Move over and make room for China in the oil market.

Jan. 28 (Bloomberg) -- Saudi Arabian Oil Co., the world’s biggest crude producer, is exporting about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said.

“We are already exporting more to China than to the U.S.,” he said today in an interview in Davos, Switzerland. “We are prudent and careful about where to invest but our eyes are focused on China and we will continue to look for all opportunities.”

China's growing buying power means it is displacing the United States as oil buyer on the international market. The day will come when China becomes top oil importer. US oil imports will decline sharply because we won't be able to afford to buy at the prices China will be able to afford. The US runs a big trade deficit. China runs a trade surplus. The Chinese economy has been growing faster than the US economy for decades and will continue to do so (leaving aside periods of possible deep recessions in China).

US energy policy ought to be aimed at reducing our need for oil. We ought to shift to pluggable hybrids and pure electric cars for most transportation uses. We can afford to generate as much electricity as we need at prices not much higher than we are paying today. Electric power from nukes and wind can keep our cars and trains moving.

Republican war hawk Obama continues the military adventure spending of his war hawk predecessor.

WASHINGTON, Feb 1 (Reuters) - U.S. President Barack Obama on Monday proposed another two years of hefty spending in Iraq and Afghanistan, seeking Congress' approval for about $160 billion this year and again in fiscal 2011 to pay war costs.

Obama's big restraint has been to cut back from fellow Republican war hawk Bush's $185 billion for 2008 and $171 billion for 2007.

If you are in the war hawk camp you can relax. Don't worry. Even a $1.6 trillion deficit doesn't provide enough pressure to make a substantial reduction in US military interventions.

The US is overextended in many ways. We have an unsustainable budget deficit, an unsustainable trade deficit, and large unfunded liabilities for old age benefits. Ultimately health care costs will rein in military spending and Peak Oil will force big cuts in health care. But the party continues for now.

If investors stop buying Greek, Portuguese, or Spanish bonds then another financial contagion panic might be in the cards.

LONDON -- Governments in Athens, Madrid and Lisbon struggled on Friday to quell fears of a looming debt crisis in Europe that is pummeling the euro and rippling across global markets, as authorities vowed to impose fiscal austerity and plug their yawning budget deficits. The problem, however, is that investors don't appear to believe them.

On the one hand the French and German governments do not want a Greek loan default and probably will intervene to prevent it. On the other hand, they are reluctant to intervene and take pressure off the Greek government to cut spending and/or increase taxes. So we get to watch a game of chicken between Greece, France. Germany, and bond investors. Who will blink first?

What, me worry? Why are the markets getting worked up when Greece should be able to avoid bankruptcy for several months yet?

Senior officials at the major rating agencies on Friday played down the risk of an immediate debt crisis, saying even nations such as Greece have enough reserves to put off for months a day of financial reckoning.

Greece shows Americans our future.

With debt piling up to 113% of the economy, investors fear Greece won't pay its debts, in the form of government bonds — or will need a lifeline from other EU countries to meet its 54 billion euro ($74 billion) borrowing needs this year.

In spite of a long distinguished history of economic mismanagement continuing to this day Italy has failed to get the markets to take its rickety finances as seriously as those of Greece and Portugal. It seems unfair somehow. What do the Italians need to do to get attention?

Economy Minister Giulio Tremonti likes to remind Italy that it has "the third highest public debt in the world without having the world's third biggest economy".

Portugal, Italy, Greece, and Spain are now referred to in some financial circles as PIGS. The PIGS financial crisis. But not all analysts see their fates as so tightly bound together. What about contagion? Goldman Sachs says Greece stands above all others in financial recklessness. Ireland, Spain, Portugal, and Italy do not warrant the same degree of attention.

Ireland has made a “solid start” to consolidating its finances, Spain’s plans are “realistic and credible,” Portugal’s 2010 budget is “a beginning,” and Italy has “stronger balance sheets,” Nielsen said.

But Nouriel Roubini thinks Spain is still a competitor in the race to cause another financial crisis.

Spain has relatively low debt, but high unemployment and weak banks, and after the bursting of the housing bubble it can no longer rely on construction and inflated asset prices to propel growth.

These aspects, together with the larger size of the Spanish economy, had led Nouriel Roubini, a professor at New York University, to suggest this week that Spain is a bigger threat to the euro zone than Greece.

Writing in the New York Times Gretchen Morgenson assures us there's no way a financial contagion will spread off-planet. Your investments in asteroid mining operations and private sector Mars penal colonies are safe.

YOU know we’re in trouble when we’re told that the economic problems in Greece, Portugal and Spain, the most indebted countries in the euro zone, are likely to remain safely contained in those nations.

After all, we heard the same nonsense in 2007 from United States financial leaders talking about the subprime mortgage mess. Both Ben S. Bernanke, the chairman of the Federal Reserve Board, and Henry M. Paulson Jr., then the Treasury secretary, rolled out to reassure concerned investors that troubles in mortgage land wouldn’t permeate the rest of the economy.

As we all now know, mortgage woes were contained — to planet Earth. And so it may be with overleveraged nations in Europe.

Morgenson makes a number of good points about the failures of US policy makers in handling mortgages. I agree with her. The US government doesn't want to own up to the scale of the needed debt liquidation.

Okay, I know the little boy cried wolf lots of times over the years and the wolf never came. But, hey, isn't there a later point in the story where the wolf finally shows up? The US government is yet another dubious borrower.

"Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in [President Obama's Feb. 1 budget] will at some point put pressure on the AAA-government bond rating," Moody's said in a report Tuesday.

The debt trajectory isn't sustainable.

"The debt trajectory is clearly continuously upward if further measures are not implemented," Mr. Hess said.

I do not want to live thru hyperinflation or a depression. But we seem on course for some kind of economic disaster.

For the next 10 years the US Congressional Budget Office expects 2014 to be the best year with a $475 billion deficit. CBO expects the deficit to grow worse after 2020.

For the shorter-term, the CBO sees deficits of $980 billion in FY'11, $650 billion in FY'12, $539 billion in FY'13, and $475 billion in FY'14 and $480 billion in FY'15.

Looking further forward, the CBO sees deficits of $521 billion in FY'16, $525 billion in FY'17, $542 billion in FY'18, $649 billion in FY'19, and $687 billion in FY'20.

You might think that surely the US government won't let total government debt reach 100+% of the GDP. But I would have thought 10 years ago that the current debt and deficit levels would be politically impossible. Yet here we are with Obama and Congress trying to create massive new spending on health care on top of the Medicare drug benefit that George W. Bush and Congress put into place on an already financially rickety medical program.

If your retirement planning for the 2020s or 2030s includes government funding of a large part of your retirement and almost all your health care costs then think again. Expect higher taxes even in your retirement and means testing of more benefits. Also expect higher age requirements for retirement. You will work longer and pay more taxes.

Silicon Valley peaked in 2000.

Santa Clara County and neighboring communities had 544,387 high-tech jobs in 2000. By 2004, that number had dropped more than 25 percent to 403,994. Silicon Valley bounced back over the next four years, bringing the number of high-tech jobs in 2008 to 435,958. That number, though, was still more than 19 percent below the total in 2000.

The average annual tech wage in year 2000 dollars was $120,064. That dropped 15.8 percent to $101,057 in 2004, then climbed back only slightly to $103,850 in 2008, down 13.5 percent from 2000.

The Valley has a lot of energy start-ups. But even if some of them take off I expect their photovoltaics plants and battery plants will get built elsewhere and most of the engineers for those companies will eventually work at other locations where labor costs, housing costs, and taxes are lower.

Jobs are being moved out of the Valley in order to lower costs.

Amar Mann, a regional economist for the B.L.S. who is based in San Francisco, said that in 2008 — even before the recession hit bottom — there were 108,000, or 19.9 percent, fewer high-tech jobs in the Bay Area than in 2000, when the bubble reached its peak. During that same period, inflation-adjusted average incomes fell by 13.5 percent in the Valley, while high-tech workers elsewhere in the country enjoyed a 1.3 percent gain.

In the course of his research, Mr. Mann said, he encountered a recurring theme: High-tech companies, looking to cut costs, moved out of the region. That said, he added, the outflow of companies and jobs is difficult to quantify.

The very communications technology revolution that Silicon Valley did so much to foster has enabled shipment of jobs and tasks abroad. Software developers and engineers can collaborate on the same problem across time zones. Technical support personnel do not need to be in the same location as product developers. Email, virtual private networks, and internet web sites enable information to flow outside of small geographical areas. The Valley has a harder time maintaining any sort of sustained advantage in knowledge and ability.

Given the high costs of coastal California the US needs another place with sustainably lower costs to become the entrepreneurial and venture capital center.

A Congressional source told Reuters that the White House expects a new record one year deficit for 2010. $1.6 trillion in the red. Is that cool or what? I love it when humans strive to achieve what has never been done before.

Bill Gross of Pimco in his February 2010 column has a ring of fire around a group of industrialzed nations headed for sovereign debt crises. The United States is in that circle and will likely reach the important 90% of GDP sovereign debt threshold that is proposed by another book that I (and apparently Gross) am currently reading: This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff. The book is a look at the history of sovereign financial crises. Reinhart and Rogoff built up a database of history of financial crises over many countries and 800 years. To my knowledge this is the first time a quantitative analysis on this scale has been done for sovereign debt and banking crises. The book is therefore able to offer unique insights into the frequency and triggers for financial crises.

Since the United States had such a financial crisis in 2008 and since its leadership shows no signs of developing an appreciation that we are skating on thin ice I expect we will experience a bigger financial crisis in the next 10 years or so. If the patterns Reinhart and Rogoff found are applicable to the US (and I see no reason to justify exceptionalism - look at 2008 for evidence of our fallibility) then our economic recovery will be slow for several years. Our big debt increase is no surprise to Reinhart and Rogoff:

On average, government debt rises by 86 percent during the three years following a banking crisis. These indirect fiscal consequences are thus an order of magnitude larger than the usual costs of bank bailouts.

Anyone who says "this time is different" is deluded.

Our immersion in the details of crises that have arisen over the past eight centuries and in the data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that "this time is different". That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy.

The book looks at inflation crises, currency crashes, currency debasement (when currencies used real metals and were debased with cheaper metals), the bursting of asset price bubbles, external debt crises, and domestic debt crises. The US has had the asset price bubble. Now it is moving on toward a debt crisis. At best US debt will weigh down the economy so that growth is slow. At worst, a bigger economic contraction could be heading our way.

Over at Secular Right Razib has written a post about Scott Brown's Senate election victory in Massachusetts and Brown's ability to appeal to non-religious voters.

What you see here is that there is no correlation on the state by state level between those with “No Religion” and voting for Republicans or Democrats in 1988, but that by 2008 the proportion with “No Religion” can explain 20% of the variation by 1988. Some of this is just due to the rapid expansion of the proportion of the American population which avows “No Religion”. But the secularization process exhibits geographic patterns; Vermont now has a plural majority for those with “No Religoin,” and perhaps tellingly it is a state which has shifted much further to the Left than the national average since 1988 (it voted for Bush in ‘88, but was a deep blue state by ‘08). Secularization in fact has been most pronounced in northern New England, which has seen a shift toward the Left over the past generation.

What relevance does this have for current politics? 21% of political Independents have “No Religion,” as opposed to 16% of Democrats and 6% of Republicans. The role of Independents in Scott Brown’s recent victory, and in New England in general, is notable. There is no doubt that today the Republican party is defined by its white Protestant core, and this will be the basis for any future Republican majority. But I think Scott Brown’s election shows the importance of demographics outside of the core in creating a viable majority party. Though Brown himself is an Evangelical Calvinist, his campaign did not seem culturally colored in a way that the secular Center-Right might find off-putting. I think this is an important insight, and suggests further analogies between Scott Brown and Barack Obama.* Though Obama does not seem to be personally a particularly religiously devout individual, he managed to appeal to substantial numbers of religious voters through his mastery of rhetoric and presentation. Similarly, though Scott Brown’s personal beliefs are conventionally Christian, his tone and presentation was such as that voters otherwise skeptical of the Religious Right coloring of the modern Republican party found him acceptable.

I think continued development of a split between the two political parties along religious lines is unhealthy for the commonwealth. A cleavage based on religious belief will end up preventing non-religious or only mildly religious candidates from running as Republicans and also prevent deeply religious Democrats from attaining office. That would have the effect of preventing many talented potential candidates from seeking office. I think the election of George W. Bush and also of Barack Obama both demonstrate the costs of using selection criteria that give special preference to candidates due to just one facet of their identity (Christian fundie in Bush's case and racially black in Obama's case) means that needed qualities in a good leader are not met by those who end up winning office.

The Republican Party will do better in elections if it manages to moderate the religious rhetoric of some of its candidates and tries to appeal to agnostics and atheists as well. It will especially do better if it its voters do not enforce a religious litmus test on candidates.

Xinhua bluntly delivers a warning to the United States.

WASHINGTON, Jan. 30 (Xinhua) -- Ignoring repeated solemn representations made by China, the U.S. government on Friday notified Congress of its nearly 6.4 billion-U.S.-dollar arms sale package to Taiwan.

The sale is a wrong decision, which not only undermines China's national security interests and her national unification cause, but also once again hurts the national feelings of the Chinese people.

Moreover, it also will cause serious damage to the overall cooperation and relationship between China and the United States.

Frankly speaking, U.S. arms sales to Taiwan have become a chronic disease that has been disturbing China-U.S. ties for a long period of time.

China's GDP is still less than a third of US levels. But it'll probably be over a half US levels in 5 years or so.

The Washington Post has an interesting article on how this latest episode fits with a recent trend where China's triumphalist attitude is worrying countries around the world. Once China becomes the most powerful country I expect political elites in many countries to look back with nostalgia on the era of American dominance.

China's indignant reaction to the announcement of U.S. plans to sell weapons to Taiwan appears to be in keeping with a new triumphalist attitude from Beijing that is worrying governments and analysts across the globe.

From the Copenhagen climate change conference to Internet freedom to China's border with India, China observers have noticed a tough tone emanating from its government, its representatives and influential analysts from its state-funded think tanks.

Calling in U.S. Ambassador Jon Huntsman on Saturday, Chinese Vice Foreign Minister He Yafei said the United States would be responsible for "serious repercussions" if it did not reverse the decision to sell Taiwan $6.4 billion worth of helicopters, Patriot Advanced Capability-3 missiles, minesweepers and communications gear. The reaction came even though China has known for months about the planned deal, U.S. officials said.

Since Boeing is making some of the weapons for Taiwan this bodes well for future Airbus aircraft sales to China at the expense of Boeing. Though eventually China will stop buying from Western aircraft makers and use mercantilist policies to create a national champion in aircraft manufacture.

US firms are threatened.

WASHINGTON -- China curtailed military exchanges with the United States on Saturday and threatened to sanction U.S. firms in retaliation for proposed American weapon sales to Taiwan.

The moves signaled a souring of relations between the world's two largest economies.

The decline of US power and influence is going to make life more difficult for countries that will fall into China's sphere of influence.

Arnie, still the governor of the fiscally deteriorating state of Calfornia, wants to outsource the imprisonment of illegal alien criminals to cheaper Mexican prisons.

We pay them to build a prison down in Mexico and then we have those undocumented immigrants be down there in a prison and with their prison guards and all this. It will halve the costs to build the prisons and halve the costs to run the prisons. That is money—again, a billion dollars right there—that can go into higher education.

His predecessor Gray Davis made a sweet deal with the union for California state prisons that made salaries and other labor costs for prison guards quite high. So California state prisons are expensive to operate.

This idea can be extended: Deport all the illegal aliens from California to Mexico so their kids can go to cheaper Mexican schools, they can use cheaper Mexican dentists, cheaper doctors, and cheaper police. Time to save money. California is a high cost state and no place for high school drop-outs from groups that continue to perform poorly in later generations.

Arnie is also making greater use of private prisons. He is trying to undo the damage caused by Gray Davis's big raises for the state prison union members.

Without a doubt, the state saves money by using private prisons. A recent state audit estimated that the cost of housing an inmate in private lock-up is between $3,200 and $7,800 less per year than in a state prison.

One reason is that private companies pay guards far less than the state pays prison officers, many of whom earn in excess of $100,000 with overtime and other bonuses. Therein lies perhaps the largest obstacle to any expansion of private prisons.

The California Correctional Peace Officers Association fiercely opposes private prisons, and regularly spends millions on state campaigns.

The union was particularly close to Schwarzenegger's predecessor, Gray Davis. Indeed, the union donated $251,000 to Davis on a single day in 2002, shortly after the Democratic governor signed a labor contract intended to give prison officers pay raises of 37 percent over five years.

Political systems accumulate parasites until crisis forces a cutting back. In California's case it is amazing just how bad the crisis has to get before various forms of parasitism get trimmed back. It isn't even clear that a reduction in parasitism will continue to happen. In the 2010 election the Democrats could win the governorship and gain seats in the legislature. If that happens the parasites will raise taxes.