economic transactions, if you strip away enough layers, are between individuals and/or groups of individuals.

It’s an obvious point, but one many people ignore. The next wealth created by government, any government, will be the first. Government redistributes. Or to be more fair, government bureaucrats and legislators redistribute. They act as intermediaries, taking assets (and liabilities) from some and giving to others. Sometimes government actors do like Robin Hood, taking from the rich and giving to the poor. Other times they’re like Ayn Rand’s Francisco D’Antonio, taking from the poor and giving to the rich (or as he calls them, the unproductive and the productive respectively.) Most often, government actors confiscate from the middle-class and redistribute to the similarly situated. While taking their cut, of course –which they distribute among each other. Money is never money unless someone’s possessing it. A non-human entity, whether a King Charles spaniel or a building, literally has no use for money.

Not to get too philosophical, but there’s no such thing as “collective” economic action as distinguished from the accumulation of our individual actions. National economic pain or prosperity – consumer confidence, or whatever else you feel comfortable calling it – equals yours plus mine plus your neighbor’s plus her neighbor’s.

With a federal budget dealing in numbers far beyond anyone’s daily grasp, it’s easy to liken economic data to astronomical data. For instance, Neptune is 2.7 billion miles away. But even if you understand every word in that sentence, and know the sentence makes sense, can you visualize exactly what it means? Neptune is farther than Tuva, farther than Antarctica, farther than the Moon. Yet is there a way to understand that in physical, personal terms?

If you drive 20,000 miles a year, and drive from the age of 16 to the age of 86, that cumulative distance is to the distance to Neptune as a mile is to the distance across the United States. That’s still complicated, but it’s about the best we can do. With national dollar figures, we can see how our government leaders’ failure to restrain themselves fiscally impacts us directly. Two little words: per capita.

“Trillion” and “million” are almost homonyms, which is where their similarities end. A trillion is to a million as the population of the United States is to the population of a subway train. Or as LeBron James’ salary is to your average 5-year old’s allowance. That doesn’t stop politicians from insulting your intelligence by proposing budgets in trillions while promising cuts in millions.

In the remainder of this week’s post, we’re going to divide every number by 300 million, and give you an idea of how government spending affects you personally.

The preceding anecdote refers to a speech the president gave last April, 2 months after signing the ($2,623) American Recovery and Reinvestment Act, a/k/a the (first) stimulus bill, and encouraged austerity among his inner cadre:

“I’m asking for all of (the cabinet secretaries) to identify at least (33¢) in additional cuts to their administrative budgets.”

Presumably, he means annually. Let’s examine each department’s budget:

Health & Human Services $2,818
Defense $2,170
Agriculture $317
Veterans’ Affairs $292
Transportation $244
Education $209 (excluding $323 in stimulus funding)
Homeland Security $173
Justice $154
Housing/Urban Development $146
Energy $ 80
Interior $67
Treasury $ 65
State $55
Commerce $47
Labor $47

You can see what a gigantic, gaping hole a 33¢ reduction would leave in the coffers of the tattered vestiges of a once-robust Department of Health & Human Services. Last fiscal year, the United States’ federal deficit increased by $6333. (Not to $6333, by $6333. To would be $48,167. Are we getting close to your net income yet?) That last number is somewhat misleading, because many of us are either too young or too old or too disabled or too incarcerated to work. Per taxpayer, the number is closer to $60,000. The interest you incur on that debt is $1,513, or 18% of the total. You’ve also borrowed $12,502 in Treasury securities, at least a third of which has gone to Chinese government leaders investing on behalf of their citizens. You paid $50 to bail out Fannie Mae and Freddie Mac. The preceding president appropriated $45 of your money to bail out General Motors and Chrysler – the latter of which was owned by a private capital management firm whose members were all billionaires or close to it.

Stop complaining, Citizen. This is all for the Greater Good. Repeat after us: The Greater Good.

This is ostensibly a personal finance blog, so if you’re wondering how this talk affects you, understand that electing fiscally ascetic politicians can mean thousands of dollars to your bottom line. Taking the effort to find them, vote for them and maybe even volunteer for them will help Control Your Cash more than clipping any coupon will.

Filed Under: Economy Tagged With: , , ,

Ignorance is no excuse

March 14, 2010

This is strip, not prime, but close enough

What does prime rate mean?

In between poking fun at people, occasionally we deconstruct complexity and explain what’s what. Prime rate is a term you hear frequently but might not know the meaning of – like “Dow”, “consumer confidence”, and other commonplace but commonly misunderstood terms.

(If you can’t get enough of Control Your Cash, read our guest posts on LenPenzo.com. Len Penzo is an engineer based out of Los Angeles – a financial amateur. But his common-sense approach and avoidance of stupidity make his blog one of the most insightful you’ll find.)

Prime rate is the interest rate banks charge their most creditworthy customers. Last January the U.S. prime rate fell from 3.61% to a 55-year nadir of 3¼%, where it’s been ever since. In 2007 the rate was 8¼%, and it reached its all-time zenith of 20½% in 1981.

Does that mean that if you’ve always paid all your bills on time and in full, Chase will loan you money at 3¼% to buy a house? No. But if you were Costco (America’s 24th largest corporation), and wanted to build a new location at a cost of $4 million, you’d pay $130,000 in annual interest charges. For individual investors, who don’t have millions in cash on hand, your bank sets its rates higher. Which is why mortgage rates average 5.09%* today.

Prime rate generally derives from the federal funds rate, which banks lend to each other in the short-term (i.e. overnight) at and which we touched on here. Under normal circumstances – 1981 was about as abnormal as it got – add about 3 percentage points to the federal funds rate, and that’s your prime rate.

Where does our 3¼% rate stack up internationally? Here:

So, two questions:

a) Why is the prime rate so historically low right now?
b) (As always,) how can I use this to my advantage?

It’s low because the Federal Reserve, the quasi-governmental leviathan that has an unduly large hand in our economy and answers to no one, wants to make it as easy as possible for people to borrow money. The federal funds rate (which is really a range of rates, rather than one rate) sits at close to 0. Banks obviously have to make money on loans or they wouldn’t stay in business, which explains the spread of 3% – which has been fairly uniform throughout American history.

But wasn’t it those low rates that got us in trouble in the first place?

Yes. People bought houses larger than they needed, cars fancier than they could normally afford, ATVs they were going to ride maybe once a year. And financed them all. It seems almost too obvious to mention, but borrowing money makes sense if you can pay it back. More to the point, it makes sense if you can buy assets with it. A piece of vacant industrial land that appreciates by 2% annually, ceteris paribus, isn’t a worthwhile investment if you’re paying 5.09% for the privilege of borrowing the money to pay for it.

So why is the Fed encouraging people to engage in more of the same destructive behavior?

The Fed would argue that this is the least bad option. Getting money circulating in the economy means borrowers are hiring people to complete their projects, and those newly hired employees will spend money on goods and services. If the prime rate were at 1981 levels, or even at 2007 levels, people would be more cautious to invest. They’d sit on their money, and the economy would stagnate.

So how can I use this to my advantage?

Don’t defer for a tomorrow that might never come. Understand that no economy is an island, and that time is not static. Interest rates can’t get much lower than they are now. The federal funds rate isn’t going to go negative. Banks aren’t going to accept a spread much lower than 3%. The eventual pressure on interest rates should be to rise. It’s no guarantee, but 6 or 12 months from now it ought to cost more to borrow money to finance an investment than it does today.

So if you’re thinking of making your way into the investment class, and joining the ranks of people who derive their income through passive means rather than earning a salary, now would be as good a time as any to take the leap. Don’t wait for a perfect set of circumstances, because a) such a thing never arises and b) it’d be tough to identify if it did.

———————-

*There are several kinds of mortgage rates, the vast majority of which you don’t need to concern yourself with. If you see the unadorned phrase “mortgage rate”, whether at Control Your Cash or elsewhere, assume that it refers to the most generic mortgage of all – the 30-year, fixed-rate kind. And if you’re thinking of buying an adjustable-rate mortgage, think again. Or did you not hear about the foreclosure crisis?

Filed Under: Economy Tagged With: , , , , ,
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