Dana Blankenhorn

Hope Rising

Think of this as Volume 11, Number 19 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.

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In most of the items marked Crisis of 2008 I have emphasized the difficulties in the time we're living with, the problems, the dangers.

But it is also vital, sometimes, to look at the opportunities, and to see the hope rising all around us.

I'm fortunate to find such things often in my work. Sometimes I bring them to you. Here are two just from this week:

• Simple breakthroughs in things like capacitors that can improve the efficiency of electric motors by as much as 300%.
• Breakthroughs in telemedicine which Microsoft is quickly taking advantage of.

Science and engineering are using the benefits of Moore's Law to create progress at a Moore's Law rate. That is breakthroughs are coming faster-and-faster, fast enough (perhaps) to halt the present processes destroying human life on this planet, and even turn them around.

If, that is, they can be brought into the world rapidly enough. The society which brings them to the market most rapidly will have the greatest share in the resulting prosperity.

What we need to make this happen is a process revolution. I am talking about accelerating both economic and political processes. We need to change business' processes so companies make more money solving problems than  causing them, as they have in this decade. And we need to change the way political change occurs at a fundamental level.

A generation ago Republicans talked about making government run more like a business. Now we need businesses to start taking their societal responsibilities seriously.

You do that by changing incentives.

• Right now electric utilities have more incentives to build power plants than to build efficiency into our electrical grid. We can change that.
• Right now drug companies have more incentives to create "me-too" drugs with patent protection than to produce generics we know work. We can change that.
• Right now energy producers have more incentives to withhold product from the market than to produce it. We can change that.
• Right now companies have more incentives to create monopolies than to open new markets. We can change that.
• Right now companies have more incentives to create paper than to see loans are repaid. We can change that.
  

When Al Gore talks about trading carbon credits, this is really what he's talking about, creating an incentive to emit less carbon by simply putting a price on it.

None of these changes are terribly difficult. Most are just a matter of will. And when we put the power of the market to work on the world's problems, pointing to those problems as opportunities with profits going to those who create solutions, positive change can happen quickly.

But that's not all.

Capacitors in The War Against Oil

What if we could shrink every electric motor in the world by two-thirds, essentially doing three times the work with the same juice?

We can. And we can do more than that. (Picture from NG Manufacturing.)

I got this story from an old college buddy out in West Texas. It seems a Mexican outfit, Neuva Generacion Manufacturing, which owns most of the big U.S. capacitor makers, has patented technology to do just this.  It will first go into things like refrigerators and air conditioners, as well as industrial motors, but could be applied anywhere such motors operate.

How do they work? As my friend put it, the key to an electrical motor inefficiency lies in starting the thing. Current technology for starting motors increases the power demand by 300%. The capacitors allow start power to match the running power, so all that extra weight (and power use) goes away.

NGM has the capacity to serve the whole market, with factories in the U.S., Mexico and China. Among their brand names are Commonwealth Sprague, Barker, and Mallory.

To quote from their (admittedly poorly written) press release:

Early U.S. Department of Energy reviews of this new technology have demonstrated drastic improvements in life and dynamic improvements in most motor start applications.  Manufacturing tests have proven that many major components of HVAC and Appliances can now achieve smaller overall size with resulting savings in materials and manufacturing costs when fully integrated with the new NG / PACCAP technology solutions.   

The implications are discussed in an article at Copper.Org. Better capacitors mean more efficient motors, three times as efficient as current models. Even if the new motors merely replace old ones as they wear out, we're talking about savings of:

62 to 104 billion kWh per year in the manufacturing sector alone. This savings is valued up to $5 billion. It would also avoid the release of up to 29.5 million metric tons of carbon equivalent emissions to the atmosphere annually.

Industrial motors consume about 23% of all electrical power in this country. Existing incentives for energy efficiency can increase the turnover rate, and the savings.

Now, how can we get even more savings?

The Oil Standard

Think of this as Volume 11, Number 18 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.

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I have long been intrigued by what stands for value. (Picture from The Zoo.)

Throughout the 19th century, gold was the standard of value.

The 1896 Crisis, the Cross of Gold speech, these were outgrowths of the 1895 gold loan by J.P. Morgan to the U.S. government in exchange for bonds, which Morgan then sold at the "usurious" interest rate of 4%. With gold as the standard of value, the value of other commodities (like wheat) withered. Farmers suffered, bankers gained. The farmers' uprising was called Populism, and it made Democrats dominant in the farm belt for decades.

Today we have a new standard of value. Oil. And the impact is much the same. For wheat read dollars, for farmers read Americans, and for J.P. Morgan read the Saudi sheikhs, Hugo Chavez and Vladimir Putin.

What makes a "strong" store of value is the fact that its supply is limited, that it doesn't inflate. It's stable. It's sound.

The U.S. dollar is no longer sound. It's being tossed out by Helicopter Ben the way farmers a century ago tossed wheat on the market, and the result is very predictable. The age of the "dollar standard" is over, and while the world seeks a new safe haven, oil will do nicely.

There can be only one response.

Making It About Us Again

Why are people so disgusted with the present political campaign?

It's not about us. (Picture by Fred Askew from MonthlyReview.)

Candidates give lip service to this being about us, but it seems to be more about the media and the pundits and their own obsessions than about us.

Campaigns generally get into the weeds like this when the discussion about us becomes uncomfortable to the elites in power. It's not policy choices which make the elites uncomfortable. It's the idea of someone other than the elites making those choices which makes them uncomfortable.

I'm not talking here of idiots and know-nothings making decisions based on their own prejudices. I'm talking about candidates and parties addressing our real crisis, not just pandering to our short-term problems but inspiring us with a different future.

What's happening, to both young and old, is we fear losing control of our future. We don't know where our next job is. We don't know if America can ever lead again. We don't know how we'll pay our bills or educate our children. We fear we've lost control, personally, politically, economically. We're scared.

An Alternative Energy Census

One of the treats in my first reporting job, at the Houston Business Journal, came in learning about geological maps. Using sonar and great creativity, engineers in the "oilpatch" mapped where potential oilfields might lie. The maps determined the value of potential oilfields, and told wildcatters where they should drill.

With businessmen now taking The War Against Oil seriously, we need new maps.

Such maps might indicate:

• How much sunlight falls.
• How deep you must drill to reach usable geothermal resources.
• How reliable is the wind.
• Where is a stream capable of taking a water wheel?

From such maps we can determine the potential alternative energy value of any place in the country.

The Manipulators

We don't like being talked down to.

(This is actually a marketing talk, by Seth Godin, done at Google, but it's worth listening to whatever business you're in. Notice that he's not talking down to anyone.)

The reason the Obama "bitter" deal hasn't hurt him is the same reason the "Jeremiah Wright" deal didn't hurt him.

This election is not about him.

What all the manipulators who are pissing-and-moaning about it, whether on the TeeVee or online, don't realize is something just as important.

This election is not about them, either.

This election is about us. You and me.

Crisis elections are like that.

Anyone want to deny we're in a crisis (other than the manipulators)?

Housing Bailout, Dollar Bubble

Here's how it's all going down. (Picture from Rev2.org.)

The Federal Reserve prints enough money so that banks can write-off the Big Shitpile and acquire the liquidity they need to make new mortgage loans.

That's what is in fact happening. The Fed has opened its lending facilities to investment banks as well as commercial banks, and is taking whatever junk these guys have for collateral. That's a nice CDO based on Las Vegas sub-prime mortgages you have there, I'll loan you 100 cents on the dollar for it.

It's possible that J.P. Morgan is telling the truth, and the loans being passed to the Fed's hands in the Bear Stearns deal aren't the worst of the worst. But that's just the tip of the iceberg. The IMF estimates there's $1 trillion of dodgy paper about, most of it American (although some is British, which is why the Pound is under $2 while the Euro climbs to near $1.60.)

The consumer aim in all this? To keep nominal home values at a level such that millions more home loans won't go underwater. That is, say your $300,000 home should really be worth $150,000 in a real market, as it should. The Fed pumps enough new dollars into the system that it's still worth near $300,000, and you feel pretty good. Trouble is the $300,000 is really worth what $150,000 was worth before the bailout started. The market has done its job but you don't notice until you do the math.

A Nation of Makers

At the heart of the economic component in our current crisis is this salient fact.

We are no longer a nation of makers. (A version of this iconic Norman Rockwell image is painted on the side of my car mechanic's workshop in Atlanta.)

In this last generation we have transformed ourselves from a nation of makers into a nation of takers. Most jobs don't really involve the making of anything. They involve either the recycling of money or the spending of it.

I'm proud to say that my lovely bride isn't part of this. One point of pride in her computer programming job has always been that the transaction processing programs she writes make money each time they run. (Another curiosity -- she's been at one employer for a quarter century.)

My son, on the other hand, wants to be a taker. A lawyer. Usually a prosecutor. Sometimes a trade negotiator. My problem with the law is that it doesn't make anything. It refines rules which take from one and give to the other. The plaintiff gets the defendant's money, or the state takes the defendant's liberty. Essential to security, but it doesn't add to GDP.

While the U.S. is still the world's manufacturing leader (believe it or not) our share of the world's value added through manufacturing has been declining throughout this decade. Changing this last fact is the key to a lasting economic turnaround.

Bias Doesn't Help

Having been a business reporter for 30 years this summer I understand the natural bias to identify with your subject.

The job of a journalist is to organize and advocate an industry, place or lifestyle. Thus, a certain bias favoring the political views held by the group you write about is natural.

But at some point your ideological blinders have to come off, or else you're doing your readers and viewers a disservice.

This has plainly happened with the financial press.

Media coverage of the Big Shitpile has ignored the Big Fact. This happened because unregulated markets were allowed to be created, to grow, to soak up much of the world's capital. When two brokers or hedge funds repackage mortgages or other things into new types of trading instruments, they are printing money, just as the Federal Reserve prints money. They're doing it in the same way, by declaring the existence of new paper, by putting a price on it, and making a market in it.

Anyone who does this has a fiduciary responsibility. You become the trustee of your investor's interest, which is supposed to trump your own. Ethical rules can police such a responsibility. So can laws and regulations.

What happened in this decade is entirely new markets and new instruments were allowed to be created, which lacked these controls.

Nothing I have seen, either from the Administration or the financial press, addresses this key point. Nothing I've seen endorsed from either is designed to control these markets. It's all window-dressing, pushing papers and organization charts around in the appearance of doing something while in fact doing nothing.

This guarantees the scandal will happen again, sooner rather than later.

Will you read this in Forbes? Will you see this on CNBC? No you won't. Jim Cramer won't tell you either. The ideological blinders of all these outlets cause them to hide from this simple truth.

We must regulate our markets, or we will lose them.

Let me put this in a way Cramer might understand. You have two casinos. One is regulated. The other is not. Where will you place your bets? Will you do it at a place where, if the casino plays 3-card monty on you they will be caught and punished? Or will you do it where the game is crooked and there's no cop on the beat?

Regulators are cops. When conservatives go on this knee-jerk "anti-regulation" jag they're arguing for lawlessness. Markets which can't guarantee transparency, which act as unregulated casinos, will over time be rejected in favor or markets where honesty is assured.

The growth of the U.S. financial industry over the last 80 years has been driven by its honesty, by its transparency, by the wealth of information on players and games which regulators of all types have imposed. Eliminating these regulations, or going around them, does not make markets more efficient. It makes them more crooked.

Law good. Lawlessness bad.

Fighting the War Against Oil at Home

How can you fight the War Against Oil today?

Here on Winter Avenue, we're doing our bit.

First, let's take a look at the field of battle. We live in an old "Craftsman" style bungalow, built in 1921 by guys with hand saws. It's one story, three bedrooms and one bath, about 1,650 square feet in all. The home was originally heated by coal, then by gas space heaters, before a central system was installed in the mid-1960s. We replaced it in 1990, added air conditioning 8 years later.

Three years ago, in 2005, we added a layer of cellulose insulation to the attic, where it's now R-30. We also had all our old knob-and-post wiring replaced by real insulated copper.

Still, with the rising price of oil and gas we're suffering. Our natural gas bills have been running at $200-250/month during the winter, and our electric bills the same in the summer.

What to do?

Halfway Through the Process

The first part of our national economic nightmare is over.

But only the first part. (Picture from Cashflowrollercoaster.com.)

What we've seen in stocks is a classic bear market. Prices fell roughly 20% from their highs, from over 14,000 to (briefly) under 12,000. They then re-traced about a quarter of that loss, and if they go higher still it's no all-clear signal. Most bear markets retrace half their initial loss.

What happens next is a test of the lows. This is just what happened nearly a decade ago in the dot-bomb. It's what happened in the "Asian contagion" of the late 1990s, and in nearly all previous bear markets. If the lows hold it's over.

But the lows don't always hold. That was true for Japan after 1987. It was true for Wall Street after 1930. And in this case there is real fear that the lows may not hold.

The reason is that under all this crap is the Big Shitpile, the mortgage derivatives created by unregulated markets over the last few years. Basically investment banks were creating money on their own, with no controls, by simply defining new securities based on these mortgages and selling them as though they were worth something. The ability to do this inflated home prices, because lenders didn't have to consider the risk a borrower wouldn't pay. The unregulated market was hungry for any new collateral.

Federal Reserve intervention staved off the first phase of panic, but there could easily be more to come. Millions of mortgages will re-set this year. Millions more are "underwater," more money owed than the value of the home. These are both opportunities for speculators to get-out, and since the bankruptcy law of 2005 made home debt less important than credit card debt (you have to pay the credit cards in bankruptcy now, but you can walk away from the home) there may be millions more foreclosures to deal with.

Each one of those foreclosures will have a ripple effect. Each mortgage is tied to other securities, all of which default or lose value when a homeowner walks away. How many are there? No one really knows.

So far home prices have dropped about 11%, and newspapers are saying this is a disaster, but it's really not a big deal. I think prices will fall by at least 20%, probably more, meaning lots more mortgages go underwater, as lenders tighten their standards, knowing they may have to hold the paper themselves for a while.

We have yet to see the second leg of this thing, in any market.

It's Not That They're Clueless

Think of this as Volume 11, Number 11 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.

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My blog friend Oliver Willis calls those in charge of our financial house clueless.

That's an easy mistake to make.

In fact, it's in the nature of our economic system that you go right up to the line of legality in order to maximize profit. Anyone who doesn't do that is an economic loser, either in the short run or the long run.

You want to go right up to the line, peer down over the edge, and maybe move your toes back a bit. That's what your lawyers are there for, to move your toes back a bit.

This is fine so long as the law is reasonable. If the law is reasonable and cops are on the beat, walking right up to the line of legality and staring down into the canyon is both legitimate and good business. It's what makes markets efficient.

The problem in this case is the law was made unreasonable, and the cops chose to look the other way.

All the problems Bear Stearns caused were through the creation of new, "unregulated" markets. An unregulated market is a market that's looking for scandal. Because there is no reasonable line you can walk right up to, it's easy as heck to become Wile  E. Coyote in such a market -- everything is fine so long as you don't look down.

The defaults on sub-prime mortgages last year were when we started to look down.

A Bigger Crime Than Iraq

With very little fanfare, a bearded bureaucrat about my age recently committed a bigger crime than our entry into the Iraq War.

Ben Bernanke, whose title is Chairman of the Federal Reserve Board, is committing half your country's capital -- $400 billion -- against securities  he knows are bogus, home mortgages that should never have been made, collateral instruments that should never have been created.  He compounded this crime yesterday by explicitly bailing out Bear Stearns, the investment bank which more than any other created this Big Shitpile.

The excuse, given even by liberals like Paul Krugman, was that Bear is "too big to fail."

Bullshit.

The Magic Word for 2008

Think of this as Volume 11, Number 10 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.

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Production.

Say the magic word and the debate, as well as the choices, of 2008 come into sharp focus.

The only way to get out of our current economic problems is through production of new goods. The only way to launch the War Against Oil is through production of new types of energy.

The two points are directly related. The key to production at a profit lies in reducing the energy costs of production. And the energy costs of distribution.

Speaking of which, a focus on production is how you address questions regarding the Internet. Our Internet infrastructure is in sorry shape. It needs a serious upgrade. These are the canals or roads of our time, and we need to treat Internet access just as seriously as our forefathers did those routes to market.

Production also puts many issues into sharp focus because of how the two parties have proposed to boost it.

Republicans want tax cuts. They want "incentives" for companies to boost production of oil and gas, of coal, and of Internet capacity. These have been at the heart of their economic program for years.

Democrats want competition. A Democratic program for production would focus on increasing the amount of competition in all markets.

A floor price for energy would be a good start. Lock in the current gains, tax away oil and gas whose price comes in under the floor (it won't once the floor is in place) and you provide plenty of incentives for both the production of new energy and increasing the efficiency of industrial production.

Competition is also the answer to our Internet problems. Demand that current networks, both wired and wireless, open up to new competition, as was done in the 1990s. Problem solved, thanks to Moore's Law, because it is only by violating Moore's Law and squeezing more money out of the same services that the current duopolists have stayed afloat.

Production is the answer to not only our labor problems, but (in part) to our crime problems. Production creates lots of relatively low-skill jobs. High demand for low-skill jobs will increase wages for those jobs, and create incentives for producers to take a chance on the 1% of us now behind bars. If you enable people with minimum education the chance to earn a fair living your crime problem goes down.  Create enough jobs and we can even hire Mexicans, in Mexico.  So much for immigration problems.

Production is an economic policy, it's environmental policy, it's energy policy, it's trade policy. By creating new ways to make things, which are more energy efficient, we create exports, both in the goods themselves and the machines used to create the efficiency.

The Manchurian Presidency

The Manchurian Candidate is about a Communist plot to install a dupe, played by James Gregory (left in the photo at right), as President. He claims to be fiercely anti-communist, but he's really controlled by the communists through his wife, played by Angela Lansbury. (Sorry if I spoiled it. Watch it for Frank Sinatra next time -- one of his best roles.)

Ever since the movie returned to vogue politicians have been warning that their opponents are secretly working for the other side. The claim is made this cycle about Barack Obama. That is, Barack Hussein Obama.

Of course, this deliberately misses the plot. The James Gregory candidate is a perfect conservative, a neo-McCarthyite. In 2008 parlance, he's McCain.

But what if the Manchurian Candidate has already been elected? What if, in fact, he's been in office for over 7 years?

The Virtuous Cycle of a War Against Oil

Think of this as Volume 11, Number 10 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.

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Right now the U.S. economy, and the U.S. in general, is in a vicious cycle. (Picture from DC Fred  .)

Wealth is decreasing, so sales are slowing. Sales are slowing, so the economy is tanking. The economy is tanking, so the dollar is tanking. The dollar is tanking, so we're importing inflation. Prices are rising so we can't cut interest rates. High interest rates causes wealth to decrease...lather, rinse, repeat.

What if we could replace this vicious cycle with a virtuous one, as we had in the 1990s?

We can, but it can't be the same. Back then we were building the Internet. That's built. We could improve it, add lanes, add competition, and that would be a very good thing indeed, but it won't provide the kind of virtuous cycle we got back in the day. Sorry.

But we can get that virtuous cycle if we commit to a War Against Oil.

What does a War Against Oil mean? It means a total commitment, on the order of a real war (not the kind we've been fighting in Iraq) to eliminating the use of hydrocarbons in our lives. That's the clearly defined victory, and (as the current President likes to remind us) nothing less than victory will do.

How do we do it?

What Change Means

Memo to the Obama campaign. (UPDATE is here.)

Rather than getting lost in the weeds of charge and counter-charge, or letting the media dictate a narrative, you merely need to put some meat on the bones of what change means to win.

Change, repeated often enough, just becomes another word. It becomes a brand, like Coke, which is fizzy water, not a solution to real problems.

There is plenty in Obama's current program to put the meat on changes' bones. I don't have to invent a thing.

I'm not a videographer. Maybe you can produce this. I'm going to describe it as a series of lines and scenes. See if it makes sense to you.

What Change Means (Voiced by the candidate)

1. Change means bringing our boys and girls home -- Pictures of troops returning to families, reunions, parades.
2. Change means engaging all our assets -- Pictures of Obama meeting foreign leaders, shaking hands.
3. Change means making things to pay our bills -- Pictures of people in modern factories making windmills, solar cells, computer chips, etc.
4. Change means serving one another -- Pictures of young people in nursing homes, teaching, etc.
5. Change means  consensus, our common humanity, living what we believe and seeking new mountains to climb -- A jumble of hopeful scenes.

Seeking Bottom

Markets are a lot like alcoholics. They can't start their recovery until they hit bottom.

In an auction market, like stocks, this happens fairly quickly. The buyers disappear, and sellers capitulate, those who were burned by the bubble lick their wounds.

The bottom is not reached until you have an honest "buying opportunity," based on fundamentals, usually at a valuation of about half what the commodity was worth before -- often less. Often this bottom will be tested, and for years after a bust your gains will be modest, even if you got what looked at the bottom like a bargain.

Lock in the Gains

With the price of oil now well over $100/barrel, the time has come for the U.S. economy to lock in its gains. (Tom Noddy does magic with bubbles.)

What do I mean by that?

There are a lot of energy saving, and energy producing ideas, which make no sense at $30/barrel but which make great sense at $80/barrel. But we can't make them so long as there is substantial risk that the price will go back to $30/barrel.

We were at a moment similar to this almost three decades ago. People were talking them about wind farms and wood stoves and all sorts of things, with oil at around $50/barrel. Instead of locking in those gains and letting innovation create a market, we decided on a strategy of killing the bastards standing between us and cheap oil. It worked. All those ideas disappeared.

The End of Impunity

One thing which has marked the last two decades, and it's as true for ordinary people as for our leaders, has been a sense of impunity.

Democrats complain often of how the Bush Administration displays impunity. The rules don't apply to them. They make up their own reality. The President cannot break the law.

We talk a lot less about our personal impunity. We can buy what we want. We can walk away from our debts. We don't have to make hard choices.

Democrats most fear talking about the impunity inherent in their own positions. We'll get out of Iraq on our own schedule, and stay in Afghanistan "to win," they say. We'll give ordinary people tax cuts and raise spending on health care and education.

The end of all this impunity is a big theme in our current crisis and all of us -- Democrats, Republicans, consumers, businesses -- remain in the denial stage of the process.

Last week's biggest story may have been Joseph Stiglitz' (above) estimate of the Iraq war's cost -- $3-5 trillion. (It's all here in his book.) The figure seems unimaginable so let me put it into perspective.

It's going to cost the U.S. its autonomy. It's going to cost our currency. It's going to cost you your life savings, and me mine. It's going to end the era of American impunity.

Through the Looking Glass

For 75 years, since the depths of the Great Depression, American economists and policymakers have offered just one cure for economic problems.

Liquidity.

Liquidity means the injection of new money into the economy. This is done through monetary policy, cutting the cost of money directly by the Federal Reserve, or through fiscal policy, spending more than the government takes in.

Of course, there's another word for liquidity, and that word is inflation. The film above, produced in 1928, illustrates the hyper-inflation which began the rise of Hitler in Germany.

Once a nation goes through hyper-inflation its people get the message through suffering. Your life's savings disappear. You can't afford food or other necessities. The government can't really help anymore because they're using the same worthless currency you are. Pretty soon you're down to barter and the use of foreign currencies. It's happened many times, especially in Latin America, and the answer of American policymakers was to peg those currencies to the dollar. The dollar was the strong currency.

Is it?

When you're running deficits of $300 billion or more a year, you print money to make up the diff