Joined: 28 Dec 2005
|Posted: Sat Jul 04, 2009 10:37 pm Post subject: The Bush Legacy & Obamanomics
|The Bush Legacy & Obamanomics: How to prosper in the 2010s:
This article is in three sections: The Bush Legacy of Iraq and the U.S. Economy; the influence of Obamanomics; and how to prosper from economic changes.
al-Qaida's 9/11 attack was more diabolical than most people realize. al-Qaida not only turned our own people and technology into missles against symbols of American power, it also attempted to provoke a war between the largest oil consumer and the largest oil producer by using Saudi hijackers.
So, the invasion of Iraq, to free-up cheap oil, was no less important than the invasion of Afghanistan, to destroy enemy bases, in fighting al-Qaida.
I stated before: It seems, Bush foresaw "Peak Oil" and freed-up Iraq, which has the second largest oil reserves after Saudi Arabia, from a madman and his two sons, rather than shift into alternative energy, which was too expensive and unreliable [Iraqi oil is very cheap to extract, and bickering among factions is why Iraq hasn't produced much oil, and collected much oil revenue].
From Wikipedia: "The Iraq sanctions were a near-total financial and trade embargo imposed by the United Nations Security Council against the nation of Iraq. They began August 6, 1990, four days after Iraq's invasion of Kuwait, and continued until May 22, 2003, after the fall of the Saddam Hussein government in the US-led invasion earlier that year."
How Much Oil Does Iraq Have?
The respected Petroleum Economist Magazine estimates that there may be as many as 200 bbl of oil in Iraq; the Federation of American Scientists estimates 215 bbl; a study by the Council on Foreign Relations and the James A. Baker III Institute at Rice University claimed that Iraq has 220 bbl of undiscovered oil; and another study by the Center for Global Energy Studies and Petrolog & Associates offered an even more optimistic estimate of 300 bbl—a number that would give Iraq reserves greater even than those of Saudi Arabia. In a Guardian interview before the war, Taha Hmud Moussa, Saddam's deputy oil minister, said that all of Iraq's oil reserves "will exceed 300bbl when all Iraq's regions are explored. If true, this would mean that Iraq has roughly a quarter of all of the world's oil.
The Real U.S. Economy:
The U.S. benefited tremendously from global imbalances, and it was inevitable they'd correct, either slowly or suddenly.
It's not understood, global imbalances were created by foreign governments. So, the U.S. government needed to respond appropriately. One imbalance was U.S. firms and households exchanged dollars for foreign goods, and then foreigners exchanged those dollars for mostly U.S. Treasury bonds. Consequently, dollars were drained from the U.S. economy, and those dollars needed to flow back to U.S. firms and households.
In 2008, the U.S. had an oil shock that was twice as big [in real dollars] than in the 1970s. Yet, unlike the '70s, the U.S. didn't fall into a severe recession, until the credit market froze after Lehman failed [in Sep '08]. Iraq, which is now a democracy, has the potential to quadruple its oil production, increase its oil revenue substantially, and add cheap oil to the global economy.
U.S. multinationals had a record 20 consecutive quarters of double-digit earnings growth in the 2000s. That "excess" capital was distributed to the masses, which raised actual output towards potential output (e.g. through the housing boom and related goods). Iraqi oil is very cheap to extract.
Export-led economies are the big losers in this recession, which is a correction to reduce global consumption. The U.S. already captured enormous real assets and goods, in the global economy, while export-led economies continue to hold worth less U.S. paper assets.
It was inevitable global imbalances would correct. The question was would they correct slowly or suddenly. The U.S. had a virtuous cycle of consumption and investment. Export-led economies sold their goods too cheaply and lent their dollars too cheaply. Consequently, the U.S. overconsumed and underproduced, while export-led economies overproduced and underconsumed. The U.S. housing boom (and related goods) helped raise U.S. actual output towards potential output, which caused export-dependent economies to overproduce even more. The U.S. consumption-investment cycle turned into a boom, which was unsustainable.
The correction was inevitable. There was diminishing U.S. marginal utility, since Americans bought too many goods, and would buy more goods only if prices fell further. Export-led economies had production strains, while lending their dollars to the U.S. more cheaply. They exchanged their goods for U.S. dollars instead of U.S. goods, and received increasingly smaller gains-of-trade through inflation (e.g. postponing or never buying U.S. goods), received negative real interest rates (e.g. low long-term and short-term bond yields), and lost in the foreign exchange market (receiving fewer units of their currencies per dollar). Export-led economies lost up to 10% a year either holding worth less U.S. paper assets, or through importing U.S. inputs (e.g. capital goods rather than consumer goods) for their output.
This is the first severe recession, since 1981-82. However, not all recessions are the same. In the 1981-82 recession, there was too much money chasing too few assets and goods. In the current recession, there's too little money chasing too many assets and goods. Rather than clear the market of excess private assets and goods, Obama has chosen to destroy (rather than consume) those excesses, while creating public assets and goods (through massive government spending rather than a large tax cut). There was a strong expansion after the 1981-82 recession. However, Obama may prevent a strong expansion, because of capital and output destruction, while creating inefficiencies in production. Chart of key economic indicators 1980-82 and 2008-09 below:
The economic recovery is inevitable. The question should be what will the recovery look like? Under Clinton, the U.S. had a "superbubble" from 1995-00, at the tail end of a spectacular structural bull market, where U.S. actual output generally exceeded potential output. Under Bush, we had another superbubble, in a structural bear market, that began in 2000, where there was a strong expansion of the real goods market, real asset booms, and a steeper rise in U.S. living standards than 1995-00, along with the greatest global economic boom in history. Obama will spend trillions of dollars and micromanage the economy. So, if we don't get another superbubble, from 2009-14, that at least matches the prosperity of 1995-00 and 2002-07, Obama should be viewed as the biggest economic failure in U.S. history (a strong recovery is more likely after a severe recession).