2008 April 17 Thursday
Warren Buffett Sees Long Deep Recession
Warren Buffett expects a longer and deeper recession.
"It seems everybody says it'll (the economic slowdown) be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways."
The deleveraging he speaks of refers to debt. A long recession means this recession might last until oil production starts declining. In that case we'll just segue from recession into depression. Sorry about that.
Paul Krugman sees growth in China as a continuing source of rising pressure on commodities prices. Those high prices are bearish for the US economy and European economies.
Some of the causes of poor economic performance since 2000 are probably beyond any administration’s control. Raw materials were cheap in the 1990s, but in the years ahead the rise of China and other emerging economies will place increasing pressure on world supplies of oil, copper and so on, no matter what the next president does.
Zero sum games? Or negative sum games? But this is the free market. Where'd I misplace my Panglossian sunglasses?
Krugman thinks rising oil prices and flat production are what Peak Oil looks like.
This is what peak oil is supposed to look like — not Oh My God We’ve Just Run Out Of Oil, but steady pressure on the economy and the way we live from rising energy prices and their consequences. And it doesn’t matter much whether we’re literally at the peak, or whether production can rise by a few million more barrels a day; unless there are big sources of oil out there, we’ll be feeling peakish for the foreseeable future.
Yes, it doesn't matter whether we still have a few million barrels a day of potential world oil production increases possible. Though I doubt it. Texas oil billionaire T. Boone Pickens says world oil production can't rise above the current production plateau.
Pickens said he thought oil was approaching $125 a barrel. Oil will eventually reach $150 per barrel, he said, while cautioning ``I won't be investing in $150 oil.''
``There is only 85 million barrels of oil globally in the market coming a day and I don't think you can increase that 85 million,'' Pickens said.
That production plateau is bumpy and January 2008 world oil production finally surpassed the previous monthly record set in 2005. But our prospects for going above that level are not good because a growing list of nations have declining production.
The big credit fiasco with subprime mortgages, the real estate bubble, and excess consumer indebtedness by itself would just cause a recession. But rising Asian commodities demand and declining oil production can cause inflation and declining living standards combined with lots of layoffs. Lay on top of all that America's twin demographic problems of unfunded old age liabilities. The Panglossian view is that economic growth will prevent the old age pension liabilities from becoming too heavy a burden. But that only works if the economy grows a lot. That might not be in the cards. Plus, Third World immigration is lowering the average skill level of the US labor force. All these factors seem like reasons for pessimism about the economy.
I think the worst part about the housing boom was that there was a lot of development in the "ex-urbs". That is, very far out suburbs. Millions of homes were built very far apart from eachother and very far from major employment centers. Not only was there a traditional real-estate bubble, but this time it comes with a major structural change in the economy.
With the price of gas creeping up, houses in the deserts look like a colossal mis-investment. Mass transit only works above a certain number of units per acre. Unless there is a method found to have electric powered cars that are actually practical whether they use batteries or some means of getting power along the road, I think these neighborhoods are going to be essentially ghost towns.
I'm very disappointed in the lack of importance that all the politicians have been giving to the looming energy dependence issue. The little they do talk about it, they are clearly either pandering to a special interest (one example: Obama, a corn-state senator, champions ethanol) or have really poor ideas when it comes to implementation (Gore's support of a California prop that would have taxed only in-state production wells, effectively giving Hugo Chavez/OPEC even more market advantage and control over us).
Today we now dependent on Hugo/OPEC on whether or not we get to drive to work. This alone is strategic nightmare. However we will soon also be dependent on sometimes hostile foreign governments on whether we can heat our house or have simple industrial feedstocks. Thanks in part to some short-sighted decisions in the 1990's concerning using natural gas, we simply don't have enough domestic supply. A massive program to force insulation retrofits on houses, solar hot water, and solar space conditioning could greatly and economically reduce our usage to the point where we won't have to be dependent on others. However, there is little initiative from our great leaders to do this. They'd rather allow the terminals to get built (in Mexico if necessary).
It's like boiling a frog in slowly warming water - it's hard to notice the noose of addiction that is slowly wrapping around our necks. I guess it comes down to the old joke , "How many economists does it take to change a light bulb? None, they assume that the invisible hand will do it." The problem is that our leaders believe these economists and have some sort of mystical faith that the Wall Street arbitrage casino has some sort of accurate crystal ball for strategic vision.
"Plus, Third World immigration is lowering the average skill level of the US labor force. All these factors seem like reasons for pessimism about the economy."
It is important to modify the green card lottery that accepts 50,000 people per year. In order to register for this lottery, the candidates must be in the top 1 % in GRE tests. And for the remaining new immigrants, excellent English and above average skills should be required. If the US can bring every year 100 immigrants like the Google kids, then this would create a lot of jobs inside the US.
I think the U.S. is entering a Japan-like no growth period for the next 5 years or longer. We are coming off of not one, but two bubbles. The marketplace distortions as well as the leveraging must go away in order for further economic growth to occur. One advantage the U.S. has over Japan is that its economy is not as regulated and rigidified as Japan's economy was during the 90's. Despite the recent attempts of the liberal-left and neo-cons, our economy is still more free-market oriented and, thus, more flexible than Japan's was in the early 90's.
One key issue is potential damage on the part of the Federal government. All three presidential candidates are either socialist or fascist in orientation. This does not bode well for governmental non-intervention in the economy.
I used to argue a lot for better energy policies. But at this point it is like arguing about the speed of the Titanic at night in iceberg weather. We've already hit the iceberg. It is too late for most of the policies that would have helped. It is now in the hands of the private sector to find ways to deal with it.
Randall, I do expect a huge dieoff in Africa and some Asian countries next decade. It seems to be a perfect storm: peak oil, global warming, and a lack of capital to build nuclear power plants will deprive them of power. My own hope is that after the die off people will abandon religion as they will question the notion of a benevolent God.
What do you mean by interventions of the left? We had 6 years of a right-winged congress and 8 years of a right-winged president?
I suspect you are referring to something Kurt said with your reference to the Left. I didn't mention the Left.
I remember just a few years ago there was a tremendous amount of guff passed about the so-called 'China effect'.
Only in this case it meant the illusion of 'cheap' electronics, shoes , textiles etc as imports surged into western markets at very low prices.The 'clever' people (ie the human-hookworms at the Economist and WSJ) enthused at the time how wonderful it all was.
'Oh those hardworking, low paid Chinese' they cried, 'working for peanuts to keep our inflation rate down' 'Oh how wonderful, a win-win situation 'we' get cheap goods, low interest rates and low inflation, while those poor silly saps in China do all our work for 'us'."
Only at that time the other side of the coin was hidden.
With the wealth the Chinese made, they actually had the temerity to use it to improve their lives ie purchase vital commodities - this in turn drove inflation up when the strength of China actually manifested.
Today China is the stronger partner and America the weaker.
The future will be a grim Darwinian (in the strictest sense of that word) struggle i which the nation that produces the best and cheapeest exports at mass volume wins.
And we all know who that is.
I think that no matter how low opinion a country that has a lot of oil has of us it will make no difference. They will sell the oil to someone, in order to make money, and they will resell it to us. It is a global market. We may not be able to buy oil because it is too expensive, but it will be out there at the same price that the Chinese, etc., buy it for. This same argument shows that it would have been irrational to invade Iraq for oil. All we should really worry about is having the oil-producing country's infrastructure screwed up. By example ... by invading the country. That's why very little oil is coming out of Iraq.
I think global cooling is far more likely than global warming. Check out the following: http://www.theaustralian.news.com.au/story/0,25197,23583376-7583,00.html
We have had the worse winter in living memory in the Pacific Northwest and are still getting snow in places. Unlike global warming, which would actually be good for civilization, global cooling would be catastrophic for civilization.