With the public employee unions making themselves heard in a fight against Governor Scott Walker, we thought this would be a great time to talk to Steven Greenhut.

Steven is the author of Plunder: How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives, and Bankrupting the Nation.

Here’s how our interview went…

Gary Gibson: Are public employees really bankrupting states and local municipalities? Are they getting paid that much and are the pensions that good?

Steven Greenhut: We’ll start with the easy one. Yes, the pensions are amazingly good. In California, there are 50,000 members of the “$100,000 pension club”, cost of living adjusted, and these are guaranteed pensions, often in the six figure region and higher in certain categories, especially for public safety workers, such as police, fire, prison guards, milk inspectors. It’s an ever-growing category of employees that get 3 percent net 50. That’s 3 percent of the final year’s pay times the number of years worked. Which means a 90 percent final year’s pay retirement forever. And that’s before all the many pension spiking gimmicks. For example 82 percent of California Highway Patrol managers retire with disabilities, which further enhances this.

They purchase something called “air time”, where they can buy additional service credits on their pension at 50 cents on the dollar. So we have, in many cases, public employees making $150,000, $200,000 a year in retirement. And it’s not just the managers. These are regular police and firefighters, different sorts of mid-level managers, making enormous pensions. And they get paid quite a bit of money. The old deal used to be that public employees were paid less and they got somewhat better benefits and protection from firing and things that we didn’t get in the private sector. Now they get more money, in many cases, much more money, and they get an enormously higher level of pension benefit.

Nobody I know in the private sector gets these guaranteed defined benefit retirement plans anymore. And they’ve been being increased retroactively, which means going back to the day that the employee started. So to answer your question: yes, pensions are that good. They are getting paid that much.

The union studies, the reports show that public employees are not getting paid as much as their private sector employees. I’ve looked at those. They’re full of holes. They adjust for things like education, and they leave out categories that they don’t want to have included in there. They don’t count the overtime, even though public employees abuse the overtime system through planned overtime and other ways to build in higher salaries.

So are they really bankrupting states and local municipalities? For instance, in the City of San Diego, which has not been the only city that’s struggled throughout California. I mean Los Angeles, they’re talking about bankruptcy, and the City of Vallejo in California went bankrupt, largely because of the pay and benefit packages of public employees. But in the City of San Diego, 70 percent of their payroll budget goes to retired workers for pensions and healthcare benefits. I mean you just do the math on that.

There’s a new report from the Little Hoover Commission, which is a government agency, an oversight agency in California. It’s a nonpartisan, “good government” commission. Here’s its conclusion: “Pension costs will crush government. Government budgets are being cut while pension costs continue to rise and squeeze other government priorities.” So yes, they are going to push the cities and states to the brink, and it is that serious.

Gary: Now before we get to just how serious that is and how we can’t afford it, what about the argument that the things that public employees do are vital? We can’t do without them, right? People have told you, “Pay them whatever they want.”

Steven: It’s a crazy argument. At what point did our country start to value government work, non-entrepreneurial, protected from firing? I mean there are certain jobs that are needed. We need certain public sector jobs. But at what point did we start believing that bureaucracy is so highly valued, that we should pay people who work in the bureaucracies whatever they want? Usually when people make that argument, they’re talking about police and firefighters and teachers sometimes too. But now we’ve created a bureaucratic system that doesn’t always result in having the best teachers, firefighters, or police because this is not a free market.

This is not a market system. Here’s a good example. 72 percent of the firefighters in the country are volunteer firefighters. So there are many people who will do this job for service to the community. When firefighters are hiring for the few positions that are opened, they sometimes will open arenas because of the thousands of applicants. So this idea that we should pay them whatever they want is ridiculous.

This is going to bankrupt us. In the case of the firefighters, it pushes out often people who really want to be firefighters. If you or I really want to be a firefighter, we have to compete with all the many people who want to be a firefighter simply because of the [artificially exorbitant] pay and benefit package, and the work hours are so cushy. So it’s not like in the marketplace.

Obviously, we need police. But often the police often overstate their dangers, and that’s a problem we’ve seen. And they use that to gin up their pay and benefit packages beyond where they need to be to attract good people. And teachers, well you know, I’m sorry, but in a competitive environment, in a private system, you know, then we would see what teachers really are worth.

But this idea that we should just pay them anything you want…other than it bankrupting us all, it’s not resulting in better public services either. And teachers are not even getting the level of pay and benefits that police and fire are. But that’s just not a good argument in my view.

We see in Wisconsin and Ohio, old rust belt states, the heart of the union movement, and now it’s a public sector movement. And there’s disagreement. There are many people in the private sector union people who agree with me on these public sector union issues. You know, the private sector union people have to make sure that their company remains healthy and in business. Where the public sector can — these guys will take the government off the cliff.

Gary: Now your book talks about how this all happened in California. It’s where you focus your attentions. But I’ve got to ask you about Wisconsin now.

Steven: Well, I mean they’re both very progressive states, very liberal states. The same thing that happened in California happened in Wisconsin, the power of the public sector unions, the ability through collective bargaining and through tapping the dues of members without necessarily getting their permission, has enabled the employees to buy their bosses. They elect their bosses. It’s the same thing that’s happened, and the book goes into, not just — it’s California heavy. It’s focused because of my experiences in California, which I draw from. But it does talk about the whole country.

And it’s a similar thing. It’s just California often is at the edge, cutting edge of all trends, good and bad, and we just happen to be further along this route. But Wisconsin’s extremely liberal, heavily union democratic state. So there are a lot of parallels. Both with a parallel progressive history, in fact. So ironically, one of the core tenets of progressivism, the initiative and the process that we have in California that might be the solution to take on these unions who have become the new robber barons.

And it was the progressives who tried to take down the power of the railroads and the robber barons, and now they’ve become what they fought against.

Gary: Now these government employee unions, did you say — you said that they’re turning, they could turn us into a third world nation, or a nation of third world cities.

Steven: Yeah, when I say it, and I’m not talking about the demographics or anything of the cities, I’m just talking about how it’s this group of folks who were just out to enrich themselves, and using their power for raw political gain. The cities are becoming impoverished, as we increasingly have to spend more and more, as the Little Hoover Commission report pointed to, there’s not enough money for other services. Even people in progressive San Francisco, some of the liberals there have been supporting pension reform efforts, recognizing that their city’s becoming increasingly tawdry.

And as you spend more and more money on these pensions, pay and benefit packages for public employees who are really the affluent elite, the parks are becoming decrepit. The streets are not being fixed. The schools are getting worse. So that’s the context of that.

Gary: I see. Is this a partisan issue?

Steven: Well, it’s become one to a degree because the republicans, the new republicans are taking on the unions, and the democrats are the party of unions, of government unions especially. So to a degree republicans certainly helped create the problem. You know, I just wrote about here in California, how three republican assembly members joined an SCIU rally opposing cuts to a particular program. I watched as a writer for local government, watched as republicans increased pensions for government employees, especially for the people in uniforms. Republicans tend to be very law and order in their philosophy, and they’ve caused a lot of the problems.

So the mess was created on a bipartisan basis, but I have seen very, very little effort by democrats to even acknowledge the problems. A handful of exceptions to the ones I pointed to in San Francisco. And they’re a minority of democrats for sure. But it doesn’t need to be a partisan issue, let’s put it that way. It really doesn’t because the right should recognize that these pensions are unfair and they’re going to cause enormous financial problems, and they’re going to lead to massive tax increases.

And the left should realize that this is destroying the progressive agenda because if you’re spending all your money on $150,000 per year police retirees, then you’re not spending money on the programs that you claim to care about. And it’s going to be the programs for the poor that get cut. The pensions are a senior obligation of the state. Programs for the poor are not. So I know progressive democrats who are very concerned about this. And I’m just — I’ve got a copy here of Reason Magazine, the cover story by Tim Cavanaugh called Farewell my Lovely — How Public Pensions Killed Progressive California. I mean these pensions are at war with the whole progressive idea.

And that’s because they’re running out of money.

March 5, 2011

How Government Employee Unions Plundered the Public’s Money was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

As you may know, California is bankrupt. That ball got rolling back in December 1994, when Orange County declared bankruptcy. Once one of the most prosperous districts in the state, it watched a pool of riskily invested and highly leveraged money go south, and the game was up. After losses totaling $1.6 billion, a liquidity trap was sprung from which Orange County’s Treasurer Tax-collector Robert Citron could not escape.

Although considered somewhat of an isolated incident, it wasn’t long until related problems began to emerge. Now the state faces endless traffic jams, aging schools and hospitals, falling cash accounts and an annual budget more dependent on volatile tax revenues than at any time in state history. And it looks like the crunch will come to a head under Gov. Arnold Schwarzenegger. But here’s the real problem.

All by itself, California is the eighth-largest economy in the world. So its bankruptcy would spell trouble for those that are interconnected with it — especially neighboring states that depend on California’s economic machine for their own growth.

But does California care? It doesn’t seem that way. Its state budget is larger than any other in the United States ($56 billion). And yet that still isn’t enough money to keep it out of trouble. It refuses to live within its means, and is determined to borrow at ever-increasing levels. For proof, remember that California voters rejected a bill that was really called, “The California Live Within Our Means Act.”

Why the arrogance? Perhaps it believes the Fed will step in with a bailout. After all, billions and billions have been given to private corporations… why shouldn’t a state benefit equally — especially if it would sink the U.S. economy otherwise?

But the corporate bailouts came with strings attached. So it’s easy to see the government telling the state to take action to get out of its mess. Reduce spending, cut programs and implement austerity programs until California’s budget is actually balanced.

Then make the very real threat to exorcise it from the Union if it doesn’t comply.

I’m sure you’re saying, “Wait, wait, hold the phone! Nobody is talking about this. There’s no chance that California is going to be kicked out of the United States”

And I am sure that you’re right. But we’ve heard very similar language used when it comes to talking about Greece and the European Union. And, in fact, that’s what today’s commentary addresses. Is it more likely that Greece will be removed form the European Union than that the state of California will be removed from the United States? After all, there are some similarities that make the comparison of the two cases worth considering.

Will California Go Greek?

Each party, Greece and California, are members of a union or conglomerate of political entities. Each one shares a united currency with the others in the union. Each one has particular trade interrelations as well as financial interrelations with others in the union. Lastly, each is “bankrupt,” and that has a certain dilatory effect on those around it.

As you may know, Greece has gotten a lot of bad publicity of late, and it has really hurt the euro — down around 10% in the last few months alone. Does the negative position of the Greek economy warrant such a drag on the European Union as a whole? Generally, they are only considered to be about 2–3% of the economy as a whole. California, on the other hand, is a little more than 10% of the U.S. economy as measured by GDP.

Thus, in theory, Greece should only drag down the euro by 3% on balance, but California should drag down the U.S. dollar by 10%. Overall, then, the USD should have fallen total of 7% against the euro… all things being equal.

But the problem is — all things are NOT equal. Here’s why.

California is a part of a 235-year-old republic. Even though it has not been a member for that same period, it nevertheless is a part of a union that has stood many difficult tests of time.

On the other hand, the European Union is still an experiment. It is barely out of adolescence, and we don’t know yet if it will even grow to stand among the older economies of the world. Also, even though both parties are entities in union structures, the structure of each union is different and addresses problems differently. The long and short of it is that California’s position in the United States is significantly more substantial than that of Greece in the European Union.

So right now California looks like a keeper and Greece a goner. If Europeans are reluctant to break up their happy (till now) Union, they only have a few options:

1. The European Union offers “solidarity” but no financial support.
2. The European Union offers a unified fiscal support from all members.
3. The European Union designates the stronger countries to subsidize the Greeks.
4. A mixture of numbers 2 and 3. Many have maintained that a bailout would be a violation of the Maastricht Treaty, the paperwork that created the European Union. However, the treaty itself is somewhat like a vicious dog that has no teeth or claws.

Here is an excerpt from the consolidated treaty, a piece that is commonly called the “No Bailout Clause”: The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. There you have it… NO BAILOUTS.

However, when a member does get into fiscal hot water, that language is no longer effective or applicable. At that point Article 100 takes over. It reads: Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken. NOW, there you have it… BAILOUTS PERMITTED.

I only give you that so you are aware that bailouts can and will be formulated in the upcoming disasters. And they do not violate the treaty itself.

However, the bigger question remains, if the European Union allows fiscal support for Greece, does that mean carte blanch permission for others to run to the EU money window and collect assistance for their carefree spending days?

It certainly seems to me that if the European Union makes this decision, which, as we have seen, is fully allowable by law, it will lose all credibility. And that may be the only thing that stands between them and ruination of the Union. It may end up collapsing on itself, even if no members ever leave, and its downfall will be the loss of confidence in the currency.

So then, how much further could the euro fall? Could it go all the way to parity? Most certainly. But before that point we will likely see many waxing and wanes of each side of the currency pair. We see a little rebound in risk appetite.

But what does all this mean for the United States and its currency?

The United States

Philosophically and economically, the United States is on a rendezvous with history… unfortunately, the path we are taking is a crash course. Many people have to come realize that we are nearing the end of a gigantic global economic experiment. No one has really walked this particular path before. A circumstance where every major nation in the world (and many minor ones too) is utilizing paper currency that has no backing of any value except for the promise of the issuing government. And we have all come to see what that is worth.

And as the saying goes, the bigger they are, the harder they fall. No currency is bigger than the U.S. dollar. No economy is bigger than that of the United States. When it comes, great will be the fall of it. Fortunes will be made. But so long as it remains the reserve currency, it is very difficult (although not impossible) for it to collapse.

It is difficult because each time it falls and gets cheap to buy, there are many who still buy it because the majority of the world’s goods are priced in U.S. dollars. So when the dollar gets cheap, so do the world’s commodities to those who are buying in currencies other than the dollar.

For us here in the United States, a cheaper dollar means more expensive everything: gas, groceries, cars… you name it. But when the dollar is cheap and other currencies are strong, it becomes a good time to stock up. Such buying will continue to prop up the dollar until a different reserve is found or created. Since such a thing will not occur overnight, the prospect for currency fluctuation over the next several decade — and our opportunity to profit from it — will be tremendous.

But make no mistake: the dollar is in trouble — one foot in the grave and the other on a banana peel.

Regards,
Bill Jenkins

February 19, 2010

Will California Be Removed from the United States? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

But the real problem is that Greece isn’t the worst Greek tragedy on the horizon. Greece is only “the canary in the coal mine.” The United States is one big fat Greek tragedy. We are Greece- SQUARED. All the same problems that plague Greece, plague this country- huge national deficits and debt; high unemployment; gigantic entitlement programs; too many government employees; not enough tax revenues coming in; endless bailouts and stimulus; and pension and healthcare systems (Social Security, Medicare, Medicaid) that threaten to eat every dollar of the budget. Just the interest on our national debt is enough to destroy our economy. It’s all a Greek tragedy.

America is Greece- except on a much grander scale. Our economic collapse is still a year or two down the road. Obama is laughing, celebrating, dancing and handing out gifts (stimulus, bailouts, entitlements, corporate welfare) at a big fat Greek wedding…oblivious to the the coming economic Armageddon…oblivious to the madness of his plan- to triple down on spending to save us from insolvency.

But it didn’t take Greece to warn America of the impending doom. California is our Greece. I warned long ago that Obama’s stimulus plan was a disaster. That handing out $120 billion dollars to state and local governments so that they could prevent layoffs of government employees; hire more teachers and government employees; and actually protect raises for government employees…was pure madness. I pointed out at the time that state and local governments across the USA were bankrupt and insolvent. The only possible solution was massive cuts in government spending and layoffs of government employees (just like the private sector). I pointed out that once the stimulus ran out in 2 years, we’d have the same exact problem…except with more government employee salaries, pensions and health care to pay for. All we did was kick the can down the road a bit. We delayed the inevitable economic disaster- just as Greece has done for decades, just as California has done for years. But the day of reckoning is fast approaching.

California is still insolvent and bankrupt…so are most state and local governments…now we have more government employee mouths to feed…more pensions to pay…how will we pay the even larger bill once the stimulus runs out? Where is the next stimulus coming from? How do we pay back the $2 trillion that the Fed has printed? Where are the tax revenues when everyone is a government employee?

All the king’s men…all the countries of the world…all the bankers and Goldman Sachs partners…cannot pay the bills that are coming due for America. The national debt has zoomed past $100 trillion. As a sign of things to come, our December deficit doubled in the past year. Obama’s budget pressed the pedal towards Armageddon- by spending more than all the budgets of all the Presidents that came before him, combined.

The old saying goes, “A trillion here and a trillion there…pretty soon we’re talking about real money.” Well let’s give you some perspective of the trouble we are in. Greece owes $300 billion to the banks. That amount…from a tiny country…threatens to bankrupt banks across Europe and bring down the entire EU. Yet Obama spent $800 billion in one stimulus bill last year. That stimulus by the way, created zero jobs. ZERO. He wanted to spend a trillion more on his expansion of government-run healthcare. If $300 billion can bring down the entire EU…and make big European banks insolvent…who can possibly bailout America’s $100 trillion tab? Just one state- California- is in similar shape and facing the same kind of economic collapse as Greece.

The lesson we must learn is that government cannot spend taxpayers’ money endlessly; that not everyone can work for government; that not everyone can depend on government for survival; that government cannot give raises and bonuses to government employees in a depression; that big pensions and universal healthcare bankrupt nations; that unions are poisonous to the survival of an economy; that “spreading the wealth around” is a failure whenever and wherever it’s been tried- Argentina, Greece, California. The socialist experiment is a disaster.

Now we wait…as the clock ticks…to see if we can avoid becoming the next Greek tragedy that pushes the world towards a second Great Depression.

Regards,
Wayne Allyn Root

February 18, 2010

California Is America’s Big, Fat Greek Tragedy was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Specifically, that lesson is that you cannot criticize, even rightly, the previous administration’s deficit spending and then triple the deficit without paying a price. I find this extremely encouraging.

America has a lot to do before the potential of the economy is unleashed again, but the tide has turned. Americans have seen what out-of-control spending does to states under the ideological control of people like Nancy Pelosi. And that lesson will be driven home in months to come. California’s State Controller John Chiang has warned that the state will be unable to pay its bills if legislators do not act on nearly $9 billion in budget cuts sought by Gov. Schwarzenegger.

I have the dubious distinction, incidentally, of having personally introduced the Governator to the champion of markets, Dr. Milton Friedman. Friedman was speaking at an event sponsored by the think tank I worked for not long after Conan the Barbarian was released. I’d read that the actor admired Friedman and invited him to the event. He came, in fact, and I put the two together.

Sadly, Schwarzenegger’s public appreciation of Friedman never really translated into policy. Today, a distressed California serves as an example of what happens when markets are seen as tax farms for politicians, no matter how lofty their goals. Friends of mine in California now admit that Texas, which they once considered a redneck backwoods, actually delivers what California has only promised.

Of course, the July issue of The Economist helped drive the point home. In a now famous article titled “California v Texas: America’s Future,” The Economist painfully detailed the differences between the states. Texans’ preference for low taxes, fiscal restraint and regulatory reform have made the state the envy of America and a magnet for business, capital and talent. California’s emphasis on government-provided benefits has accomplished the opposite.

In the last six months alone, there has been a massive shift in public opinion toward the Texas model. One of the best proofs is the recent CNN poll showing that 56% of the public opposes the administration’s stimulus plan. Only 42% support it. Back when the stimulus bill was signed into law, polls showed 54% support.

This doesn’t mean that President Obama will pivot to the center as Bill Clinton did in similar circumstances. In fact, Obama proposed massive new spending in the same SOTU in which he promised a spending freeze. The most revealing increase was his plan to further subsidize student loans. He wants to limit loan payments to 10% of income above a basic living allowance and forgive remaining debt in 20 years. The telling part of his plan is that those working in “public service” would have student loans forgiven in half the time, after only 10 years. Remember, public service workers already earn, on average, about $20,000 more per year than private-sector workers.

While the president clearly values taxing consumers more than producers, the public won’t stand for it. This is the basis of my optimism. We don’t need a full economic recovery for transformational stocks to prosper. All we need for money to move is investor confidence in the direction of governance and markets. It will come.

Right now, however, there are the triple overhanging threats of a government health care takeover, the cap and trade scheme and new bank taxes. For certain, however, cap and trade is dead. Though America’s mainstream media are still in denial about the collapse of the anthropogenic global warming (AGW) edifice, most of the rest of the world is not. Particularly in India and China, where most growth in carbon production will take place for some time, global warming is increasingly viewed as a failed scam. Here’s an English article from the Indian magazine Open to give you an idea of the tone.

Health care “reform” will certainly not pass in the form desired by the most extreme proponents. Increasingly, in fact, it appears that it won’t pass at all. I am, by the way, in favor of actual reform centered on limiting malpractice lawsuit abuse. Estimates are that we could cut American health care cuts by $3,000 per person per year on average through tort reform. This would eliminate much “defensive medicine” and lower insurance costs substantially. Americans favor this approach by wide margins, especially among the “Tea Party” movement. I expect it to move forward after the 2010 election.

Incidentally, I want to remind readers who went to last year’s conference in Vancouver that Chris Mayer and I were right about the burgeoning Tea Party movement. Today, it polls better than either the Republican or Democratic parties. Back then, our prediction that it would be a major political force was dismissed by others on our final panel.

In short, there is much reason for optimism right now. The trend lines are extremely positive and will begin to yield real benefits soon. Our debt level is seriously awful, but not worse than it was at the end of World War II. America is going to suffer the consequences of an unnecessary excursion into California-style liberalism, but we’ll come out stronger than ever. Moreover, we will be helped by a huge international market that did not exist in the late 1940s, when our economy was powering ahead.

For transformational profits,
Patrick Cox

February 9, 2010

P.S.: Shortly, investor fears are going to be calmed and the truly revolutionary technologies that will power the next period of economic super growth will accelerate further. In fact, legendary analyst John Mauldin is predicting a full-fledged biotech bubble in the years to come. I’ve been privileged to get to know John recently. We’ve been working together on a few projects, and he’s been buying some of our biotechs. I should point out that to avoid conflicts of interest, I cannot own any of our stocks.

Why the State of the Union Was Good News for Tech Stocks was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The article began with a description of California’s current rail service between the Bay Area and Los Angeles. A commission of nine-year-olds in a place like Germany could run a better system, of course. It’s never on schedule. The equipment breaks down incessantly. A substantial leg of the trip requires a transfer to a bus (along with everybody’s luggage) with no working toilet. You get the picture: Kazakhstan without the basic competence.

The proposed solution to this is the most expensive public works program in the history of the world, at a time when both the state of California and the US federal government are effectively bankrupt. By the way, I wouldn’t argue that California shouldn’t have high-speed rail. It might have been nice if, say, in the late 20th century, some far-seeing governor had noticed what was going on in France, Germany, and Spain but, alas…. It would have been nice, too, if the doltish George W. Bush, when addressing extreme airport congestion in 2003, had considered serious upgrades in normal train service between the many US cities 500 miles or so apart. The idea never entered his walnut brain.

The sad truth is it’s too late now. But the additional sad truth, at this point, is that Californians (and US public in general) would benefit tremendously from normal rail service on a par with the standards of 1927, when speeds of 100 miles-per-hour were common and the trains ran absolutely on time (and frequently, too) without computers (imagine that !). The tracks are still there, waiting to be fixed. In our current condition of psychotic techno-grandiosity, this is all too hopelessly quaint, not cutting edge enough, pathetically un-”hot.” The fact that it is not even considered by the editors of The New York Times, not to mention the governor of California, the President of the United States, and all the agency heads and departmental chiefs and think tank gurus and university engineering professors, is something that will have historians of the future rolling their eyes. But for the moment all it shows is that we are collectively too stupid to survive as an advanced society.

Ironically (if you go for gallows irony) a sidebar in the same issue of The NY Times Sunday Magazine featured the latest architect’s wet dream of an airport-of-the-future (p.35). Note to the editors and architects: commercial aviation is toast (we just don’t know it yet). We’re back in the $70-plus a barrel-of-oil aviation death-zone for airlines.

Also ironically proving that America is not alone in techno-triumphalist mental illness was another big article in the same magazine featuring French President Nicolas Sarkozy’s neo-Modernist fantasies for vast new construction projects in Paris. Note to Sarko: the developed world’s metroplexes are headed for shocking contraction, not further expansion. I know this is counter-intuitive, but a little applied prayerful research will bear it out. And, by the way, the last thing any city on earth needs is more skyscrapers — i.e. buildings that have no chance of ever being renovated when they reach the senility stage of their design-life. For really mind-blowing statements, this one from that article is a standout: “Paris’s current problems as a city can be traced to the very thing that makes it most delightful — its beauty.” Right. So, the solution will be to make it more like Houston.

Actually, I doubt the French people consider these schemes anymore plausible than ur-Modernist Le Corbusier’s 1924 proposal to bulldoze half of the Right Bank and replace it with dozens of identical skyscrapers. The French people laughed at Corbu, and put their vertical slums outside the city center, but notice that we Americans actually did it, replacing our old human-scaled center cities with priapic arrays of glass-and-steel tubes surrounded by parking lagoons. Anyway, nobody in the OECD world will have the energy to carry out anything like this again, not even France with its nuke plants.

Which brings me back to the New Urbanist annual meet-up last week in Denver. Given the gathering conditions of what I variously call The Long Emergency or the economic clusterf**k, they have had to shift their focus starkly. For years, their stock-in-trade was the greenfield New Town or Traditional Neighborhood Development (TND), a severe reform of conventional suburban development. That sort of reform work was only possible when 1.) the continued expansion of suburbia seemed utterly inevitable, requiring heroic mitigation and 2.) when they could team up with the production home-builders to get their TND projects built. To the group’s credit, they realize that these conditions are no more. Suburbia is now cratering, both as a repository of wealth in real estate and as a practical matter of everyday existence. They get that the energy crisis and all its implications are real and that our response to it had better be deft. They understand that the capital resources we thought we had for Big Projects are flying into a black hole at the speed of light. Mostly they see that he time for “cutting edge” fashionista techno-triumphalist grandiosity is over.

To put it bluntly, the Congress for the New Urbanism (CNU) is perhaps the only surviving collective intelligence left in the United States that is producing ideas consistent with the reality. They recognize that our survival depends on downscaling and re-localization. They recognize the crisis we will soon face in food production, and the desperate need to reactivate the relationship between the way we inhabit the landscape and the way we feed ourselves. They recognize that the solution to the liquid fuels crisis is not cars that can run by other means but walkable towns and cities connected by public transit.

This is exactly what you will not find in the pages of The New York Times or the political corridors of power. Oh, by the way, the Obama administration contacted one of the leading lights of the New Urbanism in the weeks after the inauguration. He never heard back from the White House. I guess they’re not interested.

Regards,
James Howard Kunstler

June 16, 2009

The High-Speed Rail Cart Before the Horse was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

No matter how you look at it, today’s legislation is outlining tomorrow’s energy infrastructure — and Gov. Schwarzenegger’s comments could be a stringent foreshadowing of a new power revolution…

As CO2 cap legislations are passed, like the one the Governator just passed in California, we will begin to see more nuclear power plants, as well as renewable forms of energy production. This will have massive ramifications for the world energy market — and by the end of this article, you’ll have some concrete information on how to profit from this huge change in the energy paradigm.

All of this news on carbon caps and clean energy laws is nothing new to you, so I won’t bore you with legislation details. I can promise you that although I’m all for renewable energy, we haven’t seen the end of the carbon fuels era. Instead, we have somewhat of an overlap with making the transition between green/nuclear energy and carbon-based energy. It’s this transition that presents itself with an awesome opportunity — a hidden market that allows you to play all of these forms of energy with one single play.

The carbon cap that Gov. Schwarzenegger passed has eliminated 15 carbon-based power plants in the surrounding states that were set to come online and supply energy to the California power grid. It just wasn’t going to be economical for them to complete production anymore.

This is a huge development for energy markets. For starters, California is a huge consumer of energy

Put it this way: If California were an independent country, its economy would be the sixth largest in the world. So when 15 or 30 power plants are shut down because of carbon cap laws, it’s a big deal. Not just for California, but also for any other economy that’s leaning toward green energy policy change. Californians are still going to use their air-conditioning units, lights, and televisions — demand will continue to rise. And the power supply has to come from somewhere, or we can expect to see massive brown- and blackouts.

According to the governor’s new legislation, this energy WILL BE green. But how green?

There are still technological limitations with green energy created from the Earth’s natural forces:

• Solar is only operational during the day and when overcast is limited
• Wind isn’t always around to keep the mills turning
• Geothermal, in my opinion, is the most optimal form of generating energy in an Earth-friendly manner; it has been slow in grabbing the public’s attention
• Hydropower is strictly limited by geography.

Nuclear energy and the market for processed uranium (U3 O8 ) has become the center of attention recently. It is a cost-effective form of energy with virtually no carbon emissions. But it, too, has its drawbacks to keep it from being a universally accepted power source: the disposal of used fuel rods, general safety worries, and an overall negative political image.

It’s for those exact reasons listed above that our coal, oil, and natural gas power plants aren’t going anywhere. A system of tradable carbon credits might be developed and used more extensively, but your guess is as good as mine as to when that will happen, dear reader. I just know that brown energy is here to stay, at least for a while.

So which carbon-based power plants are cleaner and more efficient? Honestly, I don’t really know.

Coal liquefaction and other clean-coal technology make it cleaner to burn, but less economical. Don’t forget that the coal lobby is working hard in Washington. Some of its supporters are rail companies and the Navy. The Navy has already made some B-52s coal liquefaction ready, and it is working on technology that would allow coal liquefaction to be used as jet fuel. I imagine that the coal lobby, backed by the U.S. Navy, would hold some sway in Washington.

Natural gas is also a cleaner-burning fuel source, but how long will nat gas prices remain moderate? Key legislation has been passed in Alaska, allowing for the environmentally sensitive exploration in areas where there are possibly trillions of cubic feet of natural gas. The problem is that the gas, unless another massive pipeline is built, isn’t economical to extract.

As for oil, the whole story of Peak Oil is beginning to be more common talk around the local watering holes. I don’t need to get into the details about it, because our in-house oil expert, Byron King, has written to you about the implications of this notion.

It seems that greener power might just cost more green dollars.

What’s the Solution?

Here’s how I break it down: I know that fossil fuel energy emits CO2 as a byproduct, renewable energy is behind the curve in getting online, and nuclear power plants have some innate risks to them. Basically, mitigation, as a result of Peak Oil, is approximately 10-15 years behind the curve, resulting in an attempt to bring on as much power from diverse sources in a very brief period of time.

So I’m not going to say that one form of power is better than another. What I do know is that it will be a combination of all these forms of energy that will keep the lights going; that’s definite. World population is growing, and countries like China, India, and Brazil are industrializing at an extreme pace with millions of people who will be coming onto the already overtaxed world power grid.

So what’s the point? As an investor myself, the point that I’m trying to uncover (and, hopefully, you, too, dear reader) is how to protect my investments. And that’s what’s brought me to this conclusion…

There is one market that allows you to take advantage of the growing demand in ALL of these forms of energy.

The Industrial Metal That Nobody Can Pronounce

The name of the game is molybdenum, or just moly, for short — but for your sake and mine, I looked up the pronunciation: (m uh- lib- d uh-n uh m).

This metal has several interesting characteristics that make its usage integral to several forms of energy creation.

Moly has the sixth highest melting point of any element. It is highly corrosive resistant and doesn’t expand, contract, harden, or soften under extreme temperature changes. In fact, of all the commercially used metals, moly has the lowest heating expansion. For example, moly is used in making stainless steel; hence the corrosion resistance and life span of your shiny ratchet set.

Moly is added to steel and cast iron to make metal alloys and superalloys that are much greater in strength. It can be found in anything from airplanes and cars to construction beams and filaments. This metal has tons of application and, better yet, is used in almost every aspect in the world of energy.

Molybdenum’s Applications in the World of Energy

As I said, moly is used to make high-strength metal alloys. It can be found in almost every modern drill. It greatly increases the strength of the drill and can limit technical mishaps, reducing costs. In that sense, moly is needed in every aspect from drilling exploratory holes in an oil and natural gas field to drilling the production and injection wells that go into getting a geothermal power plant up and running.

You can also find moly in the coal field. If it’s a longwall mining operation, it can be found in the shearers used to extract the coal and the conveyers used to transport it. In an open-pit, truck-and-shovel operation, moly is again used in both the extraction and transportation processes.

The corrosion resistance, combined with temperature insensitivity, makes moly very important in the production of oil and natural gas pipelines. The Alaskan Pipeline consists of a half-inch metal alloy that could handle up to 25,000 pounds of PSI and temperatures of negative 70 degrees Fahrenheit. You could find up to 7% moly in that 800 miles of pipeline. Without moly, you definitely wouldn’t be getting an above 99% reliability rate, which delivers the U.S. with approximately 775,000 barrels of oil per day.

Molybdenum is also used as a hydroproccessing catalyst in petroleum production. In English, moly is used to remove sulfur and nitrogen in making light, sweet crude. This is very important as the quality of oil is diminishing more as “the low-hanging fruit” in the oil world has already been picked. Canadian oil sands and the tar oil from Venezuela are examples of oil that contain high levels of external elements that need to be purged in order to create light, sweet crude oil.

Molybdenum can be found in every modern turbine used in a power plant. All power plants, except wind and water, directly use heat to turn a turbine. In the highly abusive environment of a turbine, strength, corrosion resistance, and heat insensitivity make moly the perfect industrial metal for power plant turbines. It greatly increases the life span, reducing the cost of the power plant

In a geothermal power plant, moly can be found in the back-pressure turbine or the condenser and pumps that reinject the fluids back into the earth. In wind energy, moly is used in the actual structure of the windmill and can be found in everything from the bearings to the generator. In hydroelectricity, again, moly can be used in the turbines and generators.

Molybdenum’s contributions to the world of nuclear energy are by far the most significant. Without molybdenum, the nuclear world would be set back at least 20 years. Newly developed high-performance stainless steel (HPSS) contains up to 7.5% moly. I cannot stress the importance enough of HPSS to the world of nuclear energy. This alloy can more than triple the life of aging fleet condenser tubes. Fleet condensers, which are rather large, are used in the heat transfer process.

Brass, copper, and nickel made up the alloys previously used in fleet condenser tubes. Although these alloys were efficient in conducting heat, their life span was only eight years. HPSS conductors were brought into play about 30 years ago. As of right now, the longest HPSS conductor has remained in service for over 26 years and is still going strong.

Older copper alloy fleet condenser tubes had corrosion issues. This affected the power plant in a couple of ways. It allowed for the buildup of corrosive materials, reducing the efficiency of the power plant. Also, the corrosion rendered weak spots in the fleet condenser tube, which could then result in holes. This was just not acceptable, because chemicals like sodium and chloride could leak and damage other vital parts of the reactor. Corrosion resistance leading to less buildup of undesirable substances increased the capacity of reactors by up to 20%.

The importance of molybdenum in nuclear energy is undeniable. But it is also used in harvesting EVERY other form of energy. Moly is the only way you can play these markets all at once.

Just because moly is vital to these markets doesn’t necessarily mean that there’s a bull market in this industrial metal. But do you really think I would have chattered on and on about moly if the supply-and-demand picture didn’t look positive for investors?

Supply and Demand of Molybdenum

Supply for molybdenum faces a similar conundrum to that of oil. Although there is current mine production significant enough to meet demand, refiners, or roasters, are expected to run into a shortfall. Guesses on when this shortfall is estimated to come fall somewhere between 2009-2015, depending on demand. Yes, that’s kind of a large range, but let me tell you where those numbers come from.

A roaster is similar to a refinery in that it processes the moly into a fine powder, pellets, or any other form of refined moly used in the industrial world. Total world moly roaster capacity can currently put out at an annual rate of 320 million pounds. That 320 million pounds also barely meets global demand. There isn’t much more roasting capacity left. The problem is that there is no one actively permitting for the production of any new roasters here in the United States, and roaster production looks grim on a global level as well.

The exact date is impossible to predict, but a roaster shortage is definitely on its way. The data above are based on one very important assumption. The assumption is that mines will also be able to increase their output. Western demand looks to increase by around 3% annually, while China and the CIS are looking at a demand increase of around 10% annually.

Globally, demand is expected to increase at around 4.5% per annum. Unless moly mine production picks up at a rapid pace, shortfalls of the silvery metal are expected to arrive around 2009. Note that we are talking about mine production, and not roaster capacity anymore.

This increasing demand can be attributed to two main factors. Hydroprocessing catalysts are becoming essential in today’s market for crude oil. The other contributing factor is the increase in nuclear reactors planned for production. There are 48 nuclear reactors to be built by 2013, and approximately 100 are to be built by 2020.

The International Molybdenum Association (IMOA) says that an average reactor contains about 520,000 feet of stainless steel alloy. Some larger reactors contain over 1 million feet of stainless steel alloy. With the metal alloy containing up to 8% moly — well, you can do the math.

If you don’t believe me when I tell you a molybdenum crunch is on the way, would you believe China? Your answer should be “yes.” China currently produces around 20% of global production. The IPO of a Chinese molybdenum ETF, China Molybdenum (very creative), jumped 59% after its open on Hong Kong’s Hang Seng Index. Oh yeah, did I mention that China passed an export quota for moly on June 18? If global supply is able to keep up with global demand, which I sincerely doubt, we’re still looking at China beginning to hoard the one-fifth of global production that it currently produces.

Molybdenum has to supply the growing growth in all energy markets. More and more people are industrializing in the developing countries. That requires energy, and I expect that energy to arrive from numerous sources. The supply-and-demand picture presents us with a double-edged dagger: Roaster shortages are unable to keep up with growing demand or mine production is unable to keep up with growing demand. I see both of these scenarios as very likely, but only one is necessary to send the price of molybdenum to new highs. As one or both of these scenarios come to light, expect China and the countries in the CIS to limit and eventually negate exports, only throwing gasoline on the already blazing fire…

Regards,
Nick Jones

July 17, 2007

A Single Way to Play Both Green and Dirty Electricity Generation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Indirectly, a Green Housing Boom

There is one segment of the California economy that apparently has benefited greatly from the cheap home financing and minimal credit checks in the environment fostered by the subprime lenders. In fact, this effect gives a whole new meaning to the term “subprime.” “California is in the midst of a major boom in large-scale marijuana cultivation operations run from inside homes,” according to the LA Times in an article entitled “Busts Point to Boom in Indoor Pot Farms.”

Marijuana seizures have quadrupled in just the last three years, according to officials authorized to speak on behalf of the U.S. Drug Enforcement Administration. Many of the seizures have occurred in what are considered middle-class homes and upscale suburbs of Los Angeles and Sacramento. Gang-related pot growers have taken advantage of cheap financing and the general lack of background documentation of borrowers, receiving loans cynically known in the trade as “liar loans” to acquire homes and then remodel them as indoor greenhouses.

The common practice of these urban plowboys has been for the new homeowners to black out the windows and install ventilation and lighting systems. After settling in, the drug growers use sophisticated growing, watering, and fertilizing equipment to cultivate as many as four crops per year in their otherwise humble, subprime abodes. This output equals or exceeds the yield from traditional outdoor pharmacological agriculture and lacks the danger posed by the discovery of the pot plants via DEA air surveillance or itinerant hikers and campers. “I am not talking about the Cheech and Chong marijuana cultivation of two plants in someone’s closet,” stated DEA agent Gordon Taylor. “I am talking about organized crime groups who are purchasing homes in our communities and creating marijuana factories.”

So as not to attract the attention of neighbors, some drug-growing subprime borrowers have hired gardeners and other employees to perform landscaping work, take out the trash, do maintenance on the houses, turn lights on and off, and otherwise give the indoor pot houses that “lived-in” appearance. And doubtless, of all the subprime borrowers who took out loans to purchase real estate, it is probable that the pot growers are the least likely to miss their mortgage payments and suffer a foreclosure. In that case, their investment might really go up in smoke.

What Is a Laid-off Subprime Lender to Do?

But indeed, if not growing marijuana, what is a laid-off subprime lender to do? Many, not surprisingly, are seeking other employment within the mortgage lending industry. Lending money and getting paid for it, after all, is what they know how to do. Like the steelworkers in Pittsburgh of old, or the autoworkers of Detroit in the past generation, they pray for the return of the familiar old mills and factories in a sort of “cargo cult,” as the anthropologists call it. But then again, who is to say that the real estate market of California will not be good to these hopeful, if unemployed, mortgage brokers if only they wait long enough. Overall, California real estate has been a great investment over the past two centuries or so.

Then again, if the scientific reports of global climate change are to be believed, the U.S. Southwest may be entering a prolonged period of drought, less availability of water in any form, and higher average temperatures. Knowledgeable experts on water availability and use patterns are already discussing California’s “perfect drought” — a combination of low rainfall in the Southland area, long-term dryness in the Colorado River Basin, and far-below-average snowpack in the mountains. The immediate answer, of course, is to divert water supply from California agriculture to California urban and suburban water usage.

Perhaps the California almond growers, for example, should take a page from the playbook of the pot growers. They can take out a subprime mortgage and buy a house in the Los Angeles suburbs and then black out the windows and grow almond trees indoors, under electric illumination, using the water that was diverted from large-scale agriculture. OK, I am just kidding.

But I do happen to know that they are hiring down at Circuit City. According to the LA Times, Circuit City has laid off most of its higher-paid salespeople nationwide in an effort to, as the saying goes, “cut costs” in the face of stiff competition and falling sales. (Makes sense, right? If sales are falling, fire your best salespeople.) The good news for the laid-off Circuit City employees is that they can apply to get their old jobs back, but the bad news is that the work comes with lower rates of pay. One laid-off employee, for example, who is now suing Circuit City for age discrimination under both federal and California law, noted that she was formerly earning $15.13 per hour, but now must compete to get her old job back at a rate of pay that is estimated to be less than $10 per hour. And if she does not want the job, then there are, surely, a bunch of laid-off subprime mortgage processors who will leap at the chance to rake in that kind of subprime dough.

Not All Feel the Troubles

But amidst the economic carnage and human hardship, not all here in SoCal are feeling the troubles. We learned the other day that Ray Irani, chief executive of Occidental Petroleum Corp., headquartered in Westwood, adjacent to pricey Beverly Hills, took home more than $460 million in compensation in 2006. This certainly ranks among the largest paydays in business history for any executive at any publicly traded U.S. company. Mr. Irani’s compensation outdistances even that of Lee Raymond, former CEO of ExxonMobil, who cleared in excess of $300 million in his last year as great helmsman of that well-integrated oil company. I have never been an oil company CEO, but I hear it is nice work if you can get it.

To place Mr. Irani’s pay in perspective, something over $270 million of the $460 million package came from the exercise of 900,000 options on Occidental shares in 2006, with another $93 million accruing due to associated share distributions and dividends. These underlying options were awarded in 1997, when Occidental stock was selling for less than one-fifth its current price and oil was selling for nearly $10 per barrel.

So a rising tide of oil prices certainly has lifted Mr. Irani’s tanker. (Actually, for $460 million, Mr. Irani could buy a few of his own oil tankers, if he could find a shipbuilder who could deliver on the orders.) And to his credit, Mr. Irani was personally instrumental in positioning Occidental and facilitating its entry into the lucrative oil development business in Libya. This is a long-term plus for the company. So maybe the guy is actually worth the $460 million. That is a lot of dinars, but I have no hard feelings. I don’t own any Occidental stock, and it is not my money. And now Mr. Irani gets to pay taxes on it.

Perhaps because Mr. Irani was feeling flush, he used his role as a member of the board of directors at KB Homes (of Westwood, Calif., by the way, just across the street from Occidental’s headquarters building, which certainly saves on travel expenses) to select Stephen Bollenbach as that company’s new chairman. Mr. Bollenbach replaces former KB Homes boss Bruce Karatz. Mr. Karatz was forced out under a cloud, after reports surfaced that he had backdated stock option grant dates to favor himself and other top executives. KB Homes, an upscale home builder, subsequently restated seven years worth of financial results. It is a good thing that people on the KB board, like Mr. Irani, understand that stock option stuff.

Lessons Learned

I began Part 1 of this article with a reference to my Navy days. Another thing that I learned in my time in the Navy was that after every significant operation, you catalog the lessons learned. So what are the lessons to draw from all of this?

First, the wheels are coming off the subprime mortgage business, and things are falling apart for a lot of people in and close to the lending industry. So for future reference, if you are going to be part of a speculative financial venture that loans money to so-called “borrowers” who cannot repay, then be sure to get yourself into the top executive suites. When all else fails, seek bankruptcy protection in Delaware.

Second, as we also noted above, Circuit City is laying off its best salespeople in the face of falling sales. That is what I call the triumph of capitalism. Speaking of capitalist triumphs, it sure is good to be the CEO of a major oil company. And you probably will not do too badly as the CEO of an upscale home building company. Just don’t sell too much of your product to subprime borrowers, who have a high probability of not being able to pay the mortgage. But you might be OK if you sell the houses to subprime buyers for the purposes of growing pot indoors. Those kinds of people will probably pay the mortgage, but if they get caught growing pot, the DEA will apply the forfeiture laws.

And finally, whatever you do, don’t get caught backdating your stock options. Make sure that you have your friends do it for you.

Best wishes from California, where it is dry and getting more so.

Until we meet again…
Byron W. King

April 12, 2007

Subprime Ground Zero, Part II was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.