"America Will End in 2011"

Screen shot of video "End of America 2011"

A video widely advertized on TV and circulated on the internet claims the biggest economic crisis in American history will hit within a year, drastically altering American life as we know it. Is there any truth to this?

This video, titled “End of America” was created by Porter Stansberry the founder of Stansberry & Associates Investment Research and editor of Porter Stansberry's Investment Advisory.  You can watch the full video 77 minute video here.  First, I’ll explain his credibility, and then deconstruct a few of his reasons for the “looming economic” disaster. 

Credibility: 

Porter Stansberry begins the video by building his credibility.  He claims that – to his knowledge – he was the only financial advisor to correctly predict the 2008 financial crises.  That “prediction” includes the bankruptcy of Fannie & Freddie and General Motors.  If this is true, he certainly sounds like some sort of guru. However, he did fail to mention that in 2007, he and his investment firm, then called "Pirate Investor," were ordered by a US District Court to pay $1.5 million in restitution and civil penalties, the court stating "Stansberry's conduct undoubtedly involved deliberate fraud, making statements that he knew to be false."  So, it seems that Stansberry has a history of deliberately misleading people, presumably to turn a profit.  Not that this completely discounts any credibility he might have, but it is worth noting.

Stanberry’s Claim:

Stansberry essentially cites one significant catalyst for the inevitable economic disaster: The United States losing its hold on the reserve currency of the world. 

Most people don’t know what the “reserve currency” means, so I’ll give a quick explanation.  Since global commodities like oil and gold are sold throughout the world, it makes since to price them in one currency.  This is just for simplicity’s sake.  After World War II, the U.S. dollar became the currency that was used to price all of these global commodities. 

Therefore, when a country other than the U.S. wants to buy a global good like oil, they must first exchange their particular currency for dollars.  Then, with those newly exchanged dollars they can buy oil.   Stansberry gives an example of this in his video about Germany. If Germany wants to buy oil from Saudi Arabia, it can’t go directly to Saudi Arabia and purchase the oil with Euros, it first must exchange it for dollars.  Then, once it has the newly exchanged dollars it can purchase the oil.

Here’s the rub: When countries exchange their currency for dollars there is a transaction fee.  Most of the time, this fee is insignificant, but over time for many countries (especially smaller ones) this cost can accrue.  Conversely, the U.S. never has to pay this transaction fee.  Therefore, the U.S. can by these global commodities – most notably oil – at a relatively cheaper price than other countries.  No transaction fees for us!  Also, it allows the U.S. to borrow money (which we do a lot…) at a better rate, because there are more dollars hanging around in the world than any other kind of currency.  These are the reasons that the dollar is known as the world’s “reserve currency”.  It’s kind of a difficult concept to understand, so don’t feel bad if you don’t have your head 100% wrapped around it.  I’m not quite there yet either.

Stanberry’s Claim Revisited:

So, now that we know what it means to have the world’s reserve currency is (or at least sort of know) we can look at Stanberry’s claim that the world will give up the dollar as the reserve currency.  As with many doomsday predictors, Stanberry takes a piece of information or a possibility and extrapolates it to point that people are rioting in the streets and children starving. 

The truth is that the dollar could be renounced as the world’s reserve currency – but not in the near future.  The types of fallout that Stanberry describes in his video could happen to the United States and the rest of the world if the reserve currency was changed from the dollar.  But the world won’t get rid of the dollar any time soon for this very reason.  There are no good alternatives right now for a reserve currency.  The Euro is failing, the English pound is too closely tied to the Euro, and the Japanese Yen probably wouldn’t work.  The only other possibility would be the Chinese Yuan.  There have been rumblings in China throughout the past several years about trying to replace the dollar with the Yuan, but it seems unlikely.  China currently has $2 trillion worth of American dollar assets (that’s called a trade deficit ladies and gentlemen!), and if the dollar were to be replaced as the world’s reserve currency it would significantly hurt the U.S. economy and devalue the dollar.  The Chinese don’t want the dollar to be devalued because then their $2 trillion of American dollar assets would lose value. 

I suppose this is one positive aspect of the world economy being as connected as it is. For better or worse!

In other words, there’s no plausible situation where the U.S dollar will be replaced as the world’s reserve currency in the short term or even the medium term.  Seventy-five years from now? Perhaps.  No can know for sure.  Let’s go back seventy-five years.  In 1936, would people have been able to predict what the world would be like in 2011?  Not a chance! It’d be another three years until Poland was invaded for goodness sakes.  If you asked the most brilliant and forward thinking economists at the time what a subprime mortgage, credit swap or – gasp! – The European Union was they wouldn’t have a clue.  Today we’re in the same situation for predicting the future.  We can be sure, however, that the dollar won’t lose its status as reserve currency anytime soon.  Stansberry’s claim that this will happen by next August is hyperbole. 

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The Takeaway:  All of Stansberry’s doomsday predictions are predicated on the dollar losing its status as the world’s reserve currency.  That may happen someday, but not in the short term or medium term.  Take deep breath and let’s start investing in education, infrastructure, and research, reforming our immigration policies, and creating better rules to encourage capital investment.  This will allow the U.S. economy to thrive once again. 

Was the Iraq War Worth It?

Is it too early to answer this question?

In my mind there are really only two logical and coherent answers to this question:  No and maybe.  Let me explain both.  Those who don’t believe that the Iraq War was worthwhile have several justifications.  They include:

• Iraq had no weapons of mass destruction
• Iraq had no significant link to the 9/11 attacks
• The overwhelming cost in human lives and dollars spent
• The irreparable damage to America’s standing in the world

First, the American citizens were sold a “false bill of goods”.  That is to say weapons of mass destruction were the selling point used by the Bush Administration to convince the American people of supporting the war.  As it turned out, there were absolutely no weapons of mass destruction.  There is some controversy as to how ignorant certain members of the Bush Administration were to this point to begin with.  It’s difficult to know.  Many liberals think that the Administration’s use of weapons of mass destruction was really a red herring; that it was a conspiracy to secure more oil.  I have a hard time completely believing that.  My guess is that most people in Bush’s cabinet believed that there were weapons of mass destruction, but that if American troops didn’t find them that would be alright because there were other justifications for the war.  Just my guess. 

Second, Saddam Hussein and the country of Iraq had virtually no ties to the men the hijacked the planes on September 11^th.  The men, who were affiliated with Al-Qaeda were not from Iraq.  They were Saudi Arabian, Egyptian, Lebanese and United Arab Emirati.  In fact, Hussien’s link to Al-Qaeda was weak at best. 

Third, the cost in lives and dollars has been immense.  Nearly 4,500 Americans have died in the eight years of fighting in Iraq.  Thirty thousand Americans have been wounded.  The U.S. has spent nearly $1 trillion in Iraq since 2003.  That’s startling.  Moreover, as with many wars, senior Bush Administration officials undersold the cost of the war dramatically.  For example, in a March 16, 2003 Meet the Press interview of Vice President Dick Cheney, held less than a week before the Iraq War began, host Tim Russert reported that "every analysis said this war itself would cost about $80 billion, recovery of Baghdad, perhaps of Iraq, about $10 billion per year. We should expect as American citizens that this would cost at least $100 billion for a two-year involvement.”  History is filled with wars that have cost more than was originally thought. 

Fourth, by acting relatively unilaterally the U.S. damaged its reputation in the world.  Though much more difficult to quantify than deaths and dollars, the first decade of the twenty-first century was an extremely transformative one.  Unfortunately, many of these changes have been relative declines for the United States.  One of these is the collision of declining world opinion of the U.S. and globalization.  Now other countries don’t need to look to the U.S. for leadership (relatively speaking!) as they once did. 

With all of this being said, how could one argue that the Iraq War might be worth it?

Here’s how:  For centuries the Middle East has been relatively stable.  Don’t confuse stability with high quality of life, however.  Dictators have essentially ruled their countries without any problem from outside forces (there are obviously several exceptions) and certainly not from their own citizens.  This stability has destroyed human capital in the region and thus the conditions were right to produce terrorism.  So, the attacks on September 11^th happen, Saddam Hussein is overthrown and there are rudimentary elections in Iraq. 

Eight years after the U.S. invasion Iraq clearly has turmoil.  There’s no denying that, even if you’re the staunchest of supporters of the war.  This turmoil could lead to something worse, but possibly something better. Fifty years from now historians might see that the overthrow of Saddam Hussein in Iraq was one of the catalysts for positive change in the region.  Perhaps turmoil that was a result of overthrowing Saddam, the subsequent Iraqi elections, and getting rid of the Taliban will have helped lead to getting rid of Mubarak, Gadhafi and others.  As I mentioned earlier, this is the argument that one could make.  It’s necessary to note that the revolutions in Egypt and Libya that rid these countries of their dictators happened at a very specific point in history.  Globalization and the Information Revolution have collided to produce the perfect powder keg of conditions for these revolutions.  Those who make the argument that the Iraq might have been worth it would like to include Saddam’s overthrow as one of the ingredients that created the right historical conditions for the Arab Spring.  You can be the judge of that. 

In the end, history will have to judge if the Iraq War was worth its costs.  Right now, I think the evidence clearly shows that it wasn’t.  The lack of WMDs, Iraq’s tenuous link to Al-Qaeda, loss of American and Iraqi lives and the world’s declined opinion of the U.S. all point to this being a bad decision from the beginning.  I suppose there is the possibility that the messy and complicated turmoil that currently constitutes Iraq could resolve itself into something better than what existed prior to 2003. For our sake and the world’s I hope it does.

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The Takeaway:  No, the Iraq War probably wasn’t worth it, though I desperately hope history proves us wrong.

What's the Deal with the Payroll Tax?

One of the taxes that we pay is called a “payroll tax”.  This is a tax that goes to the federal government, funding programs like social security.  The payroll tax has recently been 6.2%.  However, the stimulus bill spearheaded by President Obama allowed for a one year “holiday” on the payroll tax.  It brought the rate down to 4.2%.  This means that for the past year on average people have gotten an extra $50 in their monthly paychecks.  That totals about $1,000 for the entire year.

Who Does the Tax Cut Apply To?

The tax cut is applied on the first $106,000 of personal income.  Thus, it’s been applied to 160 million Americans.  People making more than $106,000 haven’t gotten the tax cut. 

Did the tax cuts stimulate spending in 2011?

Economists disagree.  There are some economists that believe that the tax cut stimulated spending, especially for those who live paycheck to paycheck.  This is one of the reasons that there is bipartisan support for renewing the payroll tax cut.

The reason it hasn’t already been renewed is because Republicans and Democrats disagree on how to pay for it.  The total cost of the payroll tax cut is around $200 billion.  Republicans don’t want to raise taxes on millionaires to pay for it.  They argue that there are too many small businesses (“job creators”) who would be hurt by this.  Democrats would like to tax millionaires by approximately 2% and would like to roll back some tax breaks for oil companies.

The deadline for renewing the payroll tax comes by the end of the calendar year.  This is also when certain unemployment benefits will expire.   It’ll be interesting!

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The Takeaway:  There are rarely easy solutions in policy matters.  Personally, I think both the payroll tax and unemployment benefits should be extended.  Congress should focus on revamping the tax code to extract more revenue. 

Government Doesn't Ruin Health Care (or your country)

http://www.washingtonpost.com/blogs/ezra-klein/post/a-larger-welfare-state-can-mean-a-lower-deficit/2011/08/25/gIQAkL9ufO_blog.html

Most people believe that two things are proportional: the welfare state and deficits.  Is this true?

Not necessarily.  This is a classic example of oversimplification.  For example, Germany has a fairly large welfare state including pensions, health care, paid vacations and unemployment benefits. According to Ezra Klein, columnist for the Washington Post and his popular Wonkblog, Germany spends 25.2 percent of their GDP on the items listed above.  Greece spends 21.3 percent on the previously mentioned items. Yet, Germany has one of the strongest economies in the world (the strongest in Europe) and Greece is on the brink of default. 

Let’s think about this in the context of health care spending.  Look at the chart above.  In 1965, the cost of the U.S. and Canadian health care system was essentially the same.  Canada spent 5.9 percent of its GDP on health care.  The U.S. spent 5.7 percent. At that time, Canada was transitioning to its “socialized” system of health care – its single payer system. Over the course of the next four decades the cost of health care in the U.S. skyrocketed.  By 2009, Canada was spending 11 percent of its GDP on health care – and covering everyone.  The United States was spending 17.4 percent of its GDP and leaving 45 million uninsured.  That’s incredibly inefficient, resulting in the U.S. spending about $3,600 more per person, per year, than Canada. 

Critics of “socialized medicine” claim that it will bring larger deficits to the U.S.  If this were the case, wouldn’t Canada have bigger deficits than they do now?  They have a larger welfare state.  Clearly, this logic breaks down when one analyzes the data. 

More Than Cocktail Party Conversation

What is it that makes a book a “classic”? 

Classic literature is thought of as esoteric cocktail party fodder. Many undergraduate students, who have to face a Western Civilization course, wonder why they need to read Homer’s Iliad or Voltaire’s Candide.  Could it be that reading the classics not only enriches your education but actually makes your life better?  If we assume this, the next question is of course – what books should I read?   This question is a common one in academia.  Since our lives are too short to read every book in the world, wouldn’t it be nice to have a rubric to analyze a book to see if it qualified as one of the “right” books to read?

Jeffrey Brenzel, philosopher and Dean of Undergraduate Admissions at Yale University thought so and recently gave a lecture about this very topic.  He explains five criteria for identifying a classic of literature, philosophy or politics.  Each criterion is insufficient on its own.  It’s the culmination of the criteria that make them a useful tool.  They are as follows:

1.  Addresses permanent and universal human concerns.  Philosophically, the work might speak to the way in which we should live.  From a literary perspective, it might say something about the way in which we could live.  Lastly, from a historical or political perspective, the work might give us insight into how humans have lived. 

2. Game-Changer.  The work must have shifted perspective on a particular topic.  It’s not enough to have simply re-stated what has already been said or thought.  Without this, contemporary thought on a particular subject would be different than it is today. 

3.  Influence other Great Works.  The work must be a response to or a catalyst for other great works.  

4.  Respected by experts.  Generations of scholars must rate the work highly.  It must be thought of as one of the best of its kind.  It’s acceptable and probable that these experts will disagree about the content of the work.  It’s only necessary that they rate it highly in the other categories. 

5.  Challenging yet Rewarding.  The work is probably not an easy read.  Rather, it demands effort to engage and understand it. But, this effort is rewarded in “multiple ways”. 

Dr. Benzel’s criteria generally make sense to me.  I think his first four criteria are spot on.  A classic work must deal with a fundamental human concern. It must have changed perspective on a particular issue.  If not, then why would it even be significant?  It also must have influenced other great works and be respected by experts.  I do, however, question an aspect of Brenzel’s final criterion.  I agree that it should be a rewarding read.  Why, otherwise would I want to read it?  But does it need to be challenging to read?  I think that a classic work should be challenging to think about.  It should challenge your preconceived notions about a particular issue, but does that necessarily translate into a challenging read?  Perhaps it does.  Perhaps it doesn’t. 

It’s important to note that there are many non-classic books that are worth reading.  The classics are important because their intellectual vigor, not necessarily their entertainment value.   There’s nothing wrong with popping open J.K. Rowling, James Patterson, Michael Crichton or Steven King.  In the right circumstances they can be as rewarding as any classic.  

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The Takeaway: Read what you want, but give classics their due.

54.5 Miles per Gallon by 2025

Can we double gas mileage requirements for all vehicles by 2025?

That’s really a silly question.  Of course we can!  Whether it will happen or not is the real issue.  The United States has the resources to improve the fuel economy of all vehicles tremendously – and has for many years.  So why is the current average for all vehicles 27.5 miles per gallon?  Politics.

The E.P.A., Department of Transportation and U.S. automakers have agreed that starting in 2017 fuel economy must increase by 5 percent for cars annually.  The requirement for trucks and S.U.V.’s is a bit less.  The best news is that by 2025 all U.S.-produced cars, trucks and S.U.S.’s must average 54.5 miles per gallon.  This will be good for both the environment and the economy.    According to the E.P.A. and Department of Transportation by 2025 these fuel efficiency improvements will add approximately $2,000 to the cost of a new car, but lower gasoline costs for the life of each car by $6,000.  For those of you who don’t like to do math, that’s a net gain of $4,000!

The Takeaway:  It’s about darn time.  We should have put these requirements into place twenty years ago.  Better late than never…

It's a Wonderful Life

The rest of the cast of "It's a Wonderful Life" and I open up at the Great Bend Community Theatre tonight!  

This beloved American holiday classic comes to captivating life as a live 1940's radio broadcast.  With the help of an ensemble that brings a few dozen characters to the stage, the story of idealistic George Bailey unfolds as he considers ending his life one fateful Christmas Eve.  It's a really fun show!  I've had a truly wonderful time with all of my castmates.  They're so much fun!