NOT JUST GREECE ....
June Samaras
for Something Worse 185 comments
by: Gregor Macdonald February 06, 2010 | about: USO / UNG / IYE / AKP
/ BBF / EIO / EMI / NNC / BLJ
Gregor Macdonald
The inevitable coming of the sovereign debt panic finally engulfed
Europe this week as the derisively (or perhaps affectionately) named
PIGS spilled their slop on the continent. But Portugal, Ireland,
Greece, and Spain are hardly worthy of so much attention. In truth,
they are little more than the currently favored proxies among the
leveraged speculator community (cough) for the larger problem of all
sovereign debt. Indeed, the credit default swaps on these smaller
European satellite states were not alone this week in making large
moves higher. UK sovereign risk rose strongly, and so did US sovereign
risk. With a downgrade warning from Moody’s to boot.
Notable among three of the PIGS are their relatively small
populations, and small contributions to either world or European GDP.
While Spain has a population over 45 million, Portugal and Greece have
populations roughly equal to a US state, such as Ohio–at around 10
million. And Ireland? The Emerald Isle has a population similar to
Kentucky, at around 4 million. While the PIGS are without question a
problem for Europe, whatever problems they present for Brussels are
easily matched by the looming headache for Washington that’s coming
from large US states such as California, Florida, Illinois, Ohio, and
Michigan.
I’ve identified seven large US states by four criteria that are sure
to cause trouble for Washington’s political class at least for the
next 3 years, through the 2012 elections. These are states with big
populations, very high rates of unemployment, and which have already
had to borrow big to pay unemployment claims. In addition, as a kind
of Gregor.us kicker, I’ve thrown in a fourth criteria to identify
those states that are large net importers of energy. Because the step
change to higher energy prices played, and continues to play, such a
large role in the developed world’s financial crisis it’s instructive
to identify those US states that will struggle for years against the
rising tide of higher energy costs.
First, let’s consider a large state that didn’t make my list. Texas
didn’t make the list because its unemployment rate has not risen high
enough to reach my cutoff: a state must register broad, U-6
underemployment above 15%, and currently Texas has only reached 13.7%
on that measure. Also, Texas’s total energy production nearly
perfectly matches its total energy consumption. Of course, Texas has
indeed had to borrow more than a billion dollars so far to pay
unemployment claims, thus technically bankrupting its unemployment
trust fund. That meets my criteria. But, it’s instructive to note
Texas’ energy production capacity in this regard, as that produces
dollars. And one of the big reasons US states are under so much
pressure, like their European counterparts, is that they cannot print
currency. Being able to produce oil and gas is the next best thing to
printing currency. So, Texas doesn’t make my list.
The seven states to make my list are California, Florida, Illinois,
Ohio, Michigan, North Carolina, and New Jersey. Each has a population
above 8 million people. Each has had to borrow more than a billion
dollars, so far, to pay claims out of their now bankrupt unemployment
insurance fund. Also, each state currently registers broad,
underemployment above 15% as indicated by the U-6 measure for the
States. And finally, each state is a large net importer of either oil,
natural gas, electricity, or all three of these energy sources.
Let’s consider the overall predicament for residents of states like
California, with its epic housing bust, Ohio and Michigan at the end
of the automobile era, or North Carolina and New Jersey in light of
the financial sector’s demise. Not only have states such as these
permanently lost key sectors that once drove their economies, but,
residents in these states are over-exposed to structurally higher
energy costs. The prospect for wage growth in the United States is now
dim. We are already recording year over year wage decreases in real
terms. The culprit? Energy and food costs. My seven states are
squeezed hard at both ends: no wage growth at the top, and no relief
through cheaper energy costs at the bottom.
US wage growth in real terms has been stagnant for years. And the most
recent decade of higher oil prices has been particularly punishing to
states over-leveraged to the automobile like California, Florida, and
North Carolina where highway and road systems dwarf public transport.
While it’s true that states like Ohio and California produce some oil
and gas, the size of their populations overwhelm any production with
outsized demand for electricity and gasoline. In contrast, and as I
mentioned, it will be revealing to see how this depression ultimately
plays out in such states as Colorado, New Mexico, Wyoming, Oklahoma,
North Dakota, and Louisiana which are all net exporters of energy.
Were it not for peak oil, gasoline prices would have fallen to a
dollar during this depression as oil returned to the lows of the late
1990’s–if not even lower. Petrol at 90 cents a gallon would begin to
chip away at the painfully decreasing spread between punk wages and
energy input costs, currently endured by underemployed Americans.
Natural gas and coal prices are also much higher than they were at the
lows of the 1990’s. And I need not remind: while energy prices are
very 2010, the American workforce has lost so many jobs that our labor
force has indeed returned the 1990’s.
21st century energy prices overlaid on a 20th century economy? That’s
no fun at all. The mainstream economics profession, perhaps
unsurprisingly, still does not pay enough attention to the
interweaving of long-term stagnant wage growth, higher energy inputs,
and the resulting credit creation that OECD countries took as the
solution to resolve that squeeze. Given that one out of eight
Americans takes food stamps, a visit to states like Illinois, Florida,
Ohio, and North Carolina would reveal that the difference between 15
dollar oil and 75 dollar oil, and 2 dollar natural gas and 5 dollar
natural gas is large.
My seven states of energy debt represent a full 35% of the total US
population. As with other US states, they face looming policy clashes
between protected state and city workers on one hand, and the growing
ranks of the private economy’s underemployed on the other. The recent
circus at the LA City Council meeting was a nice foreshadowing that
the days of unlimited borrowing by governments–against future growth
based on cheap energy–is coming to an end. Washington can print up
dollars and fund these states for years, if it so chooses. But just as
with the 70 million people in Portugal, Italy, Greece and Spain, the
108 million people in these seven large states are probably facing
even higher levels of unemployment as austerity measures finally slam
into their cashless coffers, and reduce their ability to borrow.
--
June Samaras
2020 Old Station Rd
Streetsville,Ontario
Canada L5M 2V1
Tel : 905-542-1877
E-mail : june.s...@gmail.com