Nice post, CA Pol. Also, I changed the image to a thumbnail - hope you don't mind.

Republicans pride themselves on their ability to understand economic concepts like supply and demand. Yet, we keep hearing that deficets don't matter. Exporting dollars by running twin deficets is going to matter. The only question is how soon.

Great post...thank you and much needed.

Waiting for obligatory rebuttal from our resident supply side believer about how we are in the "sweet spot" as far as the economy goes. I have a hint it is going to have to do with the GDP, ingoring every other factor that has to do with the economy you mentioned. Let's also not forget the fact we are also failing to produce enough jobs to keep pace with just basic population growth ...the past 4 years was a jobless recovery.

China and Japan's policies, propping up their currencies against the natural instincts of the markets (losing money on their investment), have to come home to roost eventually. Bush's policies have accelerated the time frame within which economic equilibrium needs to be restored. Everyone wants to avoid a sudden dollar collapse, so hopefully it will just be a slow and prolonged decline. In the mean time, I'll be invested in Euros.

Our oil consumption has barely budged over the period you noted. But that's all you got right on that one. Where is China's economic growth in your model? Or India's? Their oil consumption is rising, you know. Where's the terror premium from 9/11 and the war on Iraq? Supply-demand is one factor, so you have two factors in the oil itself and the ability to refine it into fuel.

You try to create a link between a falling dollar, inflation and interest rates. Where's the inflation? It's extremely mild. We'll get the CPI tomorrow morning. So lets see how that plays out. My guess is you're wrong. Interest rates are still near historic lows. You can get a 30-yr fixed rate loan for under 6%. Interest rates on the 10-yr treasury is less today than it was last summer.

Emal wants me to mention GDP. It's around 3-4%, which is the target rate by the Fed. We're creating enough jobs to absorb new workers. So the Fed is slowly moving short-term rates up. If we saw huge growth in jobs numbers, the Fed would aggressively move rates up, like they did in 1999-2000. And do you recall what happened shortly thereafter? CRASH. Stocks took a beatin' and we had a recession. Because all booms are followed by busts. Everytime. Who wants a boom? Slow and moderate growth is what's most healthy and sustainable. And that's what we've had for a few years now.

"We are dependent upon oil, and consumption will only decrease as a long-term response to high prices as people gradually trade in their Ford Expeditions for Ford Escape hybrids."

Hmm, no. It will decrease when people stop driving goddamn trucks/SUVs to boost their egos and make rational transportation choices.

muckdog, India and China's oil consumption increase only makes the situation much worse. Since there is a limited supply and production capacity of oil, their demand is increasing the price independent of the drop in dollar, so the situation is really worse than I indicated with respect to oil.

Most of the inflation is yet to come. We've already seen some indications of it. Foreign banks have been trying to prop up the dollar and foreign manufacturers have seen their profit margins drop in an attempt to maintain low prices. That is unsustainable, however. Greenspan was puzzled that the long-term interest rates have dropped even while short-term interest rates have risen, which would tend to indicate irrational investors asking to lose money. Basically, that describes foreign central banks, which have been willing to lose money holding dollars in order to support their countries' manufacturing base.

The recent moderate growth is unsustainable because we have benefited from other countries trying to defeat the fundamental principles of economics. It simply won't work much longer.

Well, lots of people have been predicting higher inflation and interest rates for the past few years, and they've been completely wrong. I'll file your comment in the Broken Clock is Right Twice a Day file. Eventually, someday, probably.

Especially if we see month after month of 250,000 new jobs and a GDP over 5% for awhile. Of course, the Fed would step in and derail that freight train; like they did in 1999-2000.

With regards to oil, I'd love to see us get off the stuff. If we cut our demand from 20 million barrels to 12 million barrels, we could eliminate the Middle East as a source of oil and never send them another greenback. But, we need lots of new nuclear power plants to do that, and I don't see a big push for that. It'd generate electricity and hydrogen for a new fleet of gasoline-free cars.

Perhaps that's an idea you can float to a candidate in 2008. I'd support that candidate regardless of political party, because that's probably the biggest issue this country faces. I think it'd be a popular theme. "Screw the Middle East" bumper stickers and such. That'd get some Red State votes for ya.

One final thought... Higher oil prices are actually deflationary, not inflationary. Because we spend money at the pump, instead of on other stuff. Kind of like a tax increase on people.

muckdog, I agree completely regarding energy. Everybody wins when we wean ourselves of a nonrenewable resource which will soon be in decline, stop supporting the Saudi royal family, and reduce greenhouse gas emissions at the same time. Our future economy depends upon us acting now, and the U.S. economy would benefit from becoming the world leader in energy technology. I think wind is a much more cost effective approach than nuclear, but we're on the same page at least.

By the way, John Kerry's energy platform was very agressive in reducing our dependence on foreign oil and development of alternative technologies.

OK, the dow dropped 174 today, any ideas on how to protect a 401k that doesn't have a treasury bond choice?

muck, thanks for the obligatory rose colored economic forcast. I find it interesting your comments about oil. It appears by those comments you perhaps you are not fond of the middle east...at least I get a hint of displeasure. I also find your promise of finding a candidate that would capitalize on significantly reducing our oil dependency on the mid east as one that would get your vote....hmmm interesting. Does that mean you won't be enlisting anytime soon to go over there and fight in Iraq?

But I must admit I agree with your thoughts about oil and that is refreshing for a change. By the way, the guy you voted for certainly has done nothing signficant to move our nation away from our oil dependency with his policies on energy by either tax cuts or investing heavily via government grants, loans, or a combination of the two in research and design of energy technologies. Quite the opposite, as this one article here points out, Bush's policies reward those who own gas guzzling SUV's and large vehicles more than those who are driving energy efficient cars or hybrids.

link here.

I will remember your comment about the type of candidate that would get your vote,I hope you will too.

Higher oil prices are actually deflationary, not inflationary.

Higher oil prices means higher prices for something we spend alot of our money on... oil. It also means higher prices on anything that needs to be shipped. Ask Jimmy Carter - he'll tell you about the effect of high oil prices.

Yahoo business news reports on the spike in oil prices today:

The dollar's drop was a negative for oil prices, since most major transactions are conducted in dollars, and foreign oil producers must charge more in order to make up for the falling value of the greenback.

That sums it up nicely.

If you were right, we'd have inflation up the wazzoo now, because we've seen oil go from $10 a barrel in the 1998 to $50 now. Yet, inflation is in the low single digits. Long-term interest rates are still in historic lows range. So, I think you need to rethink that one a bit.

I think we're seeing the effect of higher oil prices at the retailers. Money is being spent at the pump, and not at the stores. So merchandise sits on the rack waiting for Presidents Day sales and such. Marked down for clearance.

People are still lined up at the Cheesecake Factory, though. I guess they're willing to go into debt for $8 cheesecake. Can't say I blame them.

Regarding Kerry's alternative energy plans? I don't think wind and solar are the answer. Because the wind doesn't always blow. The sun doesn't always shine. They're just not feasible for our energy needs. Nor are the ocean waves. If we're going to make the next step, it has to be more nuclear power plants. Otherwise, we're always dependent on the fossil fuels.

Emal, Saudi Arabia and OPEC basically declared war on the US in 1973. We've done nothing about it. We've had 30 years to build more nuclear power plants. Nothing has been done. So, here we are. Same song and dance.

Anyhoo, higher oil prices have probably kept the economy from overheating. Keeping us in the sweet spot, Emal!

Wind and solar can be quite reliable in certain locations, like the Dakotas for wind or alot of the western U.S. for solar. Having multiple wind farms in different regions reduces the swings in production. Both are largely dependent upon the development of means of storing energy regardless, as you refer to in regard to hydrogen vehicles. A demonstration hydrogen fueling station has been set up in California using solar panels to produce the hydrogen.

Wind and solar have the big advantage in that they don't produce highly toxic waste which needs to be managed for as long as there is human civilization. Wind is also getting very cheap to produce.

I don't think wind and solar are the answer. Because the wind doesn't always blow. The sun doesn't always shine. So you are a resident expert in this area of technology too, Wow!

Wind is a big issue here in the northeast were I live near the ocean and the summertime gulf stream winds...(it is also where I part ways with my Senator on the issue).

Do you live near a nukyular power plant muck? You really think that is the energy form we should be investing in? I don't think public opinion is going to help you here with developing more of this energy source muck. It's the classic NIMBY, especially in this day and age of terra 24/7, and this is from someone who lives within 20 miles of one, it's an older plant.

The economic balance is very delicate here muck, we are teetering on the brink and it is very precarious. I think the biggest point CA Pol is trying to get at is that we have less control over what options our government can do to direct our own economic fate here. I certainly am worried in the long term, but you must have loaded up years ago on ExxonMobile Stock. Otherwise you'd be complaining about the 25% increase in home heating and electric bills you have compared to last year, just like millions of seniors and folks who are jobless and on fixed incomes who aren't as lucky as you, and are making a choice everyday whether to pay for their prescription drugs, food, or heat...it's a crisis muck, we are the lucky ones here.

Muck, with combined yearly debt over 1 trillon dollars (just add CA junkies two number above), it stands as 1/11th of our total GDP. Tell me that's not leaking dollars out the wazoo. Also, our publicly held debt (which doesn't even include trade imballance) is at 62.4%, and rapidly growing. (If your wondering where I'm getting these numbers it's strait out of the CIA world factbook .)

OK, you guys know more about this then I do but... Besides what CA pol junkie said about foreign countries buying up our debt (both privately and publicly), could it also be because personal savings in the United States has dropped to 0.2%. Consumption still remains high for this reason (everyones buying like there's no tommarow), but what windfall will we have when people stop buying (which they eventually will), and jobs go away in turn. The debt will still be there, but there will be no publicly held money to dip into. Inflation and stagnations (or even possible bottoming out). I don't know maybe one of you could explain this better then me, but this does not seem like a good senerio.

There's just not enough power in wind or solar to make a big enough difference. The only significant energy options are nuclear, coal, and oil and gas.

So I'll just mark you folks down as pro-oil. Maybe we can put a few windmills on the new oil rigs up in Alaska Wildlife Refuge and the Rocky Mountains so you can at least pretend to be anti-oil.

I guess you couldn't keep you inner troll at bay any longer, muckdog! Here are good reasons to oppose nuclear power (from the Rocky Mountain Institute). Here is more on nuclear folly.

There's just not enough power in wind or solar to make a big enough difference.

Umm, you are quite mistaken. As for wind, here is an analysis showing that Texas can more than meet its electricity needs with wind alone. Here is another study to debunk your misconception:

Good wind areas, which cover 6% of the contiguous U.S. land area, have the potential to supply more than one and a half times the current electricity consumption of the United States.

Solar can essentially make residential homes in much of the U.S. net electricity producers.

Umm, no muck, I am not pro-oil. I think there are many safer ways to reduce our energy dependence here at home as well as a wealth of knowledge and technology that is not being tapped into and geared toward energy research and design. If we need to give big business incentives to invest more heavily into energy research and design sign me up for that too muck. I do think our scientific community has not been tapped and asked to step up to the plate and to help solve these problems with energy dependency. Perhaps it is time they are asked to by our government....kind of like when they are asked to help with the latest creation of bunker busting bombs muck. If we only spent even small fraction of the money we spent on our defense budget on investment in energy research and design...sigh. I do think we can invent our way toward better energy systems and sources, we just need to emphasize/reward it more starting yesterday. I know it will take time.

And by the way, I am leaning toward supporting the windfarm being proposed in Nantucket Sound near my house. It is not a popular stance where I live, but I just think right now, it is the far safer and wiser alternative energy source. For me it certainly trumps risking the lives of our children, my children, our fellow americans over in the Middle East....sigh.

As someone who has a family member in WY, I don't know how popular this is state wide but my cousin has solar panels on his house. He still uses electricity and natural gas but has about a 90% reduction in electricity and gas useage since he put the solar panels in.

Let's see now...if people are spending money at the pump..that means they are not buying other goods and that keeps inflation down and that is a good thing!

That's a new twist to macro-economics.....Muck you seem to swizzle yourself into a pretzel like form whenever you start waxing on about economics.

Look around the Muck doghouse and make a list of things that don't either require a petroleum or carbon based product in the manufacture stage or that doesn't require fossil fuel to be transported. Whether the Commerce Dept or the Fed tell us there is or is not inflation is irrelevant......oil is at the source of many of the products we consume and when the cost of an input quadruples in two years there will be a piper to pay.

Sorry Muck but the administration cannot afford to have interest rates spike as it would start a housing calamity....however my friend, consider this:

The total accumulated debt of the US economy sits around 36 trillion dollars...which is many times the US Gross National Product and this is unsustainable..... especially when rates do pop!

A declining dollar does NOT help the U.S. Like the blog post reads, we EXPORT dollars in exchange for foreign goods. That's a good deal for us, and there will hurt when the godo times stop.

You just have to love it. Bush gave the rich a tax beak and they lost 25% of the value of their wealth due to the falling dollar! Some things make me smile-

No need to wax poetic about the mis-analyses of the mis-administration made by the msitaken muck. Y'all have done great!

I can opt to purchase my electricity from wind-generation. Windpower with natual gas turbine generators for backup. Sweet! All I need now is a clean burning European diesel sedan burning soy oil and I'll have it made.

During the energy crunch of the 1970's we enacted a tax credit for solar heating. One house in a neighborhood near mine took advantege of the credit and the homeowner, who I knew, rarely had to use conventional energy as a backup. This is not surprising here in the mostly sunny Carolinas. In fact, I saw a 60 Minutes report back then that estimated that solar energy would be cost effective as far north as Ohio.

In the 80's the Reaganites promptly got rid of this tax credit. And we are paying the price for this now: Think what a head start on reducing oil imports we could have now 20+ years later if more homeowners had been able to install solar heating.

Wind power has potential too. The TVA whose service area is not too far from me and has done a lot for this region, has this infomation on alternative energy.

phidipides, you make an excellent point. Anyone who is part of the "investor class" should really want a Democrat as president because, as Chairman Dean says, "Republicans can't manage money." Getting an income tax cut is peanuts next to losing your shirt on your retirement.

Of course, it is possible to profit from Republican mismanagement by selling dollars. I invested IRA money in a European stock index fund a month ago, which is up 4.8% in that time, compared to the S&P 500 up 1.0%. After the dollar has sufficiently tanked, I'll cash in my euros and buy lots of dollars.

Mucky's forecasts are predicated on the Great Real Estate Bubble continuing. We don't make anything in the US anymore, so the amount that manufacturing contributes to economic growth keeps declining. The only two engines lugging the economy along right now are real estate (including the associated financing) and government jobs. As soon as the real estate bubble pops and all of the folks working in that industry learn that no other jobs exist, the rest of the economy collapses like a bad souffle. Even government jobs will start to collapse, as we've already seen under Dubya's outstanding stewardship because governments at all levels will start slashing budgets to match declining revenues. The only other option is Greenspan opens the Fed's floodgates, in which case we're looking at a rerun of the German 1920s hyperinflation.

Forbidden! Well at least I can give you the web address-if it doesn't work somethings rotten.
www.tva.gov/greenpowerswitch/wind.html

Remember carbon based energy is nothing but fossels. : )

I don't have the time or energy this late at night but compare the plots of the cost of oil in dollars/bbl with the same plot in euros/bbl. Then plot the dollar vs the euro. all over the same time scale... say going back 5-6 years... that shows your relationship pretty clearly.

The other factor not brought up is 'debt'... debt is floating the GDP growth big time - personal & private debt - but it is unsustainable unless we were borrowing from ourselves (a closed loop system). But we aren't, we are borrowing froma potentially hostile China (latent hostiity lets call it)... in time they will pull the house of cards down around us... not now, no need to do it yet... but on their time frame, not ours.

This whole thing is a cluster fuck of unbelievable proportions... when it unravels, it will be very ugly.

Well, wind and solar are a pipe dream. If it were feasible, we'd be doing it. Heck, we are doing it. It just doesn't make much of a dent. Nuff said.

Solar and wind a pipe dream?

1. Read the links, technnology is changing what is possible.

2. One of the reasons the Reaganites were able to get rid of the solar tax credit was the unusually low oil prices of the 80's. Ironically high fuel prices over time will make alternitive energy even more price competitive then it is now.

Well, you're nuts. It helps about 1-2%. There's not much more we can do with that. I'm not suggesting we don't continue to try and improve technology, but that's the best we can do so far.

In the meantime, we better build more nukyular powwah plants. Or drill more oil. I'd prefer the former, so we can tell the OPECers to go fly a kite.

Facts are a funny thing Muck. Again, read the links. If there is no future in Wind power, then why, as in CA pol's link above does Texas-hardly a state known as a haven for environmentalist wackos-invest real money in it. This is the epitome of energy states Mucky, they know what they're doing!

Yeah, and it'll contribute 1-2% to the national power need. Super. How exciting. Meanwhile, we'll keep sending kids to die in the Middle East cuz lunkheads refuse to address the 98% of our energy needs, and build nuke plants.

http://www.windenergyaction.org/facts/">link

Here is more infomation that proves that wind power has the potential to provide more than 1 or 2% of the power supply.

Well we have a non-working link but this is worth checking out.

The bankruptcy of America is a done deal.We're living on borrowing from our international friends. When BS turned his back on the UN to attack Iraq, a sovereign foreign nation,(against UN international law established 1945, after WW2 by the way) took on Iraq by himself, plus paid billions of dollars to other nationa like it was candy, it started the downhill run toward bankruptcy (reference book, Target Iraq: by Norman Solomon) It wasn't a need to free the Iraqi people from Saddam. Note,the bombing has freed 130,000 Iraqi civilian people of their lives,plus the cost of American wounded 11,000+ with arms, legs blown off, horrible body burns which on average,10 years rehab. There's a ton of hidden costs,along with known ones; rebuilding Falluja, 73 Blackhawks shot down in 7 months In Iraq in 2003, Halliburton's corruptive,etc. We're worse than broke, folks. Thanks to BS's giving the $$ that was sposed to be to Social Security interest payment, to the top tax bracket people as a tax break, plus farm export imcome, for the first time ever, at ZERO; compounded with the speculators of crude oil, stock market holding the prices up-- who are those people?-we are already on a good slide. American paychecks are chewed up front by price of fuel affecting all basics, and chewed in back by medical and other insurance cost hikes. Our elders have worked hard all their lives but are being cut 2ce,Medicare payments just to stay on it, and not having much covered;most can't afford go to doc, can't afford the prescriptions.Don't forget the truckers;every time gas prices go up, independents go out of bizz. Bush's war might appear to some like he's done something good, til ya realize some truths. Jobs: MN NWA laying off over 600 mechanics,July 05 , along with the 100+ layed off in Jan.2005. Cost of fuel cited.3M closing its plant, off to Mexico,200+ jobs. Why was GM crushing all their 90 mpg hybrid cars in California? Make room for China, India import cars. Around here: 200-400 same-day applications for every job opening.Eh, I'm all emotional, I hate to see America go down. Wind and solar power,helps alot in Minn. There's just too much to say. How's this; name something that Bush has done good for the common working class.

We need to take this country back by getting rid of all these liberal environmental lobbyists as well as government regulations on U.S. made goods. We have the technology now to drill for oil here at home in a clean, environmently friendly way. So lets do it then! To hell with China. Why can't America take care of itself? I don't understand why things are going this way. I remember a time when tvs, appliances, radios, clothing, etc. were made HERE. The cars we drove
were made HERE. A working family could live on ONE main wage earner. This "globalist thinking,"
"global economy" etc. What's that? Years ago never heard of such talk. Take care of your own. America is so damn dependent these days. If our grandparents who were alive some 50 to 60 years ago could see America today, they would definitely have a discusted feeling deep in their guts as to what happened to this great country. I wish I was around at a time when if you wanted to work, you worked. there were jobs for everyone who wanted one. Goods were made HERE! And the car I would drive would be made of real metal and chrome. It would have a four barrel carborator and an engine that would leave a streak of rubber on the highway when accellerated. There was no EPA. That's the America I wish I could have been a part of.