Daily Digest 3/8 - We Can Live With A Nuclear Iran, How To Understand The Monetary System, An Easy Guide To The Federal Debt

Stockman---who I think the world of- said this:

The policy that they’re talking about right now is the same thing we heard in 2001, 2002, and 2003. And he needs to clearly say that we’re not going to attack Iran. We’re not going to permit Israel to attack Iran. They are not part of the axis of evil. They’re part of the axis of medieval.

Clip here and I thought a nice companion to jdargis's link above.

Of course, here is what our politicans have to say...

Barack Obama would supply Israel with bunker-busters and refueling planes if Bibi promised to delay an Iran attack until after the presidential election. 

Link to Zero Hedge

If one is looking solely at today, and getting treatment to help return him to "normalcy," why not choose the most expensive option?

Particularly, if one's coverage is 100% after a certain level of payments, why not?

If, however, the person has an underlying primary policy, which is paid-up, he may think twice about claims, particularly smaller claims.

This is because he will receive a notice showing him, after the claim, how his paid-up coverage has reduced, how his deductible covered by the primary plan is reduced, and his next month's premium is increased.

Don Levit

Although credit card companies do make credit easy they don't force people to use the card any more than cigarette companies force people to smoke. This is not a defense of credit card companies or big banks who issue the cards, it is a recognition that people are a product of their decisions. Donut makers do not make fat people fat. People who are drowning in credit card debt are victims of their own lack of self-discipline and foresight.

Just headlines:

1. China to export yuan to BRICS
2. Greek Swap Seen Provoking Aftershocks on Borrowing: Euro Credit
3. Greece Needs Extra Debt Relief in 12 Months, Merkel Adviser Says
4. Greece Readies Record Debt Swap With 60% Commitments
5. UK pension fund liabilities becoming harder to meet
6. Greece Surpasses Spain With Region’s Highest Youth Jobless Rate
7. CalPERS considers moves that would boost pension costs for governments
8. Mayor Bing: City, state must act to save Detroit
9. Calif. city seeks to escape soaring pension costs (San Jose.."from $73 million in 2001, to $245 million this year")
10. Fitch: Home Prices to Fall Another 9.1% Before Reaching Sustainability
11. Unemployment Hits New Record High in Dec. at 21% (Greece)

=====================================================

More headlines:

Household Net Worth Fell in 2011

ECB's Draghi lowers growth forecast (Video)

Disquiet at Japan's record current account deficit (FT)‎
 

We, The People, are our own worst enemy.  Our political leaders are a reflection of the cross-section of America.  To the extent We are shortsighted, they are shortsighted.  To the extent we don't want to face unpleasant facts, they don't want to face unpleasant facts.  To the extent we commit fraud and stab each other in the back, they do the same.  To the extent we spend beyond our means, they spend beyond their/our means.  (Of course, this is NOT to say that those in positions of power and wealth don't mislead and abuse We The People, because they DO. This is also NOT to say that those who are blessed with greater intelligence, power, wealth, opportunity, etc. don't have a responsibility to serve the rest and are held to a higher standard, because they ARE.)  Before we start hanging bankers and politicians from lampposts, We The People should do a lot of soul-searching.  It's time we each conducted our own searching and fearless moral inventories (of OURSELVES), as they do in 12 Step programs.  Redfir223, Davos, and Jim Quinn are all correct.  But I say the most important changes that have to occur have to occur inside the hearts of average Americans.  When that happens, we will make the necessary changes in our selves, politics, banking, corporations and economy.  Unfortunately, I believe we have to hit the wall before large numbers of Americans are jolted from their sleep enough to even start the process.  One of the few ways of looking at this positively is that there will probably be many fewer Americans around to search their own souls because so many won't survive long after hitting the wall.  Another hope I have is that America has gone through two Great Awakenings in our past like what we need now.  It can happen.

The Wikipedia entry is weak, especially on the social and moral changes that occurred: http://en.wikipedia.org/wiki/Great_Awakening

This is a better start:  http://www.great-awakening.com/?page_id=22 

Perhaps we can take that out of context and add to it: No clue that they do it to themselves or others?

There are three things about prices I often wonder about:

1. What would people answer when asked, "What'd you pay for college, that house, that car, that coat?" If there was a truth of lending clause answer that had to be provided.  Suddenly that $250K house becomes a $500K house, that $39K car becomes a $45K dollar car, college isn't $80K it's $160K...
2. Predicated on that hypothetic truth of lending cluse answer---what would inflation really be?
3. What would the cost of "stuff" be if we all saved up for it?  Seriously, how many kids would be in college without loans?  Would there be a need for student loans if people couldn't afford $20K a year for college?  How many would go?  What would that do to prices?

I get the impression we both despise credit.  

I guess my thoughts are why there is so much use of it?  

Is it just marketing?  I don't have TV largely because of that. 

But, is it too nefarious to believe that the bankers tossed us under the globalization bus, the housing bus, the government debt bus in order to make us dependent on credit thereby creating a country of debt slaves? 

Thanks to June C. for link to recent (March 6, 2012) Jesse's Café and from there on to Golem XIV!

Of course, this is one of Jesse's more philosophical essays.

For those interested in such thought, I suggest also the American Monetary Institute -- not only providing diagnosis but also detailing a possible cure on the macro level. (Not my intention to stir up controversy, just calling attention to a generally overlooked approach to the ongoing monetary-financial meltdown.)

http://www.monetary.org/intro-to-monetary-reform

Book, 'The Lost Science of Money', and, free download PDF, 'Comprehensive Explanation of Monetary Reform'.

Quoted for review purposes from http://www.monetary.org/the-need-for-monetary-reform/2009/09 ---

"The power to create money is an awesome power – at times stronger than the Executive, Legislative and Judicial powers combined. It’s like having a “magic checkbook,” where checks can’t bounce. When controlled privately it can be used to gain riches, but much more importantly it determines the direction of our society by deciding where the money goes – what gets funded and what does not ....

"Thus the money issuing power should never be alienated from democratically elected government and placed ambiguously into private hands as it is in America in the Federal Reserve System today. Indeed, most people would be surprised to learn that the bulk of our money supply is not created by our government, but by private banks when they make loans. Through the Fed’s fractional reserve process the system creates “money” when banks make loans into accounts; so most of our money is issued as interest-bearing debt ....

"Under the Constitution, Article I, Sec. 8, our government has the sovereign power to issue money and spend it into circulation to promote the general welfare, for example, through the creation and repair of infrastructure, including human infrastructure – health and education – rather than misusing the money system for speculation as banking has historically done; periodically causing one crisis after another. Our lawmakers must now reclaim that power!

"Money has value because of skilled people, resources, and infrastructure, working together in a supportive social and legal framework. Money is the indispensable lubricant that lets them “run.” It is not tangible wealth in itself, but a power to obtain wealth. Money is an abstract social power based in law; and whatever government accepts in payment of taxes will be money. Money’s value is not created by the private corporations that now control it. As Aristotle wrote: “Money exists not by nature but by law."

"Unhappily, mankind’s experience with private money creation has undeniably been a long history of fraud, mismanagement and even villainy, and the present crisis could become the worst yet!"
 

Thanks to James S. for linking to Dave Summers at oilprice.com!

Yes, it's amusing that he says "We" can tolerate a nuclear Iran. "We" are many thousands of miles from Iran. He's not an Israeli. People I know in Israel are not as able to tolerate the anxiety of a nuclear Iran. Even one nuclear missile would wipe out many people. Politicians have to respond to the mood of their citizens. The Israelis have lived with the threat of war for decades but not massive, instantaneous destruction of their families. I don't think they'll live with a nuclear Iran.

CS 

It's because there is low to no risk for those that supply credit.  Look at the places that have the largest credit problems - housing and student loans. Why - because the government guarantees the loans for the lenders.  So it's highly profitable for those that have no risk to push as much credit as possible.  Those that profit (real estate agents and colleges) have an incentive to connect as many customers to the lenders a possible, since once they get their money their is no risk to them.

On top of that there is no reason to be price competitive.  If you can also tell the customer, just get a loan - look how easy it is.  No reason to price compete, you can always find someone to take out a loan.

We need to get risk back into lending so that if you choose to make a bad loan, you pay the price.  No more goverment (read TAXPAYER)  backing for any type of loans! PERIOD!  This would also cause prices to correct as a product (house/degree) would have to be affordable to the customers and the providers would have to compete on price for customers. 

Davos

We can thank businesses (and the politicians they lobby) for outsourcing jobs to other countries where labor is TEN TIMES cheaper and bureaucratic and environmental regulations lax or non-existent.

The Federal Reserve isn't what causes businesses to constantly seek sources of lower labor and input costs. Factories in the Industrial North relocated to the places like the Carolinas, then to places like Mississippi, then south across the border to Mexico, and now to China. Even today, some factories in China are moving to Vietnam. I predict the next labor frontier will be Africa.

It's just a natural inclination for a business to seek lower labor costs and other input costs, wherever they may be found. It allows them to deliver cheaper prices to the consumer, or keep price the same while pocketing the extra income - usually a bit of both. This would occur regardless of whether there was a Federal Reserve or not.

If American businesses didn't outsource manufacturing to other countries, then other countries would use their own manufacturing labor cost and regulatory advantages to compete. After all, isn't that's how companies like Toyota and Nissan (then Datsun), and later Hyundai and Kia were originally able (deacdes ago) to produce their vehicles, pay to import their cars in shipping containers, and still do well in the U.S. auto market? By competing against cars by G.M. (where retirees have outnumbered workers by 2 to 1 for at least a decade or more)? Isn't that also why G.M. makes cars in China to sell to China, rather than make them in the U.S. to ship to China?

We can blame the Federal Reserve for a lot of things. But not for a basic tenet of running a business.

Poet

The Fed is an enabler.  Credit for most companies is like gas for cars.

“Everyone I’ve talked to continues to try to figure out ways to exploit globalization. Each of them, from the IT [information technology] guys to the big box retailers to the specialty chemical firms to the service firms, wants to have offshore supply. One of the CEOs said, “We have a long way to go in exploiting China.” We’ve heard that forever. And one of my favorites was the comment, “China, India, and Indonesia can make Italian ceramics better than Italians can now or could 200 years ago.” [Laughter] FOMC

 Fed meeting 2005

Banks/the Fed can have tremendous influence, I've seen companies sold and or chopped up when lines of credits were yanked, limited or reduced because the bank was not behind the companies new plans to do whatever, or not do whatever.  They weild a lot of weight.  I just did a 24 million dollar proforma for a client and met with the bank and watched the deal take a new shape---bank molded before my eyes and at the presidential level not the board level.

People who laugh about reducing our wages and exploiting others aren't people.  My point was, and remains, the Fed IS very responsible and I truly think they did it becuase they stood to benifit when everyone became a debt addict.

Think about it for a second Poet: What are the 2 mandates of the Fed? 1.) Maximum employment (what do we have? John Williams 22.5% unemployment) and 2.) Stable prices (what do we have? John Williams 11% inflation or Warren Buffett the buck lost 86% of it's value since I started this game in 1966). ***and really he started in 1962 despite what he wrote in his letter.

So what you're saying is that by the Fed standing behind globalization they aren't really responsible?  

How does that check out:

1.) They know we're shipping jobs away---bad idea for mandate #1.  Do they stop it? Nope.

In fact the FOMC meetings are riddled with jokes on us.  Link to my January 2011 piece.  They laughed about the housing bubble, how the really good bubble Greenspan times are going to be really bad soon, which party likes to borrow more, and about the dollars depreciation.

2.) They know we're competing agains $2 a day labor, so our wages stay down and each day more debt has to be created to pay interest so the value of the dollar tanks and we become debt slaves just to float....---bad idea for mandate #2.

But yeah, I know they're not the ONLY ONES to blame, in fact recently I wrote Globalization: Terminal Economic Cancer [Featured Article-Revised 2.19.2012]  and in it I wrote:

Globalization was nothing more than CEO’s realizing that their job and pay was directly tied to their stock’s performance, not corporate profits.  Exploiting cheap labor was a get rich quick scheme.

Additionally the 535   edited for CM site on the hill  were making it impossible for businesses to conduct business within the states.  High taxes, insane regulations, lack of well educated labor (our schools edited for cm site, we’re 17th in reading, 23rd in science and 31st in math), easier foreign government investment and a more favorable business climate,  Unions didn’t help.  Apple has a factory in China with 300,000 employees that requires 30,000 “engineers”.  Not PhD engineers, just people trained in a trade school.  Jobs said the US doesn’t have that many engineers.

Take care

That's as good a summation of the strategic and tactical situation in the ME I've seen anywhere.  It seems that, if Iran can develop a nuclear weapon and delivery system, they would essentially be in a MAD world writ small.  It worked for a lot of years to prevent the USA and USSR from incinerating each other.  It may be a cultural stereotype, but a lot of people don't think Iran is psychologically balanced enough to maintain that kind of a stand off.  Plus, the cold war took place in a bipolar world.  The ME is multi-polar with many countries, alliances and capabilities to take into consideration.  The very complexity of the situation may be the greatest danger.  And, of course, oil is the ultimate catalyst.

Doug

Are you sure about that Dogs.......?  Didn't Iran just put a satellite in orbit?

Mike

100% certain Mike.

Orbital mechanics and ballistic mechanics while similar, have some pretty stark differences.  At the risk of oversimplifying here we go....

Orbital mechanics is pretty straight forward.  The rocket launching the satellite needs sufficient fuel to get to the point where it releases the satellite at the appropriate place in space, with the appropriate speed and direction of motion to put it in the desired orbit.  The rest is physics.  The lower a satellite is placed, the higher the required orbital speed. To put a satellite in orbit at 120 miles, the required speed is a little less than 5 miles/second. At that altitude, the satellite will orbit the earth about every 90 minutes.  Conversely, a geosynchronous orbit would require that the satellite be lofted to around 21,000 miles and at a speed of less than 2 miles/second.

There are two ways of looking at orbital mechanics and how a satellite stays in orbit, and both ways are essentially equivalent.  The first is Newton's First Law - once a satellite has been put in motion at the required speed for the desired altitude, it will remain in motion.  The centrifugal force balances the pull of gravity and the satellite remains in orbit.  Frictional forces are minimal, and occasionally a satellite will need to do small control burns to boost it just a skosh higher in orbital elevation or just a skosh faster or some combination of both.  Since the frictional forces are very small, a satellite only needs a small amount of fuel for these adjustments. 

The second way to look at it is that the satellite is constantly falling toward the center of the Earth due to the gravitational attraction of the Earth. However, since the satellite is also moving parallel to the Earth’s surface, the Earth continually curves away from satellite. In a circular orbit, the satellite’s speed is exactly what is required so that it continually falls, but maintains a constant distance from Earth. The required speed depends on the satellite’s altitude because of the Earth-satellite geometry and because the rate at which the satellite falls toward the Earth depends on the strength of gravity at the satellite's altitude.

There are some variables such as inclination angle and how you want the satellite to ground track as it orbits the earth.  A satellite's ground track can never reach a higher latitude than the inclination angle at which the satellite was positioned - unless you have manuevering boosters with sufficient thrust and sufficient stored fuel on the satellite to reposition it, but that is an entirely different issue.  All of that adds up to prelaunch weight which must be factored in to the determining the booster rocket's correct thrust/weight ratio and lift capability requirements. 

Ballistic mechanics are an order of magnitude more complex.  Physics dictates that, in order to range beyond about 100 miles, some component of ballistic missile flight must be exoatmospheric.  A good rule of thumb is that a typical trajectory is an arch about a fourth as high as it is long.  If your target is 6000 miles away, you need to boost the delivery vehicle and/or warhead(s) to an altitude of 1500 miles.  Even a relatively short range shot of a 100 miles has to be boosted to over 125,000 feet. 

In order to range these distances, ballistic missiles have to fly high for two reasons. First, if the peak altitude of the flight trajectory were too low, the warhead would not have time to go very far before gravity pulled it to the ground - limiting employment range.  Exoatmospheric flight is essential to gain time to generate speed, which translates to exoatmospheric altitude which in turn translates to longer range. Second, if a missile were to try to fly at high speed over intercontinental distances through the atmosphere, it would burn up due to air friction long before it reached the necessary speed, much less the target.  The simple effort to overcome air resistance would require so much fuel the missile/warhead/payload would likely run out fo fuel even before it burned up. Because the delivery vehicle can reach high speeds only in outer space, flying mostly through space is essential for the missile to go fast, far, and survive.  Warhead speed is critical in successful ballistic missile targeting.  Higher exoatmospheric altitudes means higher re-entry speeds.  High reentry speeds are necessary to overcome ground based ballistic missile defense systems.  It is exquisitely hard to try to acquire and shoot down something that is traveling at speeds in excess of 7 km/second.  High re-entry speeds also means less time for frictional forces and air resistance to act on the warhead once it re-enters the atmosphere - which in most cases manifests itself in accuracy. 

The booster fuel requirements are very different - to achieve maximum results from propulsion and a high thrust to fuel weight ratio, booster propulsion is optimally slower at first, and then increases as air resistance decreases with altitude. There is no use expending twice as much fuel to achieve a particular speed at a low altitude when by waiting until a higher altitude will achieve that speed with much less fuel.  A satellite booster will have enough fuel to get the payload to altitude and speed.  An intercontinental offensive weapon will have fuel remaining on board as the booster attains exoatmospheric altitudes.  As such, it will use much less fuel to achieve higher speeds at altitude. 

The lift requirements for a rocket to put a satellite in orbit are much less than the lift requirements for exoatmospheric flight to achieve the required altitude and speed for a warhead to gain downrange flight distances for intercontinental strikes.  This factors into the booster fuel requirements to lift the weight of the payload.  Greatly simplified, the heavier the payload, the more fuel that is needed.

A satellite rocket only needs enough fuel to get the satellite to the desired altitude-speed relationship and direction of motion. An intercontinental missile needs sufficient fuel, with sufficient thrust to both boost the rocket to the required combination of speed and exoatmospheric altitude to achieve the desired employment range.

So what does all of this mean regarding Iran?  Simply stated, they have the rocket technology to achieve altitudes and speeds for the orbital mechanic requirements to place a satellite in orbit.  They DO NOT have the rocket technology for ballistic missile employment at intercontinental ranges. 

I've only addressed the physics aspect of this equation.  The other part that is missing is that the Iranians don't even have a weapon (yet).  They don't have the arming and fuzing systems developed and mated to the weapon physics package (that doesn't exist).  These are not trivial technological achievements.  The arming and fuzing systems need to be robust enough to handle the forces of boost, exoatmospheric flight and re-entry.  These systems have to be tested and such testing is observable.  That's why the world yawned in boredom when North Korea did the test launch of their TAEPODONG 2 missile in 2009.  The third stage failed to ignite and separate and the whole mess fell into the Pacific after flying about 2400 miles.  You can't just stack another booster stage on to a rocket and expect it to function properly, yet that is apparently what the North Koreans both did and expected.  While Iran's satellite launch was apparently successful as far as putting an object in orbit, it was not of sufficient length, altitude and speed to attain sustained exoatmospheric altitude and speed consistent with intercontinental ballistic missile employment.

Really great discussion here on issues over which I am sure only that I have no up-tp-date information and, even if I did, absolutely no ability to influence the course of events. Dogs makes a really great brief analysis of the 'classical' view of the ground-based ABM and space-based Star Wars thing.

And then Nickbert notes that "you don't waste time and resources trying to aim for a precise target or concerning yourself about it staying in one piece after re-entry (USUALLY YOU AIM FOR THE EXACT OPPOSITE)." Yes, indeed, MIRVs! And we thought it was already complex beyond calculation!

Then there's the CW assumption about China and Iran (not to mention Russia and Iran) -- "Unless China or Russia is giving [Iran] designs and actively helping them develop a Re-entry Vehicle (which I highly doubt as I don't see how that's in their interest)" -- yes, that's our standard set of assumptions, isn't it? But is it necessarily all or nothing? Couldn't China or Russia decide that just enough in the way of tech could be made available to Iran that Iran could become a strategic element capable of changing the game in the Gulf? That might be in somebody's short-term  interest, no? Or have global players now advanced beyond mere short-term considerations?

All the wise old dogs seem to be completely agreed on one thing: USA needs somehow to move toward much greater coordination with Russia. There seems to be a major disagreement only as to whether that means placing ABMs in Poland or NOT placing ABMs in Poland. But, IMHO,  that game is mostly for show, not for substance.

http://www.strategypage.com/militaryforums/23-1581.aspx

Mother Russia!

MHO, what we will see is integration of Russia (Byelorus, etc., and some portion of the former Asian Soviet Republics) with or within the EU. That will be Putin's historical legacy. On the other hand, we see pressures of nationalism building to the point that the CIA has opined that the EU is bound to disintegrate before further integration can be achieved. And then there are those here at CM who confidently hold that the whole integration-globalism thing reduces to the great scheme to enslave mankind to the long-anticipated global fiat ... and it will, before that, all fall apart with inevitable hyperinflation and crowning of King Gold as energy resources evaporate.

Here's how I see the odds -- there will be no defensive ABM line west of Russia -- but there may be such a line somewhere between Teheran and Berlin/St. Petersburg! Or not (it may be completely unnecessary or meaningless). Also, I am betting that EU monetarism will succeed and the EU will survive, and that Russia's entry not particularly into the WTO but actually into the EU is totally inevitable before the end of Putin's final term in office. At the same time it seems likely that not only the ECU system but also, particularly, the Anglo-American banking regime will decline as the IMF accommodates the BRICs. In any event, USA needs to get over the old Cold War Russia-Communist thing, which is really a postmodern revival of the ancient and bloody religious contest between Constantinople and Rome. (That's why McCain lost my vote in 2008, promoting USA siding with Georgia -- a great man, Senator McCain, but how stupid does a military-strategic proposal get?)

One last point maybe -- don't forget defensive ABMs as well as offensive mid-range BMs generally will be or are nuclear armed for maximum effectiveness. That never gets mentioned, but if you were a Russian, yes, you might find that little detail significant.

Madames et messieurs, les jeux sont faits! Bonne chance!

That's fine, as long as those same banks would go bankrupt with their clients... but they don't now do they? Who's fault is that? The government, oops... round and round we go, so I would say you are right!

Samuel