Should the Fed Continue Printing Money?

Last August Ben Bernanke unofficially announced QE2, known alternately as quantitative easing, seigniorage or laypeople as printing money. The idea behind this was to move to an easier monetary policy stance, and with real interest rates effectively at zero, this was the one monetary policy weapon left. In simple terms, printing money (should) and buying treasuries with this money would raise the expectations for inflation in the future and make investment and consumption more attractive today. This should then leads to GDP expansion and eventually employment creation.

Earlier this week, the President of the St. Louis Fed, James Bullard, gave a speech in which he said both that QE2 has been a success and that it will likely be winding down over the coming months.

“The natural debate now is whether to complete the program, or to taper off to a somewhat lower level of asset purchases. Quantitative easing has been an effective tool, even while the policy rate is near zero. The economic outlook has improved since the program was announced.”

As I have read around the blogosphere, most were against QE2 and would also for certain be against a QE3. The key arguments here were that the Fed is possible fueling an asset price bubble (in both equities and commodities) and that we risk runaway inflation in the long-term. In international relations, many developing countries have spoken strongly against QE2 for a couple of reasons, the main one being the Fed is exporting inflation and bubbles to them as capital flows into their markets; but one also cannot dismiss the fact that some countries (e.g. China) who hold large amounts of US treasuries are not too pleased about their assets being devalued.

I think all these arguments need to be considered and weighed against some of the benefits of QE2. Here are some of the points I think have not been highlighted enough:

1. Some inflation would be desirable, and the current inflation expectations are still not that high. Why would some inflation be desirable? Because it helps net debtors as the real value of their debt payments goes down over time. Since one key factor in increasing consumer spending will be reducing net indebtedness (and surely there is still some housing debt overhang in Middle America depressing consumer spending), then we should see some inflation as positive.

The key indicators of future inflation and inflation expectations all seem to be at reasonable levels. The most recent Cleveland Fed estimates of inflation expectations are only 1.8% (http://www.clevelandfed.org/research/data/inflation_expectations/index.cfm)

2. The Yuan is still overvalued: The Big Mac index (totally scientific) says the Yuan is overvalued by 40%. Not surprisingly 50% of the US Trade Deficit is China. It appears that China has agreed to devalue the Yuan 25-30% over the next three years (http://www.iie.com/realtime/?p=2012), which should certainly help push the trade deficit back in the right direction for the US (and can potentially help create jobs). Further QE is basically a bargaining chip the US has that it can use to make China stick to this commitment of devaluation.

3. We may not be out of the woods yet: economic growth has picked up in the US, but just this morning the Q4 GDP growth estimates were revised down from 3.2% to 2.6%. Combined with unemployment still at nearly 10%, the economy may still be soft.

So should there be a QE3? I don’t think we can rule it out yet. We need to watch how GDP growth, unemployment, inflation and inflation expectations, the trade balance and the Yuan depreciation develop over the coming year.
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Ending Arab Regimes With Facebook Invites

I remember being at Harvard in the basement of Annenberg and watching the war in Iraq begin on FoxNews. It was right before Spring Break and I was sitting there with an Australian guy who I rowed with. This Aussie was particularly opinionated and wasted no time in sharing his opinion with me that that the war was idiotic and would just end in disaster. He was with his roommate Mark who I barely knew and would only meet once or twice after that. We watched the footage for a while and then left to get lunch.

In March of 2003, America began its quest to bring democracy to the Middle East and would over the next several years spend hundreds of billions of dollars to that effect. Since those first bombs went off in Baghdad, countless people have dedicated their careers and lost their lives trying to bring about this vision of a free and representative mode of governing in these countries that have forever been ruled by autocrats. This has largely been to no avail. It is hard to force democracy on people. They need to want it themselves.

Over the last two months, something changed. The entire Middle East has woken up to the idea of democracy. For the first time the masses were able to effectively organize and express their desire for it in a way they had not before. This turn away from autocracy was made possible not by the bombs I was watching on screen that March day in 2003. It was made possible by my Australian friend’s roommate. The unassuming awkward kid with a hoodie. He gave them the fire that let them burn their regimes down and he never even left his room to do so.

While America was spending billions of dollars trying to change the Middle East through shock and awe, that kid in the hoodie was with a team of other people quietly developing a website that would more than anything else effect the end politics of those countries we were so desperately trying to change by conventional means. They did it with barely any working capital and very minimal expenses. It would take a few years but over time we would all know the name of the website and the name of the kid in the hoodie.

What we probably don’t fully appreciate though are the wide ranging series of cause and effect that his actions have helped bring about. When the history of this period of unrest is written, it will be said that Mubarak and the other despots fell not because of international pressure but because some of their own people took 30 seconds to put together a Facebook invite and were able to organize themselves in ways never thought possible through this new tool. A tool that was created by a kid in a hoodie.

…………

At the dawn of the new millennium A&E ran a special trying to identify the most influential people of the last millennium. For their number one pick, they didn’t choose Napoleon or Hitler or any of the famous political leaders and despots who conquered great territories and started wars. Neither did they pick the great artists like Shakespeare or Picasso who shaped the way we speak and perceive beauty. They picked a quiet man who died unknown in an obscure part of Germany. This man was not a religious figure although what he did would certainly affect world religions and lead to great upheaval. He was not a scientific figure although again his actions would have great effects on how that world developed.

His name was Johannes Guttenberg and he spent his life quietly laboring to develop a successful movable printing type. He successfully did it, although he never got the adulation he deserved in his life time. Neither did he make any money off of it. He died broke. No one even painted a picture of him until 100 years after the fact. Yet without Guttenberg, you have no printing press, and without the printing press, you have no Reformation and therefore no Enlightenment and no Industrial Revolution and everything that came after. Perhaps it would have all happened in due time but Guttenberg’s invention like Facebook helped dramatically speed up the process.

Who knows how Facebook will be viewed a hundred years from now. The fact of the matter is though that anonymous kid in Annenberg would change the Middle East in more profound ways than any of the bombs we were watching on television that day.  

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The Man Who Would Be King (If Obama Lets Him)

It has been said that without George W. Bush, Obama would not have been president. There is some truth to that. Had the Bush presidency not gone up in such spectacular flames and had the mood of the country not been so dire it is hard to imagine that Americans would have gravitated the way they did to the message of a young, single term African American Senator.

 A good portion of Obama’s appeal was that he was in many ways the opposite of Bush. Where as Bush was relatively short, Obama was relatively tall. Bush had a father, a famous one, Obama only met his twice. Bush went to schools that had scholarships named after his family, Obama was the one getting those scholarships. Bush had trouble speaking, Obama could always speak.  And then there is the obvious racial difference which underscored the entire campaign.

Democrats were smart in 2008. They knew that the country didn’t just want someone who was the political opposite of Bush but someone who was the opposite in every single way. They had learned from their mistake in 2004 in running John Kerry who was politically opposite from Bush but in every other way cut from the same patrician cloth.

American politics has always been like this. We tend to elect president’s who are not only political opposites of their predecessors but also the opposites in terms of personality and character. It is almost as if Presidents are not so much self-made as they are children begat by the previous President leaving office.

 Do you think a nice, well meaning naïve peanut farmer would have ever been elected President if Americans were not reeling from the Nixon Years and were yearning for someone who was distinctly outside the beltway? Nixon gave birth to Carter. After a few years of the nice but weak, slightly depressing Carter, we were ready for someone who could start carrying the country confidently again. Carter in turn begot Reagan. And so on.

The guys who are able to defeat the incumbent president or party do so because they represent not only an ideological turn but a turn in personality and character. Youthful, dynamic Clinton over stogy Bush I. Religious and moral Bush II over the too slick for his own good Clinton. I know Bush technically ran against Gore but he was really running against Clinton just as Obama was really running against Bush and not McCain.

Now, what does this mean for the 2012 cycle? It means that the Republicans if they are smart will find someone who is in every way the opposite of Obama. Being the incumbent, Obama will have all sorts of advantages going into the election. If they run someone who doesn’t represent a complete break from Obama, both in his or her approach to governing and his or her personality then Americans will go with what they know. Can we go through a process of elimination find the perfect candidate for this 2012 election cycle?

Obama’s experience is limited so the Republicans will need someone who has lots of government and private sector experience –eliminate Sarah Palin.

Obama is young, boyish so the Republicans will need someone who is older, more adult like –eliminate Tim Pawlenty, Bobby Jindal.

Obama is very telegenic and charismatic so the Republicans will need someone who seems more plainspoken and down to earth – eliminate Mitt Romney.

Obama is too over exposed and the media is too saturated with him so the Republicans will need someone who is relatively unknown and not trying to constantly grab face time – eliminate Mike Huckabee and eliminate Sarah Palin again.

So who are we left with after this process of elimination? Who is the anti-Obama? The answer is….

This guy…Mitch Daniels, the Governor of Indiana.

You’ve probably  never heard of him. Let me just give you a quick summary. Mitch Daniels is a short, quiet, not particularly charismatic, plain spoken down to earth Midwesterner who has loads of government and private sector experience and more than anyone else fully grasps the fiscal issues this country is faced with. Hearing him speak reminds you that adults still do exist in this country. He is already building some support and momentum going into this cycle. It still is unclear if he will run or not but a lot of smart people within the party would like him to.

More on Daniels at a later point. …

$5 gas, coming to a pump near you

Back in the spring of 2008, oil prices hit the $80 range, climbing on a seemingly endless ascent from $15/barrel in 2002 (it’s hard to even imagine oil at $15/barrel now!). At the time, I was leading the energy demand research work at the McKinsey Global Institute and I started getting quite a few emails from partners around McKinsey who wanted to know if the oil price was ever going to stop going up. Had peak supply actually arrived? We decided to kick off a piece of research on short-term demand (paired with some work on supply) and how it would be affected by higher prices.

What we found may seem a bit obvious: like any other demand for any other good, oil demand reacts to price, at least in pockets. One major area of demand reaction is intuitive – people just reduce their demand for oil intensive goods, namely driving and flying. This reaction tends to happen more where the price signals are stronger. In Europe, gasoline and diesel have been highly taxed since the oil shocks of the 1970s, so the demand that’s left is a lot more resilient to price increases. If you are already paying 5 quid per gallon of petrol, 6 quid probably doesn’t seem like that different. Going from $2.50 to $4 per gallon in the US stings a lot more, because driving as an activity spans income levels. In 2008, the dollar was weakening in currency markets and oil (priced in dollars) and the dollar developed in inverse relationship, meaning that the countries that were really feeling the bulk of oil price increases where the US and any currency pegged to the dollar. Stated another way, the price for oil, which is sold in dollars, was not going up as much in other currencies. So the US was really going to feel this shock harder than other countries. (Indeed if you look at the reductions in driving in the US in 2007/08, this was actually happening). The other way that demand decreases is through a secondary income effect. Basically oil is more of a necessity than other goods and services, people can decrease demand to a certain extent, but they also have to spend more of their income on the necessary usage and reduce expenditures in other areas. Simply stated, US consumers needed to pay more money to oil exporting countries and spend less money on other goods. On an overall basis, higher oil prices dampen economic growth globally, and as a secondary effect this reduces oil demand and helps alleviate price pressure. Given that oil prices had been rising since 2002, many argued that this price reaction – both the direct price effect and indirect income impact – should have happened much earlier. But in fact, other income effects were helping support demand, namely the easy credit situation in the US. We concluded that the demand impact of high prices would come as soon as credit growth slowed down.

Our overall conclusion was that ~$150 a barrel oil over a period of 6-12 months, would create enough demand reaction to foment the price increases and probably reverse them temporarily (there was likely to be some overshooting in demand reduction). We never really got to find out if our analysis was right or not, because although oil did reach nearly $150/barrel that summer, as we all know in October 2008 something else brought oil prices back down to earth.

Our second conclusion from the study was perhaps a bit more frightening – that after the recession ended, oil demand was going to pick up its rate of growth again and that supply was not going to be able to keep up. We reached this conclusion through very careful bottom-up projection of all the components of oil demand, like the number of air trips in China, how many electric vehicles would be on the road in 2020 and how many refrigerators in India would get power from oil-based electricity plants. Based on this analysis, we published in 2009 that a supply/demand imbalance like we saw in 2008 was likely to happen again somewhere between 2012-2014, depending on how deep the recession was and thus how fast demand recovered. Demand is on a faster recovery pace than we had predicted even in our most optimistic scenario; according to the IEA’s statistics, 2010 oil demand jumped 2.8 million barrels per day, which was a huge jump (albeit following declines in demand due to the recession), and prices are quickly following suit. (http://omrpublic.iea.org/currentissues/high.pdf)

$100 a barrel, may seem expensive, especially when we are in the middle of the worst post-war recession. The current uptick in prices also rooted in the political turmoil in the middle East, and thus oil price may also subside in the short-term. But with demand on its current pace we shouldn’t think any relief we get is permanent. It looks like in the next year or two, we may get another real-world experiment to see if our theories about price elasticity of oil in the short-term were right.

If we were right, the US is in for a bugger of a time. One can easily imagine a double dip recession, with US consumers feeling twice the oil price pain due to a likely to be declining dollar (remember oil is priced in dollars) and our addiction to gasoline…

Ken Jennings and Singularity

Just this past week, we saw an IBM computer beat Ken Jennings on Jeopardy. Over a decade ago, an IBM computer bested Gary Kasparov at chess. Each time artificial intelligence triumphs in a realm that we once thought was the unique purvey of human intelligence – the media will celebrate, the pundits will ponder the long term implications and then a week later we forget. In the short term noise and non-sense of our modern world, we lose sight of the continuing onward and upward march of these computing machines that are getting much faster and smarter every day.

Singularity is not a new concept. It was actually coined in the 1960s but it has of late been getting a lot of press. Time magazine just recently did a large write up on it – here (http://www.time.com/time/health/article/0,8599,2048138,00.html) – focusing on Raymond Kurzweil’s work on the subject matter. For those of you unfamiliar, singularity is the concept/idea/belief that at some hypothetical point in the future, the capabilities of artificial computer intelligence will surpass those of human intelligence. If entities of artificial intelligence come into being which surpass their creators then the logical consequence of this is that humans might no longer be able to model/control their own destiny.

If this sounds like the plot of science fiction movie, that is because it basically is. Countless movies have played on this subject – usually to a dystopian effect. However, this notion of artificial intelligence eventually surpassing human intelligence is not science fiction any more. It is real and may happen sooner than we think. Not only are computing speeds increasing at faster rates but the rate of that increase is increasing as well.  If you are to believe the protagonist of the Time Magazine article, Raymond Kurzweil, then singularity will be approached in the year 2045 which is a year well within many of our lifetimes. When that happens, all bets are off according to Kurzweil.

See once, computers actually become smarter than us they would start becoming infinitely smarter than us. In other words, they wouldn’t just surpass as by a little they would make exponential leaps ahead of us. The logic here is that if you create a machine whose intelligence surpasses human intelligence then that machine could design an even more capable machine which in turn could design one that has further capabilities. Once you reach that point where the created entity is smarter than the creator entity than the rate of improvement becomes just a straight line upward, with each iteration accelerating on the one prior in a more powerful and instantaneous way.

So what happens when we are living in a world of super intelligent computers that sustain their own development? The positive take, after all we are developing these machines for a reason, is that these entities help us solve bigger and more complex problems. Take something like global warming. Imagine if you had a search engine that didn’t just tell you what global warming was but one that told you exactly step by step how to solve it through building some sort of carbon contraption technology and then could in turn develop the robots that would build this technology. If you had effectively infinite intelligence then you could overcome any engineering, political or socio-economic problem. Given the drastic increase in population that will occur this century, we will have plenty of those sorts of large scale problems that will require more than just normal human intelligence. Artificial intelligence will probably be needed to even greater degrees to just help ensure that mankind does not self-combust.

There is an alternative view though – The Matrix/Terminator school of thought if you will. That is that these entities will eventually seek to take over the world and end human existence. Initially, that seems unlikely. I imagine that once people start actually creating artificial intelligence that is mobile and exists outside of a computer box they will be programmed with laws that ensure that they do not kill humans. However, imagine if we got a point where robots could create other robots. Then what would happen?

Then the answer is evolution. If you had replication, it likely wouldn’t be perfect replication. You would get some degree of “genetic diversity” among the AI machines. There would be a selection bias towards some AI machines and not others. I imagine that over time, those artificial intelligence machines that had a “will to live” that is the ones that were not indifferent to whether or not they were shut down would probably survive at higher rates of frequency than the ones that were indifferent to this. Once you had machines that were not indifferent to whether they were shut down then you have a question of what happens when that will to live on the part of the AI machine comes up against the will to live of human populations?

I don’t know the answer to this question and we likely won’t have to really ask it for another few decades. What concerns me though is whether we will ask it in time. Will we develop a clear approach as to what we ultimately want and don’t want out of computers? Would we ever let computing development take on a life of its own in order…

The Shrinking International Monetary Fund

The populist criticism of the International Monetary Fund always ran something like this: since power at the IMF is apportioned based on monetary contribution to the Fund, the IMF will tend to act in ways that further the interests of its wealthy contributors, and in many cases the IMF will proffer policies that are against the interests of less wealthy countries that seek its assistance.

Extreme versions of this criticism note the fact that the rich countries who are the heaviest contributors to the Fund are prodigious consumers of natural resources, while the poorer boom-and-bust countries that occasionally seek IMF assistance tend to be producers of natural resources. They then argue that the IMF serves the wealthy countries by effectively “keeping down” countries which produce natural resources such that those countries will supply their resources to the rich countries at low cost. A side benefit is that the poor countries never gain enough wealth to compete much on the resource consumption side.

The problem with these criticisms is that no one has to accept IMF assistance or involvement, so in theory it is just an additional option provided to countries in need. Further, at the time of construction, the IMF was envisioned as an organization that would facilitate rich countries lending to one another, not rich countries lending to poor countries.

As we accept $1.4 trillion deficits in the US in perpetuity, we should reflect on the fact that the US response to its recent financial crisis has run directly counter to the response that the IMF would have pushed, should the US have been just another nation seeking its assistance. The IMF is strongly orthodox in its policy recommendations — it places a very high premium on movement towards sustainable government budgets and current accounts, even when that means substantial pain (in terms employment, equity values, and real estate values) in the short-term.

Most economists today would probably agree that the IMF has tended to strongly towards orthodoxy in its past recommendations, and, at any rate, comparing the US to other counties who’ve sought US assistance is an apple-to-oranges comparison, as the US is a fiat currency issuer that borrows in its own currency.

One area, however, where US policy has clearly been in conflict with past prescriptions from the IMF is policy regarding the banking sector. IMF policy here has always been: develop transparency as quickly as possible, shut down insolvent banks, put the bad assets obtained from the insolvent banks into private hands as quickly as possible. This was essentially the policy employed by the US after the savings and loan crisis.

It’s worth quoting Paul Blustein’s “The Chastening” at length:

Shortly after the mission arrived in Bangkok in late July 1997, its members were shocked to learn of the extraordinary lengths to which the Thai authorities had been going to keep the system from collapsing. To compensate for the steady withdrawals of deposits from the finance companies and some of the weakest banks, the Bank of Thailand had secretly lent about $20 billion to these institutions, at below-market interest rates. Those loans, moreover, went well beyond the standard central banking practice of acting as a lender of last resort to healthy financial companies that are suffering runs by panicky depositors. Although a central bank is supposed to lend freely to banks that are temporarily short of cash, the Bank of Thailand was propping up insolvent institutions that were so loss-ridden that they weren’t genuinely viable as business concerns…. The Fund insisted that Thailand must stop the secret bailouts and start shutting down insolvent financial companies. …

The 3d Printing “Revolution”

I have to admit, when I first heard about it,  the idea of 3-d printing it blew my mind.  “Printing” an actual object in 3d, it was hard to wrap my head around when i looked over at my 8 year old laser printer noisily toiling away.  But for about the last 10-years, 3-d printing technologies have continuously been improving their costs, quality and manufacturing.  Currently you can print in a variety of materials including plastic, metal, wax, and acrylic.  There’s even a 3-d printer that prints stuff out of a stack of  office paper. Its like turbo paper mâché!  Nowadays, your dentist might even have a 3-d printer and print your crown out right in his office; cutting the time of production from 2 weeks to 2 hours and 3 office visits to just one.  A company I own, which makes custom bobbleheads, recently purchased and uses a 3-d printer in place of the old fashioned physical sculpting and molding methodology for making the dolls.

The New York Times even ran a big story recently under the headline “3-d Printing is Spurring a Manufacturing Revolution.” (http://www.nytimes.com/2010/09/14/technology/14print.html)  It lists a variety of applications that 3-d printing is being applied to, most customization of items such as important as prostheses, ranging down to the mundane iphone cover. A very compelling argument can be made that Western consumers have grown tired of mass produced goods and they now have the money to pay more for customized products that suit their own needs and tastes.

But is this really going to be a revolution? From the inside looking out, I personally find it very unlikely.  In the first place, there are some short term practical barriers, the first being that printing in 3-d is still very expensive.  Material costs for a 3-d printing plastic can be 20x or more the equivalent traditional resin.  3-d printers are also slow, so printing just a few objects on a 3-d printer can take 5-10 hours.  In general they can only print objects that are small as well, ranging up to something like a breadbox in size.  With machines costing $30,000-$100,000, you are really going to have to value customization to make up for the capital costs on each object printed.   The optimist might say that competition and innovation will overcome these barriers, and given the pace at which 3-d printing has advanced over the last 5 or so years, I would tend to agree with them. If these were the only barriers to the revolution, the revolution might almost be upon us.

More practically speaking though, 3-d printers are in general good at printing solid and hollow objects out of a few general materials.  Take a look around your house and figure out what percentage of the items are made of a single material, with few moving parts and have no electronics and are somewhat small in size.  These are the things that 3-d printing can easily produce. So if a revolution constitutes having a drinking glass shaped like your head, an ashtray in the shape of a rhombus, or even a pair of shoes that look like these (http://fabbaloo.com/blog/2011/1/4/3d-printed-couture-shoes.html), then we may be well on our way.

The truth is, 3-d printing is a somewhat expensive way to offer complete 100% customization of a form.  There are certainly applications where it makes a lot of sense – things like crown-making and prostheses and even custom bobbleheads are perfect examples of where this can be utilized. Probably one of the most promising mass market applications of 3-d printing is anything where customized fit is important and the materials are fairly rigid.  One of the biggest markets for 3-d printing right now is customized hearing aids. It fits the sweet spot of 3-d printing perfectly – high value to complete customization of form (for fit), small size, single material compatibility and a high value object.  There are probably some other applications like this one that are viable, but have not taken off yet.

Overall, the case for using 3-d printing as a basis for mass customization of objects is probably overstated. Even if 3-d printing were able to produce electronic or mechanical items somehow, would you really want to design your own iPod and print it? Most companies that offer mass customization actually generally do so on a modular basis, allowing consumers to build their products from a finite set of option. This in the end is easier for the consumer since for the most part, they are happy to vary their customization on a few dimensions and still consider their purchase to be customized.  Dell is famous for being a trailblazer in mass customization, and I have always heard that in the end a high percentage of consumers end up choosing just a few different configurations, even though the number of customization permutations is practically infinite.  If I had to bet on where a manufacturing revolution would come from, I’d place my money on modular mass customization.

The science fiction like aspect of 3-d printing will continue to attract media attention I think, and I have to admit it’s pretty cool to press print and get an object out of a printer a few hours later.  I’ve even started reading a 3-d printing blog recently called Fabbaloo, and I’ve come to find that there is a whole movement…

Las Vegas in Crisis?

http://www.economist.com/node/17800101?story_id=17800101

The Economist struck an unusually pessimistic tone in their recent commentary on Las Vegas, titled “Party Over” (pasted below).

I think things will turn out a bit better than they suspect.  I still believe the world’s ending, but I’m very optimistic about the future of vice, and I think this will work in Las Vegas’ favor.

There are a couple of strange macro factors that have had a strongly positive influence on Vegas lately.  First, the casino business in Asia is on fire, and, as a result, the cash flow (and stock prices) of the Western casino companies (especially WYNN and LVS) are far, far better than they otherwise would be.  Las Vegas Sands would likely be bankrupt without the Asian market.

Second, the emphasis of economic policy in the US over the past couple of years has been asset price support (for Treasuries, mortgage securities, home prices, and equities).  The result is that many of the very rich have stayed very rich, after a brief swoon in Fall 2008 and Spring 2009.   As in the Great Depression, the strong downturn that started in 2008 has acted to exacerbate wealth inequality.   The poorest in Las Vegas, as in the rest of the country, are faring terribly, but the exorbitantly priced food/beverage/entertainment sector has held up fairly well.

Nevada ranks with California and Illinois as having some of the worst state government finances in the country.  Nevada actually makes California’s situation worse than it otherwise would be because, during the long real estate boom, hundreds of thousands of wealthy Californians bought homes in Nevada (Nevada has no state income tax) and established residency there to avoid California state income taxes (many of these people continued to live and work in California).

To me, the big question for Las Vegas is whether it holds the fort socially.  Will people feel safe there?  Will they feel that the police are effective?  Will they feel they can get good health care if they need it?  If it can remain socially healthy, I think Las Vegas will whether any economic storm reasonably well.  A decline in social health (a big uptick in crime, for instance) would be destructive for Las Vegas because it would set off a vicious cycle whereby the ratio of thugs to friendly tourists is continuously on the increase.   Las Vegas has always had its deviants, but in good times their numbers are dwarfed by friendly, rich tourists.  If fewer tourists come b/c they feel unsafe or otherwise uncomfortable, the ratio of deviants to tourists increases, causing fewer tourists to come, and so on.

A big question mark for the long future of Las Vegas is oil.  Few cities are hurt more by a big uptick in the price of oil.  Las Vegas is just  the epicenter of waste when it comes to oil (well, not quite the epicenter — that would be the indoor ski slope in Dubai).   Brightly lit, heavily air-conditioned hotels in the middle of the desert; employees living in desert houses driving twenty miles to work; tourists flying in from all over the world — all of it makes for extremely intensive use of oil.  One would think that an oil price of around $130/barrel (the July 08 price) would be deadly for Las Vegas. …