US Interest Rates At A Record Low – But This Is Only Because Europe Is A Much Bigger Risk – American Fiscal Predicament Pretty Awful – Is There Enough Time To Avoid The End Of The Year “Fiscal Cliff”?

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By Paolo von Schirach

July 12, 2012

WASHINGTON – US 10 year Treasury Bonds are well below 2%. This historic low caused a dramatic decline in lending rates. Amazingly, interest rates on 30 year mortgages are now at 3.56%, the lowest they have have been since the 1950s. In ordinary circumstances, these unheard of low interest rates for government securities would exist only in countries with super solid finances and an impeccable fiscal record.

Horrible US fiscal outlook

But this is not at all the case in America. In fact just the opposite is true. The American fiscal outlook is bad to terrible. Annual deficits exceed $ 1 trillion, while total debt is now beyond $ 16 trillion, an astronomic figure. We borrow 40 cents of every dollar Washington spends.

Still, all this is not because the country is broke. This is due mostly to a complete lack of political agreement between Democrats and Republicans on the best way to reconcile entitlement reform with tax reform and other spending cuts, while preserving viable welfare programs for the truly needy, for seniors and for retirees.

As long as this ideologically driven deadlock persists, there will be no comprehensive spending and tax reform. The gap between revenue and spending will continue, the deficit will stay high and the national debt will keep piling up.

Why such low interest rates?

This being the case, then why the extremely low interest rates on US debt? Why aren’t we going the way of Spain and Italy, with 10 year bond rates above 6%? Well, believe it or not, America’s debt is coveted today, (hence the low interest rates), precisely because Spain, Italy, Greece, Portugal, Ireland and many others are doing so poorly, at the same time undermining the credibility of the entire Eurozone. Given persistent fears of a possible European monetary catastrophe, investors worldwide look at US bonds as the best refuge. America is still perceived as a solid country, or at least better than many alternatives. And the US dollar is still the world’s reserve currency.

Complacency makes things worse

But while the US can look at this long period of incredibly low interest rates due to the turmoil in Europe as a true blessing for a government that has to borrow vast sums just to keep going, I believe that this reprieve is in fact bad, because it allows policy makers to pretend that there is no crisis. This complacency allows them to postpone the day of reckoning. Today, America is like a terminally ill patient under massive sedation who feels no pain and therefore mistakenly believes he is doing alright.

The truth is that these historically low interest rates for US Government securities have not been “earned” trough sound fiscal policies. We get them because so many weaker countries are doing so much worse. As Bill Gross of PIMCO put it, America is the cleanest one in a pile of dirty shirts. I would not call this a compliment paid to Washington’s fiscal management by one of the smartest bonds trader in the world.

A solution is possible

Sure enough America can fix this fiscal mess. It is not beyond our reach. But now we are waiting for national elections, and all serious negotiations are off. So, wait until after the November vote. Still, without any agreement on fiscal reform by year end, current law prescribes huge mandatory spending cuts and tax increases that would have a horrible impact on the country. Without action, we are indeed headed towards a “Fiscal Cliff”.

Only a short time left to avoid the “Fiscal Cliff”

One would hope that Washington would not allow this to happen. Well, who knows how irresponsible our leaders can be. Based on their record so far, a lot. And consider the time constraints: assuming no action before the elections, there will be just a little more than a month to take care of this huge fiscal and taxation mess between the November vote and the end of the year deadline. May be enough time to concoct “something” and avert falling into the “Cliff”; but sadly not enough time to come up with a wise, credible and long lasting plan.

No Substantive Proposals In This Campaign For The White House – Romney Maintains That He Knows About the Economy, While Obama Doesn’t – Obama Managed To Paint Romney As The Enemy Of Entitlements And Of The Struggling Middle Class – And This Strategy Is Working

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By Paolo von Schirach

July 10, 2012

WASHINGTON – The unfolding campaign for the US presidency is hardly inspiring. After a long and truly bitter struggle, Republican Mitt Romney managed to outfox and outspend a couple of quite unremarkable opponents (Newt Gingrich and Rick Santorum) who, despite all their weaknesses, were getting a lot of votes in the primaries because Romney is not well liked among rank and file, conservative Republicans.

No compelling message from Romney

Well, now that he’s got the nomination, Romney has yet to fire up the masses. He has yet to articulate his Great Plan for America. The only trend working in his favor is the under performing US economy. Historically, when the economy does poorly for a long period of time the Americans demand a new coach. The problem is that the economy has been so weak (without being disastrous) for so long that my hunch is that people got used to it. They do not blame Obama. So, team Romney better think about something inspiring to say between now and November. Repeating that Obama’s economic policies are bad is just not enough to get elected.

Obama has got a couple of small ideas

As for the incumbent president, he has almost nothing to say about what he did in his first term and, far more significant, about what he intends to do in his second. His “Big Ideas” are really small. They consist in: a) a jobs plan focused on subsidized public sector hiring; b) the semi-amnesty for a chunk of (mostly Latino) young illegal immigrants; c) an extension of the Bush era tax cuts; but not for the rich. Let’s look at where these initiative are headed. The jobs plan has not chance of going anywhere, given Republican opposition in the House. Ditto for the tax cut as presented. The semi-amnesty for young illegals (only for two years, mind you) is an administrative action and thus it requires no law. Taken together these “proposals” have nothing to do with governing, but a lot to do with politics. These are nods to favorite constituencies. “Look at what goodies I would deliver to you, but these nasty Republicans do not allow me. So, vote for me and for Democrats in Congress”.

No Grand Plan

As, for everything else, nothing doing. This president has given up on governing and also on serious leadership. True enough, the Republican opposition in the House makes it certain that nothing of significance will become law. Still, it is the obligation of the president to lead. This should include presenting and advocating his agenda, his vision for America. And here there is essentially nothing.

Just to name a big one, there is no comprehensive plan for fiscal and tax reform, with spelled out goals for entitlements, a new tax system and a new vision for the role of Government in America. It is not a secret that, with no action, we are going down into the “Fiscal Cliff” at the end of this year, with mandatory spending cuts and tax increases so large and so destructive that only a mad man would allow any of that to happen.

Likewise, after the semi failure of a Government driven push into renewable energy, there is no articulation of a new energy policy that would take into account the significant new oil and gas discoveries that have radically changed the American energy outlook.

In foreign policy, there is the attempt to keep things quiet at least until after the elections. No US leadership and thus no action on the Syria crisis; sanctions but not much else for Iran; nothing on North Korea; zero on Israel-Palestine; mostly words of encouragement for Europe dealing with its debt crisis. The only visible change is the declared intention to play a stronger role in Asia. And this seems to be a way to court all the medium and small powers that feel uneasy about China’s growth.

Obama does have a re-election strategy…

That said, it is not true that Obama has no plan. He does indeed. Only it has nothing to do with governing. It consists in a pretty sophisticated manoeuvre to paint Mitt Romney as an out of control right-wing ideologue who wants to attack and destroy all entitlement programs created to shore up the incomes and health care services for the poor and the elderly.

Obama’s message is not that he has a vision about the next four years. His message is “Vote for me, because I am your friend. With me the gravy train keeps running. Romney is instead really bad news for seniors, for the young, and for the struggling middle class. He is out to get you, so that he can get more tax cuts for the super wealthy, such as himself. Vote for me and you’ll be safe. I’ll take care of you”.

…And it is working

You may think that such a caricature is totally preposterous; and so it will not stick. Well, look at the polls and you may want to reconsider. The strategy is working. Even with a bad economy that is actually getting worse, with unemployment stubbornly still at 8.2%, Obama is generally ahead nationally, (although not by huge margins). Most importantly, though, Obama is significantly ahead in all the swing states: including Ohio, Virginia and Florida. These are states that Romney must –absolutely must– win in order to get to the White House. So, this is it. If these numbers do not change, it is all over. Four more years.

Obama has a mediocre to bad record, and he is not presenting a policy agenda of any substance. But he surely has a well crafted strategy to get himself re-elected. (Summary: “Me? Perhaps not so great. But Romney is your enemy. Now, you pick“.) Of course, the American voters should demand a higher standard of political debate. Yet, sadly they don’t.

Increased Numbers Of Teachers Have Done Nothing To Improve US Public Education, Writes Andrew Coulson In The WSJ – And This Is Why Parents Pick Charter Schools – US Public Schools Are Mediocre To Bad

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By Paolo von Schirach

July 9, 2012

WASHINGTON – One of the key components of Obama’s jobs program proposal was to provide funding that could be used by states and local governments to hire more teachers. The president stated that this was a good way to fill major shortages that hurt the quality of education, while at the same time creating new employment for needed teachers.

Many more teachers, no test scores gains

Well, he got the employment part right. But, as for teachers shortages, it is not so. Andrew Coulson who directs the Cato Institute (a Washington think tank) Center for Educational Freedom has a very interesting op-ed piece in The Wall Street Journal, (America Has Too Many Teachers, July 9, 2012). The basic truth, he writes, is that America has in fact too many teachers. Since 1970 public education employees have doubled, (and most of them are teachers), while the student population has grown my a mere 8.5%. And so, as he put it: ”Employment has grown 11 times faster than enrollment”.

In the meantime, overall test scoreshave stayed the same or improved fractionally here and there. Which is to say that many more teachers serving just a few more students have not helped. Tax payers pay more salaries; but American public education stagnates.

Charter schools are an answer to the failures of public education

And we have plenty of evidence that it is so. As public schools fail to provide a good education, charter schools proliferate, and usually they perform much better than public schools. Some charter schools are so popular that admission is only by lottery, because it would be impossible to enroll all the children who would otherwise apply there.

Sadly, we must agree with Coulson. Hiring more teachers has little to do with policies aimed at improving the quality of education. Hiring more teachers is a “jobs program” and a way to assuage a powerful constituency: the teachers unions, always happy to see their ranks and thus their clout grow.

Public schools are mostly about employing teachers

Most unfortunately, in America today the main institutional purpose of public schools is to provide employment for mediocre staff who do a poor job at educating children. Public schools systems somehow forgot that their “clients” are the children, not the teachers.

Charter schools seem to get this basic principle: education is about kids, and teachers are there only to provide quality services to the students. And the market place –parents and families– now can tell the difference between the public and private sector approach. Parents understand that quality education for their kids is in the private sector.

More charter schools

And this is why charter schools need lotteries to allocate whatever places they have. Hopefully their success will inspire others. At some point all American children will have a chance to migrate to a better system. This one failed. Adding more teachers to dysfunctional public schools may help president Obama get more votes, but it would do little to help kids.

Just 10% Of Patients Responsible for 64% Of US Hospital Costs Covered by Medicare, WSJ Reports – This Is Because There Are No Limits On Spending, Even In Desperate Cases – We Need An Honest Debate On “How Much Is Enough”

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By Paolo von Schirach

July 8, 2012

WASHINGTON – Probably the biggest perversion embedded in the segment of US health care subsidized by the Government (Medicare, Medicaid, Disability) is that it is blank check, an open invitation to overspend on routine treatment and in particular in desperate cases in which doctors try the utmost with the net result of prolonging someone’s life a little bit; but at an enormous cost. In other words, both doctors and patients know that the Government picks up the bill. So, why economize, when there is even a remote chance to improve a clinical outlook?

How much is enough care, in desperate cases?

It goes without saying that doctors should always do their best to save lives. But there is absolutely no reasonable limit to this zeal when doctors know that neither the patient nor his or her family will pay the bill for all this care.

As a result of this system, we get really shocking statistics. According to data gathered by the WSJ, when we are looking at hospital care provided by Medicare, just 10% of the recipients are responsible for 64% of total spending. This is a staggering percentage. This means that care for the relatively few super sick is by far the main component of total costs. Again, this is possible because there are no breaks and thus no constraints on more and more treatments, even in the most desperate cases, when more and more efforts are really futile.

Change is impossible

Is it possible to correct this aberration? Probably not, within the current system. Any attempt to introduce standards of care that would inevitably limit medical intervention and therefore costs, especially in “near the end” cases, would be immediately called a “death panel”. The Government would be accused of having established euthanasia as a way to save money and so on. This will never work.

In truth, deciding when to stop treatment is a really difficult issue, involving social values, morality and of course religious beliefs. Who can “objectively” decide when “enough is enough” and that it is alright to let a patient die instead of trying some other super expensive treatment? No one can. And this is why no one does. As a consequence, there being no limits on care, these costs skyrocket reaching absurd dimensions.

Quite frankly, the only way to limit these expenditures would be to radically transform the system. Right now neither the hospitals nor the patients bear the costs, so there is no incentive to stop treatment, at any point, whatever the chances of making a real difference.

In a different world, beyond a certain point care recipients pay

However, in a different world, while there would still be public financial assistance, especially to the truly needy, it would not be limitless. In this new environment, the shared awareness (meaning doctors and patients) that at some point there will be a bill to pay, because after a given amount the Government will no longer pick it up, would transform the entire approach to treatment of severe and –in many cases– desperate cases.

If not, let’s have an honest debate

If this “cost-benefit” approach is deemed callous when we deal with human lives, then we have to be frank and openly and publicly declare that: ”We, the taxpayers, endorse limitless public payments for any treatment, even the most improbable, until the patient is alive”. While this is what is going on in practice, I am not sure that we have honestly debated the issue and reached the consensus, as a society, that this is exactly the way we want it.

The Tesla Model S Is A Great Electric Vehicle That Performs Better Than Most Luxury Cars

WASHINGTON – The recently launched Tesla Model S is the first, and most impressive, US made all electric sedan. This Electric Vehicle, (EV), is produced by Tesla Motors, the company that is already producing a smaller roadster. All of them are part of (South African born) entrepreneur Elon Musk’s effort to demonstrate that electric vehicles are commercially viable in America.

Innovators are welcome

I am all in favor of innovation and of all original dreamers who have the courage and the drive to push the envelope trying something new.

For these reasons I admire Elon Musk; who by the way is also behind SpaceX, the company that just managed to send an unmanned space vehicle full of supplies to link up with the International Space Station. A first for any private business.

Great car…

The Tesla Model S just had a glowing review in The Wall Street Journal Off Duty Section, (July 7-8, 2012). A huge, enticing headline, (I Am Silent Hear Me Roar), plus a nice big picture and a long piece. That said, and with full recognition that this is a beautiful piece of engineering, that this is a car that proves that it is possible to have an EV that drives like a Ferrari, minus the engine noise, (yes, electric engines are silent), this is not a game changer.

…But too expensive

This is another fancy, if sophisticated, toy that goes just a bit beyond “proof of concept”. The problem is that the car is too expensive. The model used by the WSJ reviewer costs almost $ 100,000. The rock bottom version of the same Model S goes for $ 50,000 minimum, (after a tax rebate). While not prohibitively expensive, a motor vehicle in the $ 50,000 to 100,000 range has a limited market.

Gas savings not enough

And, most certainly, the people who will buy it are not driven by the desire to save on the cost of gasoline. Somehow I don’t think that anybody who can shell 70,000 for a new car is that concerned about the price of fuel.

And yet the main selling point for even thinking about EVs as an alternative to internal combustion cars is that an electric charge is much cheaper than gasoline.

However, if the EV is too expensive to begin with, all your fuel savings are offset by the higher price of the car, a cost difference that the average EV driver will never recover through lower operating costs, assuming current or even higher gasoline prices.

From “cute” to transformative

I think that it is Bill Gates who said that solar panels are mostly “cute”. Indeed, at this stage of the technology, while they may make the rich people who install them on their roofs feel good about their green credentials, they are not game changers, because they are still too expensive.

By the same token, a souped up, beautiful electric sedan may be a sensation among California millionaires who want to be green and trendy, but it is not a game changer.

Waiting for affordable EVs

This does not mean that Tesla or may be other companies will not come up at some point with an affordable all electric car that costs only $ 20,000 to $25,000.

That would be a game changer.

However, until then, most of us will continue to think that fuel efficient cars are vehicles that have improved internal combustion engines, so that they can give us more miles per gallon of gasoline.

Yes, it sounds so yesterday compared to the futuristic wonders of a high performance EV. But, alas, most of us cannot get one.

The Fukushima Nuclear Disaster Is Not The Result Of The Tsunami, A Report Claims

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By Paolo von Schirach

July 6, 2012

WASHINGTON – Well, it would appear that it was not just the unprecedented combination of a major earthquake and a gigantic tsunami that caused the Fukushima nuclear plant failure in Japan, with consequent explosions and release of radioactivity in the atmosphere. A group of experts asserted that a a dominant and unchallenged culture of cozy relationships between industry and government leading to relaxed regulations and thus poor safeguards at Fukushima is the primary culprit.

The Fukushima nuclear disaster is about bad system upheld because of a culture of conformity

The Diet Nuclear Accident Independent Investigation Committee chaired by Kiyoshi Kurokawa candidly stated that the lack of adequate safeguards at Fukushima was really due to: “our reflexive obedience; our reluctance to question authority; our devotion to ‘sticking with program’; our groupism; and our insularity”. This was “a made in Japan” disaster because of a shared and unchallenged attitude encouraging all players to hide problems and minimize issues. In Japan the guiding principle is not to do the right thing; but to do whatever pleases authorities. Above all avoid embarrassment.

The report’s gloomy conclusion is that this unprecedented disaster is not about a set of individuals in charge who made fateful mistakes. No, the problem is systemic. “Had other Japanese been in the shoes of those who bear responsibility for this accident, the result [might] well have been the same”.

While the report makes also other considerations about the way controls and accountability have been set up and managed, this strong and candid indictment is interesting precisely because it is so non-Japanese to air such sweeping self-criticism in the open.

Will this report trigger a debate?

This powerful indictment, assuming its accuracy, should invite the opening of a national conversation in Japan on the limits and indeed liabilities created by a culture that reflexively imposes uniformity and strict compliance with authority, at the same time punishing or at least discouraging dissent.

In practice the report says that had anybody come out denouncing the inadequacy of safeguards and safety procedures at Fukushina prior to the disaster he would have been immediately eliminated and quickly forgotten about. No whistle blowers in Japan.

If this is indeed how most organizations are managed in Japan, then the Japanese people only hope is to be blessed with excellent managers, because the system is impervious to analysis, scrutiny and corrections.

Defenders of the system will fight change

While a deeper reflection on what this report asserts should be welcome, I am quite skeptical about how far this self-scrutiny –assuming that it even started– can actually go. It is easy to explain this whole matter away. The defenders of the status quo will claim that Fukushima is an unprecedented disaster which occurred in the wake of a historic natural catastrophe. Easy enough to convince the general public that whatever happened there was due to specific circumstances and that generalizations would be most unwise.

Forget about cultural renewal

And therefore we may as well forget about the beginning of a cultural transformation that would result in a more open Japanese society; a society in which a Western-style spirit of inquiry coupled with a healthy principle of personal accountability would supersede the established tenets of subservience to authority, group think and the entrenched principle whereby lies and misrepresentations are alright –in fact noble– in the pursuit of the worthy cause of saving the reputation of the organization one belongs to.

Japan is an old and sclerotic society. Holding on to cherished principles that force conformity and the preservation of relationships, even when these work against the public good, is not going to help modernization and rejuvenation.

The US Should Get More Oil From Canada, Even If The Alberta Oil Sands Release Higher Emissions – America Energy Security Is At Stake – Oil From A Close Ally Is A Better Deal

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By Paolo von Schirach

Related story:

July 3, 2012

WASHINGTON – A simple question. Taking all into consideration: overall cost, trade relations, environmental concerns, geographic proximity, relations with foreign governments and US energy security, answer this: “Is it better for the United States to import more oil from neighboring and friendly Canada, or is it better to forgo that source and keep importing a share of the oil we need to fuel our millions of cars from Saudi Arabia and other OPEC countries?”

Canada or OPEC?

The fact that we even have to pose the question, means that unfortunately the issue is not settled. And this is amazing. Do we really need to ponder as to whether –taking everything into consideration– is it really a good idea to rely more on Canada, a friendly neighbor, for increasing supplies of a commodity we desperately need, rather than taking our chances on distant suppliers, half a world away, located in an inherently unstable, conflict prone region like the Persian Gulf?

Of course we should opt for Canada. With oil sands reserves estimated at 170 billion barrels, Canada can supply America for decades. The stark reality is that America, even with significant new oil discoveries in North Dakota and elsewhere, still needs to import almost half of what it consumes, at least until we find something that will replace oil as transportation fuel. (I noted, see link above, that natural gas can help a lot to lessen our dependence from imported oil. It will do great as fuel for heavy trucks. But natural gas would not provide a total solution.)

Environmental concerns

Well, The Washington Post is not convinced. On July 1, 2012, the Post run a long and exhaustive front page article on the Canadian oil sands located in the Province of Alberta, (An Oil Rush Up North). The article mentioned in passing US energy security and gave a little space to the arguments of the oil producers.

Otherwise, the entire story is an indictment of the whole idea of extracting oil from the sands of Alberta. This is an environmental calamity, with damages to the land and to the global environment, as the process for extracting oil from the oil sands requires large amounts of water and energy. The land from which oil is extracted cannot be fully restored. All in all, oil from oil sands pollutes more, while it releases more greenhouse gases.

Fort McMurray is a bad place

On top of that, a less than flattering companion piece on Fort McMurray, a Canadian oil boom-town, describes the place as a modern Sodom and Gomorrah where poor people are sucked in, attracted by high salaries in the oil industry, and end up losing everything because of high prices, drugs and alcohol. So, we may as well shut down the whole thing. Bad for the environment and bad for the people. Talk about a developed world version of “The Oil Curse”.

Needless to say, I find this coverage of this immense supply of a strategic commodity critical to America’s survival one sided and unhelpful. Remember that we are talking about 170 billion barrels of oil, the second largest crude reserves in the world.

Coverage lacks context

I am not suggesting that what was written is wrong or inaccurate. I am suggesting that it fails to present the issue in its proper context. And the context is that, for decades to come, unless some major technological breakthrough comes along, the US will need to import large amounts of oil. May be less than we used to, on account of higher efficiencies and increased domestic production, but still several millions of barrels a day. This is not optional. This is a matter of national survival. We simply cannot function as a society without it.

Canada is a better supplier

That said, from the stand point of our national security, energy security, trade relations and international politics, which one is a better and more reliable supplier: Canada or Saudi Arabia? Canada, of course, because it is next door and a trusted friend.

Or are we really saying that since Canada’s oil pollutes more, (by about 20%, mind you), then we should stay away from it? This would be really silly. It is obvious that, if the US will not buy more of the Alberta oil, others will. In this energy deprived world there will be plenty of customers.

This is not to say that environmental concerns should not be noted. They should be aired and discussed in order to have policies in place that will minimize any damages. But, unfortunately, for the time being, we cannot do without oil. As we need to buy it anyway, better to source more of it from our friends next door.

So, let’s do the smart thing and build all the pipelines we need in order to get all the oil we can from Canada.