Bacon's Rebellion

Virginia Gov. Bob McDonnell gave a somewhat disingenuous response when confronted with the facts that the massive oil rigs explosion and spill in the Gulf of Mexico make his plans for Virginia’s emergence as “the Energy Capital of the East Coast” highly questionable.

In case you missed it, today CNN reports:

“An oil spill off Louisiana was designated a spill of “national significance” Thursday, meaning assets can be drawn from other states and areas to combat it, Homeland Security Secretary Janet Napolitano said.

“The U.S. military may be called on to assist authorities scrambling to mitigate the potential environmental disaster posed by the spill as it expands toward the Gulf Coast, the Coast Guard said.

“In addition, another controlled burn of the oil slick may be conducted, Coast Guard Chief Petty Officer Erik Swanson said.

“Officials said late Wednesday the estimated amount of oil spewing into the Gulf from three underwater leaks after last week’s oil rig explosion has increased to as much as 5,000 barrels, or 210,000 gallons, a day — five times more than what was initially believed.”

And you said “no oil is leaking”?

Tobacco does not cause cancer either.

DDT does not harm the environment.

The world is flat.

The climate is not changing.

OK if it is, humans have no role in that change.

And they need not take action to protect against negative impacts.

Oh yes, be sure to tell your friends that it is intelligent to continue to rely on Autonomobiles for Mobility and Access.

And all the while, the Dow is up by 125 or so because after all cleaning up oil spills is a plus for the GDP.

Sleep well.

EMR

“Drill Baby, Drill” advocates who include President Barack Obama along with Virginia Gov. Bob McDonnell have been telling us that modern offshore oil technology is so modern that deaths and devastating spills are the problems of yesteryear.

Consumers account for roughly 70% of the U.S. economy, and their spending is the driving force behind economic growth. Over the past three business cycles, consumers increased their buying power through borrowing: running up credit cards, purchasing automobiles and houses on easier credit terms, and tapping their home equity. This trend was particularly pronounced during the Bush II expansion, a period in which incomes stagnated but consumers, buoyed by the rising value of their houses, borrowed more than ever.

In the United States, consumer debt grew from about 60% of GDP in 1990 to 96% of GDP by 2008, according to a McKinsey Global Institute report. A simple arithmetical calculation suggests that debt accumulation added an average of roughly 1.4% per year to economic growth over that period.

(For those generation war-mongers who would flagellate U.S. Baby Boomers for throwing prudence, frugality and thrift to the winds, it is worth noting that the leveraging of consumer debt was widespread throughout the U.S., Canada, Europe and South Korea as well. The debt accumulation coincided with a period of low and declining interest rates that reduced the cost of borrowing. McKinsey did not address why interest rates were so low, but the trend clearly seems connected to the “global capital glut” noted by Federal Reserve Chairman Ben Bernanke in a Sept. 11, 2009, speech to the German Bundesbank in Berlin.)

Not only will the U.S. economy lose the propellant of consumers getting into hock up to their eyeballs and spending with wild abandon, consumers will actually cut back their borrowing. In economist-speak, they will “de-leverage.” Although consumers have increased their saving in the past year or two (no mean accomplishment when joblessness and underemployment approach 18% of the workforce), they still have a lot of de-leveraging to go.

The chart to the left, based on Federal Reserve Board data, shows that service on mortgages, credit cards and other forms of household debt peaked at 17.5% of after-tax income in the third quarter of 2007 before falling to 16.4% two years later. That implies that consumers have accomplished only one-third of the de-leveraging needed to get back to the 14.0% indebtedness experienced as recently as 1993. (Click on image to view details.)

Economists debate whether the “new frugality” represents a fundamental shift in American values, or if consumers are just making a virtue of necessity as financial institutions curb their lending for their own reasons. Evidence suggests that a little of both is occurring. Boomers have awakened to the fact that they will retire soon and that they have done too little to prepare for life after the paycheck. Although some Boomers will put their faith in God or the U.S. government, others are trying to spend less and save more.

Similarly, there is evidence that the U.S. population generally has come to see the pitfalls in a life dedicated to the accumulation of material possessions and status symbols. As part of the nation’s greening consciousness, people are increasingly aware that buying more “stuff” sends economic and environmental ripple effects across the globe, from the decimation of rain forests to the emission of greenhouse gases. In a parallel trend, market research tells us that people are more likely to say that the most important priorities in life are friends and family rather than earning more money or being famous. It is unknowable how long this cultural shift will last, but when reinforced by badly burned financial institutions imposing stricter lending standards, it’s a good bet that consumer spending will remain depressed for years.

By simply not borrowing more, consumers will slow economic growth by 1.4% per year compared to the U.S.’s historic performance since 1990. If newly frugal consumers continue de-leveraging to levels of indebtedness prevailing 20 years ago, the unwinding could steal an additional 1.0% of annual economic growth over the next 20. Absent a new source of dynamism, a potential combined loss of 2.4% in the annual economic growth rate suggests that economic performance could be sickly for the next two decades.

So, how does this quick analysis inform our understanding of the debacle, known as Boomergeddon, to come? First, slow consumer growth must be viewed in the context of the massive overhang of bad commercial and residential real estate debt (see “The Ugly Ain’t Over Yet, Not by a Longshot” and “The Ugly Ain’t Over, Part II“), which will ravage bank balance sheets and crimp lending. If economic growth is slower and of shorter duration than projected by the Obama administration, deficits will be considerably higher than the $9 trillion between 2010 and 2020 also forecast by the Obama administration.

On the surface, the Team Obama’s 10-year budget forecast seems fairly cautious. This year, 2010, will resume economic growth at a tepid rate, but the expansion will gain momentum over the next few years and then settle into a slow-but-steady mode for the rest of the decade. However, a comparison with previous business cycles shows that the O Team is predicating its optimistic budget forecast on the strongest, longest economic cycle of the past 40 years. (Click on image to view details.)

First, compare the Obama forecast for the first four years of the business cycle: Under an Obama presidency, the U.S. will outperform the first four years of the Clinton and Bush II business cycles, lagging only the turbo-charged expansion of the Reagan years. Moving into the middle years of the business cycle, Obama expects U.S. economic performance to trail Reagan and Clinton, but only by a modest margin. Then, in the final stages of the expansion, Obama expects the economy to keep to going — the Energizer Bunny of the economic world. While the Bush II’s business cycle lasted only eight years, Reagan/Bush’s nine and Clinton’s ten, Obama projects economic growth into the indefinite future in a state of never-ending bliss.

Needless to say, not everyone expects to see such a strong business cycle. Some, like U.S. Chamber of Commerce President Tom Donohue, have warned of a double-dip recession brought on by a wave of new taxes, regulations and mandates. One need not heed Donohue, however, to think that the current economic expansion will be weak — for reasons that predate Obama’s elevation to the presidency and have nothing to do with his political agenda. Let me emphasize: Republicans could win control of Congress this fall, Obama could lose re-election in 2012, a new team could enact a new economic policy, and the political pyrotechnics would not change the underlying economic trends. Obama’s sin is not in creating our current economic dilemma but in failing to acknowledge the effect it will have on the economy, deficits and the national debt over the decade ahead.

Boomergeddon is coming, baby. Deficits are gaining momentum, with entitlements and interest payments on the debt spinning out of control. Within a few years, the chain reaction will be unstoppable.

Here’s a “top ranking” list you don’t want to be on: Business Insider‘s list of “America’s Most Bankrupt Cities.” Unfortunately, the fair city of Norfolk appears there with a $26 million deficit.

I have not been following developments through the Virginian-Pilot, but the Business Insider‘s description is pretty scary:

City Manager Regina Williams has whittled down a deficit of up to $46 million (including $10 million in current-year shortfall) in a few months. But the rest of the way is an uphill fight. City departments have dismissed her request for 20% budget reductions. Schools are asking for a $6 million budget increase. Someone’s getting disappointed in the April 20 proposal.

The consolation is that Norfolk’s per capita budget deficit is only $110. Things could be worse… like they are in Harrisburg, Pa., where the per capita deficit is $1,500!

Beware, Virginia, you are not exempt from Boomergeddon. Borrowing $650 million from the VRS to balance the budget? Naughty, naughty.

One wonders after nearly three months in office, just what is going on in the head of Gov. Bob McDonnell.

The massive underground coal mine blast that killed at least 25 miners on the afternoon of April 5 in Naoma, W.Va. brought back some doleful memories.

The United States, and Virginia along with it, is entering a new era of budgetary constraints. The economic expansion we’re now entering will be weaker and frailer than in previous business cycles, with lamentable consequences for the productive, tax-paying economy of businesses and workers — and for the government that feeds off them.

Two weeks ago (See “The Ugly Ain’t Over, Not by a Longshot“), I made the point that the economy faces a wave of bad commercial real estate loans that will result in another round of crippling write-offs for commercial banks. But the magnitude of that problem is modest compared to the coming second wave of defaults in the residential mortgage business. Even that’s not the end of it. On top of real estate loans going bad, we soon will need to worry about the precarious state of the junk bond market.

While the Obama administration has supported the residential real estate sector with more than $1 trillion in TARP funds, Fannie Mae/Freddie Mac mortgage purchases, FHA mortgage underwriting and Federal Reserve purchases of mortgage-backed securities, it is not clear that housing prices have hit bottom. The housing sector has ridden out the wave of defaults on sub-prime loans and some “Alt-A” loans (lesser credit quality than prime loans but better than sub-primes), but it is bracing for a tsunami of bad Option ARM (Adjustable Rate Mortgage) loans. (See the T2 Partners presentation for details.)

During the peak of the housing bubble, financiers kept mortgages flowing by relying upon Option ARMs, which enticed buyers through ultra-low teaser rates and the ability to defer payments by adding to the mortgage balance. Typically, these loans reset after five years, at which point the payments can jump by 60% or more. Roughly $750 billion of these mortgages were written, and they are coming due. As Option ARM homeowners go into default, they will dump more houses into a sagging market, which will exert more downward pressure on housing prices. In a downward spiral, more homeowners will find themselves underwater, owing more on their mortgages than their houses are worth. If they walk away from the loans in large numbers, they will put even more pressure on housing prices and the financial institutions left holding the bag.

Indeed, there is little sign that the foreclosure crisis is abating. Monthly year-to-year comparisons between 2009 and 2010 show that mortgage foreclosures were still increasing. Realtytrac Inc. reported more than 308,000 default notices, scheduled auctions and bank repossessions in February, a six percent increase over the previous February. The silver lining was that, for the moment at least, the rate of increase was slowing.

Similarly discouraging is a recent report by Neil Barofsky, special inspector general for the Troubled Asset Relief Program (TARP), who concluded that the Obama administration’s $75 billion Home Affordable Modification Program (HAMP), which aimed at reducing the number of foreclosures by subsidizing the restructuring of troubled mortgages, was having little effect. Writes Barofsky in a recent report:

Absent a thorough review of HAMP and its goals, the program risks helping few [homeowners], and for the rest, merely spreading out the foreclosure crisis over the course of several years, at significant taxpayer expense and even at the expense of those borrowers who continued to struggle to make modified, but still unaffordable, mortgage payments for months before succumbing to foreclosure anyway.

Throughout the 2000s bacchanalia of borrowing, the non-finance business sector was restrained about taking on debt — thank goodness, or business bankruptcies would be far more widespread and unemployment even worse than it is now. But there were pockets of excess in residential and commercial real estate, and in the private equity sector. The growth of private-equity financial companies, which structure debt-heavy buyouts, led to a surge in highly leveraged acquisitions during the 2000s.

According to a recent McKinsey Global Institute study, companies acquired through such buyouts were 2.7 times as leveraged on average as publicly listed corporations. The use of leverage is a wonderful thing for investors if the companies prosper and pay off their debt — big fortunes can be made in a hurry. But if the economy stalls and companies have difficulty paying off their loans, investors and debt-holders can take a beating. By McKinsey’s estimate, roughly $434 billion of such loans in the U.S. are scheduled to come due between 2010 and 2014.

Add it all up, and the U.S. could experience another $1 trillion or more of write-offs over the next three or four years — and that’s just from the problems we know about. Banks, which have barely recovered from the sub-prime loan fiasco, will endure more rounds of massive write-offs. To avoid the prospect of more Wall Street-style bailouts, regulators are requiring banks to set aside more loan-loss reserves and strengthen their balance-sheet leverage, which leaves them no choice but to restrain lending. That they are doing by tightening their lending standards. No more sub-prime mortgages. No more liar’s loans. Lower lending limits on home equity loans. Fewer credit cards issued. More collateral demanded of small businesses.

Predictably, the politicians will rail at the banks for taking bailout money only to turn around and curtail their loan volume, but banks cannot simultaneously bullet-proof their balance sheets and ramp up lending. It is a financial impossibility that only a grand-standing congressman could fail to grasp.

The chart above shows the contraction in lending by which the banking industry shared its pain with consumers and small business in the past two years. Large, publicly traded corporations have alternatives to bank loans: They can issue stock and sell bonds. But small businesses, the job-creating locomotive of the U.S. economy, depend heavily upon banks. Obama’s plan to pump up small business lending by $30 billion may help, but it can’t make up for the $110 billion decline in bank lending to business last year alone. If the banks can’t lend, small businesses can’t hire, and the economy can’t grow.

No, the ugly ain’t over. And the politicians in Washington, D.C., and Richmond had better adjust their plans to that economic reality.

Gov. Bob McDonnell may be dancing for joy, if not perhaps for feeling a little upstaged, by President Barack Obama’s reversal of a stand against drilling for oil offshore of Virginia.

SORTING WHEAT FROM CHAFF CONCERNING THE SUSTAINABLE FUTURE SKETCH

EMR will move on from THE SKETCH soon but several key points were raised by Larry, Groveton and others in comments following ONE MORE NOTE ON SKETCH COMMENTS that may be lost without special attention. This is the last post from which EMR will NOT delete comments intended to belittle, confuse, embarrass and waste time. That will make multiple posts on a single topic required less often.

Larry said:

“well – at least you looked.”

More than that Larry, EMR appreciated the lead to the Melissa Data Carrier Route site.

“while the data is not quite a granular as you might prefer, I think it does get past the zip code dilemma and I find it interesting that someone has melded/fused income and wealth data to end up with a geographical distribution.”

There is one reason they did this:

A lot of advertisers are willing to buy the information and for them, it is ‘accurate enough.’ They are not concerned with the need to achieve a Balance of economic, social and physical activity – in fact they sell more stuff if there is no Balance within and no Critical Mass of settlement pattern components.

And sell they do. Since signing on to the site EMR has received two personal Emails and a newsletter from Melissa employees. EMR put a tracer on the registration and it will be interesting to see who they sell the information to. All this advertising frenzy will end when citizens wake up and advertising is phased out because it is no longer effective in convincing citizens they need to consume. (More on that soon.)

Larry went on to say:

“so maybe not academic nor implementation …”

Glad that is now straight!!

“I dunno.. but it sure looks like data that could form a better basis for looking more closely at actual settlement pattern attributes.”

The big issue is, as EMR noted before, WHO WILL PAY for the data and analysis that is needed. More on that below.

“I wonder what would be the things that would need to be looked at in particular?

Same things, just looked at within a Comprehensive Conceptual Framework – and through the right end of the telescope.

Later Larry said:

“Here’s a gift for you EMR:

” CNT has updated our Housing + Transportation Affordability website to now cover over 330 metros in the U.S. with expanded and improved data. And our analysis shows that only two in five American communities—or 39 percent—are affordable for typical households when their transportation costs are considered along with housing costs.”

“http://www.cnt.org/news/2010/03/23/expanded-h-t-index-most-comprehensive-snapshot-of-neighborhood-affordability/

“The Housing + Transportation Affordability Index is an innovative tool that measures the true affordability of housing based on its location.

“http://htaindex.cnt.org/”

This REALLY IS a gift! EMR had not checked in with Center for Neighborhood Technology (CNT) for a long time. EMR worked with some of their colleagues on “Blueprint for a Better Region.”

CNT, their colleagues in other Institutions such as STPP and the funders behind CNT, STPP, et. al. were (are) the driving forces behind Location Efficient Mortgages.

Recall that a Location Efficient Mortgage criteria could have avoided the meltdown at Fannie and Freddie.

The idea of location efficiency is what the expanded H + T Index is intended to support. Take a look at those maps! Almost all the affordable places are inside R=20. The ones that are outside R=20, based on a quick review, are also the places with high foreclosure rates for ‘cheap’ houses.

SO!!! The Index is not ‘perfect’ but those places are reselling. It is the WSH, WL that are bringing down the economy.

The reason that the H + T is not perfect is that CNT had to rely on the same coarse data granularity that was the topic of earlier discussions. Even the foundations (Institutions) that fund CNT cannot afford to capture and aggregate data at that scale. It will take every Agency working together to do that job. At the present, governance practitioners see no reason to rock the boat. They get paid every two weeks and / or enjoy contributions.

So, while H + T is great and CNT gets the big picture, the data is open to spurious, mean-spirited, and misleading comments by the advocates of Business-As-Usual.

In a comment on the BACK TO THE FUTURE? post by Peter G., Groveton said:

“Interestingly, I am in Bad Homburg Germany today (outside Frankfurt). Looking for examples of EMR’s functional human settlement patterns. I see some of what EMR describes – dooryard, cluster, alpha community, clear edge, etc.”

Groveton:

When you read Chapter 34 of TRILO-G you will learn that Fahmah had the same observation. Once one has a handle on the Vocabulary, it is easy to see the physical ramifications.

Groveton went on to say:

“However, I see some of what Jim Bacon worries about too – sky high taxes, lots of restrictions, nanny statism.”

There is a much finer grained governance structure in Germany. Also, the governance structure is much more closely aligned to the settlement pattern. So the Agencies responsible for many of the Services and controls are much closer to those governed (no million population ‘municipalities’). If that were not the case, there would be much more carping than you heard.

“Hard to say whether the relative calm of relatively functional human settlement patterns is worth the loss in personal freedom.”

Actually it is not that hard.

The ‘personal freedom’ part of the equation is an illusion. That is because those who are enjoying the ‘freedom’ are not paying the full cost and the vast majority are not enjoying very much of anything.

In a recent comment TMT almost put his finger on the issue. He said “too many people lose.” The problem is that too many citizens THINK they are losing.

The vast majority of the citizens, especially those at the top of the Ziggurat, have been convinced by pandering politicians and those who profit from Business-As-Usual that they DESERVE Big Rock Candy Mountain. Larry said something like: “Those who have IT do not want less of IT.”

Well, it is quite simple:

Five percent of the population cannot continue to consume 25 percent of the resources.

It has been suggested that over the past 30 years a third of the total global natural resource base has been consumed (wasted). That may be a stretch but over the past 140 years it is clear that far more than half have disappeared. Even in the nation-state where those fortunate 5 percent live (the US of A) there is a widening Wealth Gap. Only 0.5 percent are really enjoying themselves.

In a global society with high literacy, instant communications and weapons of mass destruction, market economies and democratic governance processes cannot survive with the current trajectory.

The citizens of India and China what their share and so do those in Southeast Asia, the Middle East and Africa. There is not just that there not enough oil (cheap energy and cheap feed stocks), there is not enough water, top soil, marine and mineral resources, etc. to support anything like the current US of A consumption rates and settlement patterns for 6.5 Billion humans.

As Amitai E. says: There must be a balance of private rights and community responsibilities.

To do that with democratic processes and a market economies, the prices must be adjusted to reflect the true total costs determined by democratic processes.

In addition, the illusion of being able to live ‘the way we have been’ must be replaced by a realistic understanding of the real alternatives.

EMR