California Scientific

Satellite photos show Japan is not yet glowing in the dark. Everyone is bored with Libya. Europe is scheduled to do one of those "Help, I've fallen and I can't get up" commercials, but they haven't fallen yet. Our government is headed for a showdown on the debt, but not this month. And Bernanke brought another bag of chips and tub of guacamole to the party. Stocks are up. A lot. It's hard to be seriously unhappy when the keg is still pouring.

S&P 500 October 25 2010 to April 21 2011

Obama's poll numbers are sinking. Optimism about the economy is at its lowest level in two years, and 57% of voters disapprove of Obama's handling of the economy. Cutting spending is hugely more popular than raising taxes (bye bye Department of Energy). Republicans are more trusted to deal with the deficit 44% to 39%. Republicans are seen as more compromising than Obama 35% to 20%. 57% think we need to make changes to Medicare, 63% oppose raising the national debt limit. In short, Obama is extremely vulnerable to charges of tax, borrow and spend. Obama is being pushed firmly towards the center. I expect he'll conclude that the democrats will lose the senate, and that he has more to gain by cooperating with deficit cutting republicans than by thwarting them. Obama is a masterful politician, he will not go down by fighting a losing cause.

Arizona's legislature passed a law requiring presidential candidates to submit a birth certificate in order to be on their ballot. Arizona governor Jan Brewer vetoed it, calling it "a distraction." Louisiana is working on a similar law, and governor Bobby Jindal has promised to sign it. Imagine Obama's lawyers challenging such a law in Federal court.

A couple weeks ago I wrote about Deutsche Telecom tracking their cell phone users for 6 months. Well, now it's coming out that iPhone and iPad users are being similarly tracked in the US. Lawsuits are just getting started. If I was AT&T, I'd nip this in the bud with a "Sorry, it appears we've not been as good about always purging this data as we should have, it's now enforced at 30 days or records saved, max."

Syria is heating up - protests are getting bigger, the police are getting more violent. Syria has no oil, and is a major supplier of instability to Lebanon and weapons to Hizbollah. They're the #2 threat to Israel, behind only Iran. No one will miss them. The president of Yemen has agreed to step down in 30 days. Why 30 days? I'd have to guess, but the slogan of my generation is "follow the money." He needs some time to get his money into numbered off-shore accounts and ship his paintings and collectables outta there.

Investors are continuing to run scared from the PIIGS. Greek bonds are now paying an Argentina-like 23%. This would spell instant death for Greek finances but for the fact that the Greeks don't have to sell more bonds until next year. The 23% signals that bondholders don't expect to be paid back in full. Irish and Portuguese debt are at 10%, again signaling that investors are starting to doubt they will be paid back. Spanish and Italian debt are at 5% and rising, that is they are today where Ireland and Portugal were a year ago. This problem is not going away. Now the talk is turning toward Germany. Germans have been complaining for a couple years now that they shouldn't have to bail out people who work fewer hours and retire younger. But the PIIGS are now complaining that the fixed exchange rate of the Euro has given Germans a huge export advantage over the rest of Europe and is almost completely responsible for Germany's fantastic growth of the past decade. Which is true? Both, in my opinion. But the real question is what will they do next. Northern Europeans have a long history of putting fingers into dikes, we can expect another round of bailouts later this year, and another for Greece next year. But what happens one to three years from now when Spain and Italy go critical - bailouts for them are probably more expensive than Germany and France can afford. Stay tuned for more episodes of The Old and the Anemic.

In a barter economy, you grow an orange, I bake bread, we agree on some exchange rate like three oranges for a loaf of bread. Soon the economy is too diverse for barter - a new neighbor is making milk and cheese, another makes sausage, another makes tables and chairs. Soon someone comes up with the idea of money - gold coins at first, later paper money, finally some electronic impulses encoded on a little plastic card. But in the end it's all about trading value for value.

Suppose the government prints money and just gives it away. At first that's ok, I bake some more bread, you plant a couple more orange trees, our profits rise and more people eat; but pretty soon my oven is working full time and your land is covered with trees. That's when we raise prices: when we're at full production capacity, but demand continues to increase. Too many people on welfare and too few people working will eventually lead to inflation.

There's a more subtle form of welfare: suppose the government hires people to build highways and airports. At first they build interstate 80 and an airport in Chicago. This is extremely productive, lowering transportation costs for everyone, allowing us to sell our bread and oranges in both Illinois and California. But if, as in China, they're building roads to nowhere, airports where no plane lands, giant malls with no customers, complete cities where no one lives, then from an economic point of view these construction workers aren't producing anything useful. The only difference between these construction workers and people on welfare is 1) they're tired and sweaty and hungry at the end of the day; and 2) you have to buy a huge amount of copper, iron, concrete, fuel to keep them working. The result is inflation, particularly centered in oil, metal commodities, and food, as these workers have money and want to eat more and better. This is exactly what China is experiencing and helping create for the rest of the world. Unfortunately, if they fire their many-million non-productive construction workers, the resulting unemployment will create social havoc and bring down the government; and if they keep paying them the resulting inflation will create social havoc and bring down the government. This is why I think the Chinese have painted themselves into a corner and will have big trouble soonish. In the short run the government can and will spend their $3 trillion of savings (reserves) to subsidize food and gas, but in the long run that money will not be enough. Every case of inflation in the history of the world has either ended with a big recession with huge layoffs, or become runaway inflation and destroyed the country's currency. China says they will make a third way. Good luck with that.

Shanghai has been shut down for three days due to a trucker's strike, protesting inflation in food and gas prices. Shanghai is China's largest port, they can't hide this. Goods are stuck parked on the side of the highway, ships are leaving port three- quarters empty. It does beg the question, how many strikes in less visible cities are the Chinese hiding?

One quarter of Chinese millionaires have already financially fled China by emigrating and buying property in their new country. Another half of them plan to do so. Why? It's speculated that a lot of these people made their money by cronyism - knowing the right government people - so they're all too aware that assets that were substantially granted by government fiat can be taken away just as easily. Or perhaps they share my sense of trouble coming for the Chinese government in the next year or three.

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