Friday, February 11, 2011

Oil Imports and Debt Crisis

People, in general, are incredibly bad at math, numbers, and scale.


Numbers, Inflation, Scale

The ancient Sumerians used a Sexagesimal numbering system, from whence most of us get our counting systems for things like clocks (60 minutes, seconds) and degrees (360° (6×60) in a circle).  This was most likely helpful in calculating fractions, but I ponder whether it represents some human limit of scale.

If I were to ask someone what they were doing 60 seconds ago, I could get an answer pretty quickly.  If I asked what they were doing 3600 seconds ago I would get a blank stare for a few seconds, until they realized that that's only an hour ago, and then I'd get an answer pretty quickly.  Somewhere between 60 and 3600 lies a comprehension boundary - our minds simply can't handle that level of scale.

Given that, what is the likelihood that we can understand a number like one million?  It's really pretty low.  As fast as you can answer, what were you doing one million seconds ago?  Is that a month?  A year?  How about one billion seconds ago?

Numbers like "million" and "billion" have no meaning because they are literally incomprehensible to us.  One million seconds was about 11 days ago; one billion seconds is about 32 years.  Notice that I didn't say 11,500 days, nor did I say 2 weeks and 1,653 weeks ... quickly: About how many years is 1,653 weeks?)

The decimal system lets out throw out these numbers without doing divisions by 7 or 60 quite easily, but that doesn't mean we truly understand them or that the issue is limited to measurements of time.  See the video link for a simple demonstration much better than I can describe.

Now, what does this have to do with inflation?  Inflation is bad for many reasons.  It's the fairest of the flat taxes - a simple devaluing of purchasing power.  Yes, it's a tax paid to bankers, but they only take 6% and pass the rest on to the Treasury (here in the U.S.)

But the insidious part is that they make all the numbers bigger, and by extension, less comprehensible.


Deficits, Interest, Money

So - the deficit this year is estimated to be 1.56 trillion dollars, a bit above our legal debt limit of 1.4 trillion dollars.  (Quickly: what does one trillion dollars look like?) Well, what is a deficit? Quite simply, that's how much more we will spend than we earned.  Or: that's how much we had borrow so far this year (the U.S. fiscal year ends in September so this isn't all from January.)

That's a lot of cash.  The debt -- how much we owe in total -- is about 5 times larger.  And each year it increases by that year's deficit.  Taking a quick look at the 2010 budget we see that interest on the debt was $150 billion.  Income taxes brought in about $1 trillion (I'm using round numbers in the most optimistic way).  That means that for each dollar you paid in income taxes, 15 cents went to pay interest.

Except that this isn't paid to the bank (well, it is, now that the Fed is buying treasuries, taking 6%, and then giving the rest back to the treasury department), but also to other nations, like China, who now hold more U.S. debt than any other nation - about 20%.  So for every dollar you pay in taxes, 3 cents goes directly to China just for holding our debt.

3 cents -- 3%.  That's the same amount that everyone was an in uproar about when Obama wanted to raise the tax rates on people earning over $250,000 a year - from 33% to 36% and from 35% to 39.6%.  And that's only on the amounts over $250,000.

If you look at the projections things start to look pretty grim.  I'm going to gloss over some stuff here, but suffice it to say that the Federal Reserve is pursuing inflationary policy in order to sustain housing prices.  Loss of housing value means foreclosures which means bank losses which means minimum capital reserve requirements failures which means loss of bank credit which means loss of dollars which means deflation which means more defaults (because money literally becomes scarce - similar in effect but different to the liquidity crisis) which eventually means the end of the world monetary system as we know it.  While that would probably not be a bad thing, it would be very painful and lots of politicians and bankers would likely lose their jobs so don't expect to see that any time soon.

So the first item of business is to tackle the deficit.  People like to call this "get spending under control".  This is said out or either ignorance or irresponsibility.  In short, the problem is that the rent is too damn high, and anyone supporting the elimination of social security or medicare will not get reĆ«lected.  People who want to cut defense spending tend to find themselves in the same boat.


Spending, Oil, Retirement

Listen: the problems are fairly simple.  Yes, we need to cut spending.  That appears to mean that we also need to stop electing people who call themselves conservative republicans.  We're sending money to "hostile" nations in exchange for oil.  We need to end this dependence, but today we can't.  The economics of it don't work because oil is still cheap.  We cannot spend ("invest") more money in this battle as a nation -- because we don't have any.

So what do we do?  We impose a constitutionally-allowed tariff on all imported oil.

Today, oil trades around $90 per barrel. We can impose a $1 per barrel tariff on all imported oil.  Domestic producers win because they can charge more for their goods.  The higher price allows renewables to be more cost competitive.  Supply and demand dictates that usage wanes, so we can forgo all the cap-and-trade and carbon tax talk.  Efficiencies will increase, mostly because they always do, but now there's additional incentive.  And the revenue can pay down the deficit.

... or can it?

We hear a lot about imported oil, and we do import a lot: somewhere in the neighborhood of 10 million barrels a day in fact.  (Quickly: How much is 10 million barrels?  Google tells me that it converts into about 1.5 million cubic meters, but how big is 1 million cubic meters?)  Good - we can bring in $10 million a day.  That's a big number.

It's ... $3.5 billion a year.  A bit shy of our $1.5 trillion goal.  We'll have to increase that tariff from $1 per barrel to about $500 per barrel.  Do you think Americans would change anything if gas and fuel oil went from $3 per gallon to $15 per gallon?

But the best part of this news is that this is just to eliminate the deficit - to balance the budget.  Once we've done that we have to start to figure out how to pay off the other $14 trillion in existing debt.  That assumes, of course, that we don't elect any more conservative republicans and that none of the Baby Boomers retire.

But, in reality, how much additional federal spending would 76 million retirees actually add?

I can't imagine.  How about you?