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April 24, 2015

Six minutes and 17 seconds of the all the unique THX "Deep Note" sound system checks that have played before your feature presentation at your local THX-certified movie theater. Time to turn the sound up!

The audience *was* listening. And now, its new all over again - here's the rejuvenated sound:


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April 23, 2015

In March 2015, environmental scientists employed by California Department of Fish and Wildlife published a study examining the impact of diverting surface water to sustain marijuana cultivation upon four northwestern California watersheds. For a state that has been experiencing an extreme drought, the researchers were alarmed to find that marijuana growers were diverting up to 100% of the water flowing in a number of small streams in Humboldt, Mendocino and Trinity Counties during dry periods for the purpose of irrigating their pot farms.

California’s Mediterranean climate provides negligible precipitation during the May—September growing season. In Northern California, 90–95% of precipitation falls between October and April [14]. Marijuana is a high water-use plant [2,15], consuming up to 22.7 liters of water per day. In comparison, the widely cultivated wine grape, also grown throughout much of Northwestern California, uses approximately 12.64 liters of water per day [16]. Given the lack of precipitation during the growing season, marijuana cultivation generally requires a substantial amount of irrigation water. Consequently, MCSs are often situated on land with reliable year-round surface water sources to provide for irrigation throughout the hot, dry summer growing season [7,8,12]. Diverting springs and headwater streams are some of the most common means for MCSs to acquire irrigation water, though the authors have also documented the use of groundwater wells and importing water by truck.

Converting liters to gallons, a single marijuana plant can consume up to 6 gallons per day.

TakePart summarizes the California Department of Fish and Wildlife scientists' research and findings:

They chose four areas, all surrounded by forests, and all with streams containing endangered salmon. The scientists estimated that the growing operations were using between 138,200 and 191,265 gallons of water a day. People in Northern California, for comparison, use an average 172 gallons of water per day per person.

Marijuana growers were taking 100 percent from three of the streams studied and 25 percent of a fourth stream.

Those streams aren’t just picturesque—they’re critical to the survival of the coho and Chinook salmon and steelhead trout.

Doing some more quick math, the estimated cultivation of 23,033 to 31,878 marijuana plants in these regions was consuming the same amount of water per day as somewhere between 803 and 1,112 people. Or rather, 28 plants consume the same amount of water as the average northern Californian.

But that's just that small region. To find out how much water is being diverted to grow marijuana in California, we need to know how many plants are being grown throughout the state.

Map - U.S. Outdoor Cannibis Cultivation Areas - Source: http://www.deamuseum.org/ccp/cannabis/production-distribution.html

To determine that, we're going to use the same methodology that was done in a study by the U.S. Department of Justice's National Drug Intelligence Center for its 2010 drug market analysis of the High Intensity Drug Trafficking Area in Central Valley California. Here's how they described it:

California Produced More Outdoor Grown Marijuana in 2009 than Mexico: (Method 1-Seizure Based): Mexico’s 29,025 MT production was eclipsed by California’s cannabis output of 49,105 Metric Tons in 2009. How was the California output computed? To determine the California output potential we used different (published) methods in an attempt to determine the accuracy of these estimations.

First we began with the 2009 DC/SEP actual seizures of outdoor marijuana, 7,365,760 plants which weighed 5,140 MTxii We applied the WDR median percentage (15%) and calculated that 49,104,576 marijuana plants was the production potential for California in 2009. Applying the Gaffney formula to determine metric tonsxiii, this equates to a gross weight of 49,105 MT of marijuana possibly produced in California during 2009.

We found the number of marijuana plants seized by law enforcement in California in 2014 and an estimate of the total crop that was seized compared to previous years in the Washington Post:

The number of marijuana plants seized and destroyed by the Drug Enforcement Administration fell slightly last year and remained sharply lower than the record numbers seen at the dawn of the Obama administration. According to the DEA's records, 4.3 million marijuana plants were destroyed last year, down from 4.4 million the year before and 10.4 million in 2009.

With 2.7 million plants destroyed, California alone contributed 63 percent of the total haul last year. But California's numbers have fallen sharply during the Obama administration, taking the national numbers down with them. "Coinciding largely with the downsizing of, and then ultimately the disbanding of, the state's nearly 30-year-old Campaign Against Marijuana Planting (CAMP) program, DEA-assisted annual marijuana seizures in California have fallen over 60 percent percent since 2010," said Paul Armentano, deputy director of NORML, in an email.

Those numbers give us what we need to estimate the number of marijuana plants grown in California in 2014. Since the number of plants seized by law enforcement has dropped only because of the Obama administration's changes to federal drug enforcement policies, all we need to know is by how much those enforcement efforts have declined. Since those seizures have fallen by 60% from 2009's levels, we just need to multiply 2009's 15% of plants seized figure and to reduce it by 60%. Doing that math:

15%*(100% - 60%) = 6%

We find that law enforcement authorities believe that they seized about 6% of the number of marijuana plants grown in California in 2014. To find the total number of marijuana plants being grown in the state that year, we just need to divide the number of plants seized in 2014 (2.7 million) and divide it by 6%. The result of that math puts the estimated number of marijuana plants currently been grown in California at 45 million.

Outdoor Cannibis Cultivation Area - Source: http://www.deamuseum.org/ccp/cannabis/production-distribution.html

Multiplying those 45 million plants by 6 gallons of water per day puts the total water consumed by pot farmers at 270 million gallons a day - the same amount of water that would be consumed by 1,569,767 northern Californians. With the average time to grow a mature plant being about 105 days (or 3.5 months) long, providing enough time for two full crops per year, that works out to be 56.7 billion gallons a year, which works out to be 174,006 acre feet of water consumed per year.

That puts marijuana cultivation at a little over double California's strawberry crop when it comes to annual water consumption.

California's Annual Agricultural Water Use (In Million Acre Feet) - Source: Slate http://www.slate.com/content/dam/slate/articles/business/moneybox/2015/04/150417_SLATE_Chart_CaliWater02.jpg.CROP.original-original.jpg

From the numbers presented in the chart above, it is pretty clear that marijuana cultivation is a smaller contributor to California's overall water shortage problems compared to other commercial crops, even though it would rank in the top 10 of California's thirstiest crops. However, the irrigation practices of marijuana growers in a number of the state's watersheds is causing considerable ecological damage, as the growers who unlawfully divert any portion of the water flowing in natural streams to irrigate their pot crops during California's dry seasons would appear to be little more than environmental rapists who are facing too few consequences under the Obama administration's politically selective law enforcement policies.

References

Bauer S, Olson J, Cockrill A, van Hattem M, Miller L, et al. (2015) Impacts of Surface Water Diversions for Marijuana Cultivation on Aquatic Habitat in Four Northwestern California Watersheds. PLoS ONE 10(3): e0120016. doi:10.1371/journal.pone.0120016.

Holthaus, Eric. Stop Vilifying Almonds. Slate. [Online Article]. 17 April 2015.

Ingraham, Christopher. Facing budget pressures, the DEA is pulling up less weed. Washington Post Wonkblog. [Online Article]. 24 March 2015.

U.S. Department of Justice. Central Valley California High Intensity Drug Trafficking Area. Marijuana Production in California. [PDF Document]. 4 June 2010.

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April 22, 2015
Stock Market Chaos

We've been working behind the scenes here at Political Calculations on how to visually describe the near-real time health of the private sector of the U.S. economy using what is perhaps its simplest and most powerful indicator: the number of U.S. companies acting to cut their dividends.

Here, we've previously identified that the U.S. economy may be considered to be comparatively healthy when no more than 10 companies take the step of cutting their cash dividend payments to their shareholding investors in a single month. If more than 10 companies take that action during a single month, those collective actions are sufficient to indicate that a significant portion of the private sector of the U.S. economy is experiencing recessionary conditions, where the nation's GDP growth rate may be described as sluggish.

More recently, we've determined whenever the number of companies acting to cut their dividends in a single month rises above the 20-25 per month mark, it is likely that a significant portion of the U.S. economy is in outright contraction, where it is possible that the U.S. economy as a whole may be also be experiencing negative growth. We list the threshold for economic contraction as a range because we don't have enough data as yet to refine where the threshold really falls.

Previously, we've had to wait until the end of a calendar month to get the data for the number of companies that cut their dividends during the month. But we now have data sources that report that kind of information on a daily basis:

We've found that these two sources capture a large percentage of all the dividend declarations each month, with a relatively low level of "false positive" errors in their reporting. In particular, these kinds of errors are something we've seen with the WSJ's Dividend Declarations report, which because it's an automated reporting system, will occasionally trip up when dealing with unusual situations, such as special one-time dividend payments following a merger (see the atypically good comments at Seeking Alpha here for more discussion of a recent example).

Meanwhile, because we're still working out where the threshold between economic expansion and contraction exists where the number of companies acting to cut their dividends is concerned, we want to be able to match that daily dividend reporting up against an entire quarter, which should give us a sense of how the GDP growth rate for a quarter will be reported.

So what we've done is to develop a chart that tracks the cumulative number of dividend cuts announced each day throughout an entire quarter, identifying the various thresholds that correspond to a relatively healthy expansion (green), distressed conditions (yellow) or a relatively unhealthy economic contraction (orange-to-red). Our results comparing the number of dividend cuts in the first quarter of 2015 (2015-Q1) and the second quarter to date (2015-Q2) are presented below:

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2015-Q1 and 2015-Q2, Snapshot on 21 April 2015

At this point of the second quarter of 2015, it is clear that the U.S. economy is experiencing a higher level of distress than at the same point of time during the first quarter. We see that the number of dividend cuts announced through 21 April 2015 is already sufficient to classify the U.S. economy as experiencing contractionary conditions in this first month of 2015-Q2.

We also see that overall, the first three months of 2015 fell well into the contractionary zone, suggesting that the U.S. economy shrank in 2015-Q1. We'll find out if that was indeed the case by the end of June 2015, after the U.S. Bureau of Economic Analysis releases its third estimate of GDP for 2015-Q1. The BEA will release its first estimate of GDP for 2015-Q1 on Wednesday, 29 April 2015 and will revise it in each of the two following months (their release schedule is available here). And perhaps one more time when they perform their annual larger scale revisions spanning multiple quarters over multiple years in July.

We'll periodically update this chart while the number of dividend payments being cut remains at elevated levels.

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April 21, 2015

Since we were discussing Greece in our discussion of the debt capacity of nations in our previous post, we thought this might be an opportune time to update our chart showing the trajectory of the Greek government's spending per capita and its tax revenues per capita against the nation's GDP per capita now that we can update all this data through 2014 with the latest update to the International Monetary Fund's World Economic Outlook.

The results of that data visualization exercise are presented below.

Greece Government Revenues per Capita and Expenditures per Capita vs GDP per Capita, 2000-2014

The most significant observation is that Greece has continued on its contractionary trajectory. Greece's economy has shrunk, causing the Greek government's tax collections to shrink, which has forced it to shrink its spending. In fact, in 2014, Greece's economy has basically returned to where it was a decade earlier, but with a higher level of spending and tax collections as compared to 2004.

It's important to note that these things are all interconnected. Previous Greek government administrations implemented large tax hikes in both 2010 and 2012, which negatively impacted Greece's economy. This is why we see the relative amount of tax collections rise for given levels of GDP per capita as compared to the period from 2000 to 2010, and also why we see both GDP per capita and tax revenue per capita never the less fall. Meanwhile, the Greek government has also had to significantly cut its spending to more affordable levels in response to its falling tax revenues and economy.

But perhaps the really interesting thing is what has happened to the Greek government's tax collections as its new government led by Prime Minister Alexis Tsirpas swept into power. Beginning in December 2014, as that outcome became likely, Greeks with the ability to refrain from making tax payments began doing so.

While that action has clearly strained the Greek government's fiscal situation, that's not what's interesting about it. It's the amount by which the Greek government's tax collections have fallen that stands out, where the data we have to date suggests has fallen to levels that, if they hold over a full year, would be consistent with the level of taxes collected in 2004 when the Greek economy last recorded a similar level of GDP per capita.

We suspect that might be the phenomenon of Hauser's Law at work. Here, once a nation has effectively maximized its ability to extract revenue from its population and businesses with respect to the size of its economy, it is essentially unable to collect significantly more than that percentage share for much more than a limited period of time regardless of how high it may set its tax rates.

GDP Multipliers for Government Spending Cuts and Tax Hikes

For the Greek government, that maximum level would appear to be about 40% of its GDP, which is the maximum level that it has largely sustained since 1995. While Greece's tax hikes of recent years has allowed the government's tax revenues to temporarily exceed that level in the period from 2011 through 2014, it is unlikely that higher level of tax collections can be sustained, which is why Greece's tax collections have really collapsed. It's really more of a surprise that they were at such an elevated level for as long as they were.

That's an important thing for both Greece's current government and its creditors to consider as Greece nears default on its debt payments. Until Greece can break its negative feedback cycle of tax hikes and economic recession, it will never be able to reverse its course. In the short term, the optimum solution would be for Greece's creditors to write off a significant portion of the short term debt whose payments are coming due in the next 18 months, while in return, the Greek government would commit to freezing its already reduced spending at current levels for up to 24 months and implementing modest tax rate reductions to reverse its economic trajectory.

That makes sense if the Greek government is only capable of collecting 40% of the nation's GDP in taxes, and we can all see in the chart above that the 2010 and 2012 tax rate hikes have already failed to produce sustainable higher revenues. Only a growing Greek economy can produce the outcome desired by both the Greek government and its creditors.

An interesting option for Greece's creditors would be to exchange the short term debt they would be asked to write off for GDP-linked warrants. This would allow them to recover a portion of the money they would otherwise lose outright, which would be enabled by the positive growth of Greece's economy.

But the real question is whether anyone among Greece's government or its creditors are smart enough to figure this strategy out before they commit to policies that ensure a much bigger default and failure.

Data Sources

Knoema. IMF World Economic Outlook, April 2015. Greece. [Online Database]. Accessed 18 April 2015.

Eurostat. Population. [Online Database]. Accessed 18 April 2015.

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April 20, 2015
Wile E Coyote, Gravity Lessons - Source: http://archive.ahrq.gov/news/events/conference/2010/moyer/

When it comes to its national debt, how much ruin is there in a nation?

Our question about the amount of ruin in a nation actually traces back to the surrender of British troops under the command of John Burgoyne at the Battle of Saratoga in October 1777 during the American Revolution, when a contemporary of Adam Smith lamented that the nation was ruined, to which Smith replied "There is a great deal of ruin in a nation."

But can we quantify how much ruin that might be?

That question is immediately relevant today because of the reaction of global stock markets to the news that the heavily indebted nation of Greece was much closer to the edge of a fiscal precipice than had previously been understood, where the Greek government is now scraping the "bottom of the barrel" in hunting for "cash to stay afloat" as it seeks to make promised payments to its creditors.

Thanks to Louis Woodhill, we have the math to be able to quantify how much debt a nation can afford to accumulate before it might reach the point of its ruin, based upon its inflation-adjusted, real economic growth prospects, how much it costs for it to borrow in real terms, how much of its GDP its government is capable of collecting through taxes, fees and other revenue-generating schemes, and also how much of its revenue it is able to devote to making debt payments.

The final factor is the time horizon, which represents the number of years over which a government's creditors would be satisfied to receive interest payments at all, regardless of whether any the principal for the amount they loaned is ever paid down. Here, Woodhill suggests that 1,000 years is a reasonable proxy for representing an infinite time horizon for the term of the loan to a nation's government.

The default numbers however aren't those for Greece. We've instead used data for the United States as projected by the Congressional Budget Office in its 2014 Long Term Budget Outlook from July 2014 in its appendix covering its very long term assumptions for economic variables after 2024. If you're accessing this post on a site that republishes our RSS news feed, you can access the tool directly at our site.

National GDP and Debt Service Data
Input Data Values
Average Real GDP Growth Rate [%]
Average Real Interest Rate [%]
Tax Collections as Percentage Share of GDP [%]
Government Debt Service as Percentage Share of Tax Collections [%]
Time Horizon [Number of Years in the Future]

How Much Total Public Debt Can a Nation Afford to Have Outstanding?
Calculated Results Values
Nation's Total Public Debt Capacity as Percentage of Current Year GDP

With these projections, the debt capacity of the United States is 395.1% of its current day GDP. That compares to the nation's debt to GDP ratio of 102.4% at the end of 2014. The margin between these two percentages goes a long way toward explaining why U.S. Treasury yields, the interest rates the U.S. government must pay on the debt securities it has issued, are so low as compared to those that Greece must pay its creditors.

However, if you play with the tool, you can see how quickly that apparently healthy situation can change if economic growth slows too much or if the interest rates the U.S. government must pay its creditors rises. Trimming the real annual GDP growth rate for the U.S. to just 2.0% cuts the nation's debt capacity by more than half. If then the average real interest rate that the U.S. government must pay on all the money it borrows were increased by just half a percentage point, the U.S. government would find itself with the same fiscal outlook as Greece if that situation were sustained.

Speaking of which, Woodhill has provided the following historical data since 1995 to help explain why Greece's increasing national debt has pushed that nation to where it finds itself now at the edge of the precipice of fiscal ruin, and would even if it only were required to pay the same rate of interest on its debt as does the United States.

Historic Economic and Debt-Related Data (1995-2013)
Debt Capacity Factors Greece United States
Average Real GDP Growth Rate [%] 0.52 2.44
Average Real Interest Rate [%] 2.7 2.7
Tax Collections as Percentage Share of GDP [%] 40 17.5
Government Debt Service as Percentage Share of Tax Collections [%] 5 5
Time Horizon [Number of Years to Project Into Future] 1000 1000

Plug these numbers into our tool to see what we mean!

How Greece Got There, or Rather, Previously on Political Calculations

We've been periodically monitoring Greece's deteriorating fiscal situation for a number of years. Here's our previous analysis, presented in chronological order.



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