Eric Janszen Interview: CNBC Jan. 25, 2008

[Rajiv]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

How about a bubble in a steady state, sustainable economy? OK, no chance of that.

See my comment further down

[zmas28]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

EJ sez:

As I have said starting way back with The Big Bet back in 2005, first a crisis has to occur to empower new leadership. USA, Inc. needs restructuring and new management. Paradoxically, if economic problems don't get bad enough fast enough, this will make matters worse because new management will be aligned with old interests who got them elected, and they will try to keep the system working. Then it's four years of throwing everything and the kitchen sink at it (ala Japan 1990 - 1994) versus a well thought out New New Deal.

I went back and read the Big Bet article. Great article and what was scary was that I actually understood most of it! You concluded with "As Paul Volcker stated in April of this year, "I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.""

It looks very much like the financial crisis is here.

I went and browsed the websites of the major Presidential candidates (Romney, McCain, Clinton, Obama) for clues. Based on an admittedly cursory inspection, here's what I came up with.
McCain: main focus appears to be on tax cuts for middle class and business while maintaining fiscal discipline. Doesn't sound like the "infrastructure, alt energy" candidate.
Romney: wants to reduce taxes also, while reducing growth in government spending. There's a brief mention of build and repair transportation infrastructure, but difficult to see how this would be done on the required scale while maintaining fiscal discipline and cutting taxes.
Clinton: she has more on her website
"Hillary Clinton’s plan to promote energy independence, address global warming, and transform our economy includes:
* A $50 billion Strategic Energy Fund, paid for in part by oil companies, to fund investments in alternative energy. The SEF will finance one-third of the $150 billon ten-year investment in a new energy future contained in this plan;
* Doubling of federal investment in basic energy research, including funding for an ARPA-E, a new research agency modeled on the successful Defense Advanced Research Projects Agency
* Aggressive action to transition our economy toward renewable energy sources, with renewables generating 25% of electricity by 2025 and with 60 billion gallons of home-grown biofuels available for cars and trucks by 2030;
* 10 “Smart Grid City” partnerships to prove the advanced capabilities of smart grid and other advanced demand-reduction technologies, as well as new investment in plug-in hybrid vehicle technologies;
* An increase in fuel efficiency standards to 55 miles per gallon by 2030, and $20 billion of “Green Vehicle Bonds” to help U.S. automakers retool their plants to meet the standards;
* A plan to catalyze a thriving green building industry by investing in green collar jobs and helping to modernize and retrofit 20 million low-income homes to make them more energy efficient;
* A new “Connie Mae” program to make it easier for low and middle-income Americans to buy green homes and invest in green home improvements;
link: http://www.hillaryclinton.com/news/r.../view/?id=4057

And from the Obama website:
Barack Obama will implement a cap-and-trade program to reduce greenhouse gas emissions to the level recommended by top scientists. Obama will invest $150 billion over ten years to deploy clean technologies, protect our existing manufacturing base and create millions of new jobs.
......
The Obama plan will invest in America's highly-skilled manufacturing workforce and manufacturing centers to ensure that American workers have the skills and tools they need to pioneer the first wave of green technologies that will be in high demand throughout the world. Obama will also provide specific tax assistance and loan guarantees to the domestic auto industry to ensure that new fuel-efficient cars and trucks are build in the U.S. with American workers.
....
Obama will create a federal Renewable Portfolio Standard (RPS) that will require 25 percent of American electricity be derived from renewable sources by 2025.
....
Additionally, the Obama plan will provide tax credits for locally-owned biofuel refineries – which have already started to strengthen the economic vitality of rural America.
link: http://www.barackobama.com/issues/ec...for-innovation

[metalman]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

wow, great work. so looks like the dems are the next bubble/new new deal candidates, extra points for clinton. i think ej mentions that someplace... culled from hilarity clinton's NH debate babble.

[jk]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

comments on several issues in this thread:

Can alt energy and infrastructure be bigger than real estate? in front of every home there is a road. Under or beside that road runs power, communication and, sometimes, sewer and water services. That road can be dug up and new, improved services installed to further the energy efficiency goals.


Great moderation? What was moderate? Some immoderate inflation was magicked away by statistical legerdemain. Also while many of the statistics for the real economy were moderated, a giant credit and derivative bubble was expanding immoderately. The great moderation is analagous to the lack of volatility in the equity markets, exemplified by a low and stable vix. Turns out that the moderation was achieved by moving all the volatility off the books into mark to myth financial instruments.

The problem of Gambler’s ruin and the successive “doubling down” of bubbles- the gambler in the gambler’s ruin lacks an essential tool available to the u.s. – a printing press to print new money. This serves 2 purposes- it provides new funds for the new “bets” on the new bubble, and through inflation it diminishes the value of past losses. Run that through your model!

is additional wealth created by the bubble? YES. The tech bubble created a lot of tech infrastructure, for example fiber optic networks. When, e.g., global crossing went belly up, the fiber it had laid did not disappear. Instead it could be acquired cheaply and therefore lit to provide service at lower rates. In the 19th century there was a railroad boom. Ultimately all the rail companies went bankrupt. But the track and rolling stock was still there, to be used at cheaper rates once resold at a cheaper price. All the houses built in the recent bubble are still standing. They face a somewhat diminished prospect because of the rising cost of commuting, but their prices will reflect that. the alt-energy and infrastructure bubble will result in real wealth being created, but that real wealth will at some point be overpriced in the marketplace, and then its price will drop. But the real wealth, the energy plants, the communications facilities, the more efficient cars and so on, will remain.

On the word “bubble” – the word has become too popular and too varied in its meaning. People ask, for example, whether gold is in a bubble, pointing to its meteoric rise in the ‘70s and its recent repeat performance. So sometimes “bubble” is used to refer to an unsustainable, parabolic price rise, whatever its source. Ej, however, wants to reserve the term for a government sponsored inflation of values in some economic sector. I think this is a losing battle, and we either need a new word or phrase or we need to accept the broader definition of an unsustainable rise in some asset class prices.

[GRG55]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Certainly possible, Chris. I for one would rather have heard what was coming next from the economist Davis, whose last words were, "Can I just make a comment about that?"

In a perverse sort of way, it seems both were in agreement (but not necessarily for the same reasons).

All the apologists for bubbles are saying that "bubbles are good for the economy because [fill in unique and creative rationalization here]".

EJ's view is that the only thing worse than the "next bubble" is "no next bubble"...

...in other words, bubbles are "good".

[zmas28]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

The same question had occurred to me: "Can alt energy and infrastructure be bigger than real estate?". I rationalized it in the following way.
The amount of money that needs to be spent on alt energy/infrastructure to generate a specific GDP response would seem to depend on the efficiency (multiplier effect?). I seem to remember reading in the distant past that money spent on defence expenditures was very inefficient; similarly that it currently takes about $4 of new credit to generate $1 of GDP growth. I speculate that where real value is being created with new paradigm shifts (bubble talk?) that much less money would need to be spent in order to return the same GDP response, i.e. the process would be more efficient.
Further, even if the bubble is not big enough to subsume the housing virtual wealth loss, it should help cushion the fallout.

[bill]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

EJ writes in:

As the economy and financial markets devolve over the next few years, we all going to be looking for ways to get things going again and I’m hoping we go the re-industrialization route

. Get government out of the business of subsidizing industry directly as it does the real estate industry today. Participants are government, private industry, private equity, and Wall Street. Capital gains tax rate on private company investment? Zero. If as an entrepreneur you’re taking all the risk to compete to, say, make the best ceramics technology for the high temperature turbines for the new nukes, you and your investors should not pay any capital gain taxes if the bet wins. How to make up for the tax revenue shortfall? Shift taxes back onto the FIRE Economy, especially real estate and other non-productive assets. The economy will shift its focus from debt-financed consumption to equity financed production.

The FIRE Economy V2.0 is as good as over anyway. What we need is a place to transition to.

A very important point you made in Harpers magazine.

infrastructure upgrades will accelerate,

with plenty of opportunity for big government

contractors fleeing the declining market in Iraq.

With US government incentives corporations will redirect project priorities, thus launching massive projects creating the new new deal.
Can the US make investment policy attractive enough for domestic as well as international investors? I think our policy makers know what to do as they are heavily influenced by corporations in need of opportunities.
Keep an eye on politically correct corporations and product standards produced by labs.

http://www.wgint.com/projects/ee/
https://www.llnl.gov/
http://www.inl.gov/
http://altenergy.lanl.gov/index.shtml
http://www.babcock.com/services/rese...d_development/
http://www.ne.anl.gov/index.html
http://bakerinstitute.org/Event_View.cfm?EID=732
http://www.battelle.org/index.aspx
http://www.netl.doe.gov/index.html
http://www.futuregenalliance.org/

[GRG55]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

comments on several issues in this thread:

Can alt energy and infrastructure be bigger than real estate? in front of every home there is a road. Under or beside that road runs power, communication and, sometimes, sewer and water services. That road can be dug up and new, improved services installed to further the energy efficiency goals...

Perhaps a less US-centric perspective on our part might reduce the need for the question "Can alternate energy and infrastructure be bigger than real estate?". In the developing world a large part of the infrastructure boom IS real estate (housing).

The massive demand for adequate housing for growing (in numbers and in wealth) populations is partly responsible for driving the construction of more power, water desalination/treatment, schools, hospitals, roads, sewers, telecommunications, and so forth. The Arabian Gulf states were transformed dramatically in this respect in the short 7 years I lived there, and it hasn't slowed down so far. I saw much the same in India and many other places I travelled. One difference in these locales - mortgage credit standards usually require the debtor to put up 25%-30% of the purchase price. Interesting concept, eh? No jingle mail there...

Great moderation? What was moderate? Some immoderate inflation was magicked away by statistical legerdemain. Also while many of the statistics for the real economy were moderated, a giant credit and derivative bubble was expanding immoderately. The great moderation is analagous to the lack of volatility in the equity markets, exemplified by a low and stable vix. Turns out that the moderation was achieved by moving all the volatility off the books into mark to myth financial instruments...

The moderation, imperfect though it may be, is that during the last 25 years or so we have witnessed (one of ?) the greatest peaceful economic and political integrations of mankind around the globe:

• the maturing and material expansion of the "European project";
• the successful emergence of elements of capitalism in the economies of the world's two most populous countries;
• the end of apartheid and South Africa's isolation;
• the fall of the Berlin Wall and the end of the isolation of Eastern Europe;
• the addition of previously war-torn Vietnam, Laos, and Cambodia to ASEAN;
• significant expansion and development of the WTO (despite the efforts of Seattle protestors and Bill Clinton's spineless public pandering to them at the time);
• the early signs of political reform and economic emergence in select African nations...

All this, and more, without a World War. Have we ever witnessed this much cooperation and collaboration between nations and peoples in such a comparatively compressed time frame? My late father-in-law, who fought for the Allies in Europe in WWII, was emphatic that the EU, for all its problems and deficiencies, deserved unconditional support if for no other reason than to ensure sufficient political and economic integration to preclude another European war. Perhaps the same can be said of the whole world?

There are only two times when it seems "easy" to achieve broad cooperation and consensus - during times of economic plenty, and during times of crisis. We've been witness to decades of the former. Will it continue a while longer, or are we about to partake in the later?

is additional wealth created by the bubble? YES. The tech bubble created a lot of tech infrastructure, for example fiber optic networks. When, e.g., global crossing went belly up, the fiber it had laid did not disappear. Instead it could be acquired cheaply and therefore lit to provide service at lower rates. In the 19th century there was a railroad boom. Ultimately all the rail companies went bankrupt. But the track and rolling stock was still there, to be used at cheaper rates once resold at a cheaper price. All the houses built in the recent bubble are still standing. They face a somewhat diminished prospect because of the rising cost of commuting, but their prices will reflect that. the alt-energy and infrastructure bubble will result in real wealth being created, but that real wealth will at some point be overpriced in the marketplace, and then its price will drop. But the real wealth, the energy plants, the communications facilities, the more efficient cars and so on, will remain....

Agree with your view. With respect to US housing specifically, an excerpt from a post last summer http://www.itulip.com/forums/newrepl...wreply&p=14712:

...Wall St. appears to have executed a remarkably effective marketing job to foreigners, and stuffed every corner of the globe with garbage paper backed by US housing. Every day there's a new revelation by someone holding this junk - hedge funds from Australia to Zurich, German state banks, BNP Paribas, and today even the Chinese fessed up...

...I am not an economist, but on a macro level seems to me that over the last 5 years the USA has built about 20 years of housing stock, complete with new roads/utilities/malls/schools, etc. without using any of its own national savings (hell, there aren't any savings...). All of this funded by foreigners who are now taking a major balance sheet hit. They can't very well jet over to the USA and take the assets back with them now can they.

Bail out or no bail out, the end result is the USA has an enormous inventory of modern housing stock and the foreign investors have...well...a fresh hair cut. Over the years to come this probably means that a disproportionate share of USA national income and savings can be devoted to productive, export related investment as it works off the oversupply in the fundamentally unproductive housing sector. That should make the Chinese lose a bit of sleep.

The USA has always muddled through it's periods of bad leadership. I seem more optimistic than some others that post on iTulip, and even if the post-housing-bubble transition is tumultuous, neither the American people nor the rest of the world has much tolerance for it to be an extended one.

[metalman]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

The same question had occurred to me: "Can alt energy and infrastructure be bigger than real estate?". I rationalized it in the following way.
The amount of money that needs to be spent on alt energy/infrastructure to generate a specific GDP response would seem to depend on the efficiency (multiplier effect?). I seem to remember reading in the distant past that money spent on defence expenditures was very inefficient; similarly that it currently takes about $4 of new credit to generate $1 of GDP growth. I speculate that where real value is being created with new paradigm shifts (bubble talk?) that much less money would need to be spent in order to return the same GDP response, i.e. the process would be more efficient.
Further, even if the bubble is not big enough to subsume the housing virtual wealth loss, it should help cushion the fallout.

even a poorly executed alt energy boom is better than a bunch of ad hoc shit from dodd et al. what we need is a midi/japan boom.

[raja]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Can alt energy and infrastructure be bigger than real estate? in front of every home there is a road. Under or beside that road runs power, communication and, sometimes, sewer and water services. That road can be dug up and new, improved services installed to further the energy efficiency goals.

Who are the laborers that are going to be building all those roads, sewers, etc.?

During the Depression, the unemployment rate went up to 25%. Does unemployment have to get up to those levels for this new new deal to start working?

I've read that 70% of the economy comes from consumer spending. How is building new infrastructure going to put money in the hands of the consumers?

[Jim Nickerson]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Who are the laborers that are going to be building all those roads, sewers, etc.?

During the Depression, the unemployment rate went up to 25%. Does unemployment have to get up to those levels for this new new deal to start working?

I've read that 70% of the economy comes from consumer spending. How is building new infrastructure going to put money in the hands of the consumers?

Unless all the laborers are illegals, then the workers doing the labor of building will get paid, and what do people in America do with their paychecks? According the the datum you quote, spend 70% of it on consumption.

[c1ue]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

The question I have is not whether the stimulus/next bubble money will be spent; the question is on what.

One reason bubbles have to be successively larger is that the short term debts from the older bubbles are paid off (or written off in context) by the next.

Having a same or smaller size successive bubble doesn't keep the economy going if the previous debts cannot be paid/written off.

Thus in this scenario, the next bubble money could wind up just recapitalizing the failed banks - i.e. paying off the HDTV, home, and car loans.

Were this to happen, it would not bode well for the US economy as repayment of debt does not add to jobs, incomes, or anything else.

Of course, the other scenario is almost as bad - Americans keep on truckin', buying 100in HDTVs to replace their 60 inchers, and maintain or even increase their debt loads.

This postpones the trouble for 2 or 3 years, then the redoubled weight of debt falls geometrically harder.

Of course, this could be a cunning strategy - inflate a new bubble AND increase inflation.

This would provide money for short term consumption continuation - while medium term the debts accumulated are inflated down.

I cannot believe the US trading partners would stand still for this though - it means the effective nullification of 50% or more of their capital accumulation from the past 10 years. Again, the Arabs might not care as they have more than enough money per population to not matter, but other nations like China would not be so sanguine.

[jk]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

the issue is how long the process can be strung out. in the meantime we hope that the domestic stimulus/infrastructure/alt.energy spending creates something useful in the way of making the u.s. economy more productive.

[zmas28]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

I hope the alt energy/infrastructure bubble will add real value, like the tech bubble initially did, but unlike the housing bubble. The previous bubbles provided fuel for the consumer to keep on spending from the perceived wealth effect (first in equities and then in housing). Our economy (actually the global economy) is too dependent on US consumer spending (70% of US GDP). This is unsustainable as we are finding out. My hope is that this new "re-industrialization" envisioned by EJ will go some way to help restore the balance towards a more capital investment oriented economy (not a FIRE "investment" economy) where new domestic jobs are added.
There is the potential to add a lot of new domestic jobs here in clean/green tech, wind power (turbines, etc.), solar power (eg plumbing, electrician jobs for home heating), not to mention engineering and construction jobs across the spectrum. Most of these jobs would be domestic and not outsourceable.
Deficit government spending will likely deprecate the dollar even further so it is unlikely the stock market (overall) would go up in real terms.

[Crow]

Re: Eric Janszen Interviewed on CNBC today January 25, 2008 at 2:20 PM Eastern

Bubbles can only last as long as the bubble machine that creates them To say fiat money can be created forever would be false...as history has already proven. I find it odd that people will question where the next bubble will be? By asking such a question, one is assuming they are transferring money from one asset class or service to another. But the root problem is not the re-allocation of money...it's the value of the money itself.

The next bubble could well be tulips for all we know (I jest, of course) but the number of wheel barrels of paper dollars required to buy a tulip will grow exponentially as the hidden M3 continues its skyward trajectory. It will all have to come back to the most simplistic of transactions. You have something of value I need. I have something of value you need. We will have a mutual agreement as to how we can best conduct this transaction. A paper note is made from 75% virgin cotton 25% linen blend of paper, and
industrial oil based ink is used to produce the coloring on the paper. Real value...maybe 2 or 3 cents? But when this piece of paper is backed by a huge military machine, the largest consumer nation in the world and a history of wellness, it has a value that is perceived to be much larger. But more and more people are aware of whats behind Mr. Wizard of Oz's curtain and are calling his bluff.

My point is, perhaps it is time to stop looking for bubbles....because in the end they are what they are...full of air and not much else...and the bubble machine is getting weaker by the day. Perhaps its time to forget about bubbles and tulips...and get back to the fair trade of what they need and what we need. At least that's something that is both tangible and of intrinsic value.

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