Nice article from the WSJ (subscription required) on coming electric cars and claims for huge mpg numbers (since not much gasoline is used). Nissan Leaf (all electric): 367 MPG; Chevrolet Volt: 230 MPG; compared to Toyota Prius: 51 MPG.

Those numbers make the electric vehicles seem like super winners, but they ignore the cost of the electricity. Here’s the money number: Nissan, using EPA guidelines, figures that “…82 kilowatt hours of electricity are the equivalent of one gallon of gasoline…” Using my PG&E bill, the lowest tier of electricity use costs $0.11/KWH, and the highest tier is $0.37/KWH. I almost always max out every month in electricity usage and have at least some electricity usage in the highest tier (the tiers were set in the 1950’s and the electric companies have tried very hard to insure that they have not been changed significantly since). I have a tiny house, but I have a hot tub, and an office, and that is enough to blow us into the top tier of electricity expense. People in McMansions will have it much worse.

So what does that mean? Adding an electric car is an additional electric load, regardless of time of day. At the lowest fantasy rate, I would be paying $9/gallon equivalent of electricity (82KWH x $0.11/KWH). But that is fantasy, since the real rate will be at the top tier that I have to pay every month, which would be $30/gallon equivalent (82KWH x $0.37/KWH). That makes the plug-in electric car seem like a horrible idea.

But, at $30/gallon, and 367MPG, it would cost $8 to go 100 miles (30/367*100). At the fantasy rate, it would be $2.45 (9/367*100). Compare that to an average gasoline car getting about 30MPG, with gasoline at about $3/gallon, which would cost $10 to go 100 miles (3/30*100), and the price seems competitive. But just barely. Maybe.

Excellent analysis by Andy Kessler in the WSJ (with my take added):

Banks had long term holdings (MBS’s, CDO’s) with 10-30 year time horizons, but generally operate on a day to day basis with overnight funding. To count these and their derivatives as part of reserves, regulators demanded that they buy insurance against the derivatives defaulting. That’s credit default swaps (CDS’s) and AIG is the main player that sold them. Blamo! Drive the price of the CDS up, and it’s taken as a proxy for default likelihood, as well as used to value collateralized derivatives through the Gaussian Copula formula. So, drive the CDS price up, and the collateralized derivatives drop, which must be recognized via mark-to-market (i.e. writing off the supposed losses and hence taking immediate hits to the stock price), and so the bank reserves drop, and then they are regulated to have to raise more capital, which gets harder and harder as their reserves drop and their investment grade decreases (by the rating agencies) through a pro-cyclical cycle.

It’s a beautiful thing. Principally because apparently it doesn’t take much money in the CDS market to influence prices (say $25M or so). So for $25M in the CDS market you can make it appear that GE or Citigroup are close to bankrupt.

What a gorgeous bear raid.

That’s part of how a small change in house prices (the objects of collateralization) plummeted the world financial markets. Maybe it was all a big fake out.

Kindleberger. – credit expansion

Mechanism – collateralization of debt by banks, moved loans from balance sheet to investment roster so it no longer triggers capitalization rules, and thus allows more lending. Result – we went to a 30:1 leveraged economy from a typical 10:1. 10:1 has historically been handled, 30:1 has not. Direct bank lending accounts for 20% of credit market, the other 80% is various forms of collateralization (e.g. the bank isn’t giving you that auto loan). Collateralized debt securities were purchased and copied worldwide. Legitimization of collateralization was triggered by Fannie/Freddie and rating agencies. Collateralization is the worldwide infection vector.

Consequence: more money sloshing around for hot investors (the collateralizers), who largely played the Yen carry trade funneled into the commodities market. (Oil run-up was consequence, not cause. In 80’s majority (ca. 80%) of US GDP was directly tied to oil consuming industries. Today it’s ca. 20-30% (having been replaced by electricity, which is not mostly oil based (it’s coal and nuclear etc.)). Oil run down is not causative of GDP contraction, but rather symptomatic. Also, oil is priced in US dollars which have been weak during the oil price run up. Priced in any other currency, oil didn’t really go up that much.)

Down Side Floor: moving back from 30:1 to 10:1, a 2/3 contraction. 67% drop in everything is probably the floor.

As bad as that is, it can be made worse. Before credit contraction is allowed to take it’s natural course, we will see (and have seen) policies leading to not-quite-hyper inflation due to a lot of irrelevant drink-the-punch-before-the-bowl-is-empty crazy socialism spending, and just-for-philosophical-fun killing off of a few perfectly healthy additional industries (e.g. healthcare).

Update 12 Mar 2009: Beautiful explanation in Wired of use of Gaussian Copula formula as infection vector for global financial meltdown (the problem with the methodology used for collateralization).

I’ve taken a long hiatus from blogging, and expect that to continue, but thought I would mention this:

I am just a simple cave man, and perhaps I do not understand your ways, but I do know that whenever you do any sort of modeling (whether it be femtosecond chemical dynamics, protein folding, regional ozone formation, or financial markets – all of which I have done) your model must survive the simplest boundary cases to be prima facie correct. Or rather, if it doesn’t satisfy the simplest boundary cases, then you know it has to be wrong.

The theoretical premise of the current “stimulus” pork package is the “multiplier.” It is estimated by the Keynesian spenders behind the pork package to be something like 1.4 – meaning for every dollar spent by the government, we all get 1.40 dollars back. That is prima facie absurd. If it were so my best investment would be to give as much money to the government as I could, so they could redistribute it, resulting in my getting $1.40 back for every $1 I gave them. I would overpay my taxes to the 100% level because of the easy excess returns. I think you know that doesn’t work. By the way, it was tested – a little thing called Communism, and it sort of failed as an economic exercise. If I am taxed at 100%, I do not expect a 40% return. The multiplier on taxation, i.e. government spending, is more like zero.

At the other extreme, if I am not taxed at all, the one thing I know is that I will keep that dollar. So the multiplier on keeping my dollar (i.e. lower taxes) is something like 1. There are definitely services provided by the government that are worth paying for, so the multiplier isn’t exactly 1, but it is around there.

Any model that is not complete garbage has to have the multiplier for 100% taxation at about 0 and for 0% taxation at about 1.

But I am just a simple caveman.

Update 12 Mar 2009: Academically rigorous evidence (pdf) that the 1.5 multiplier is a fantasy of "old Keynesian" fallacies, when in fact the multiplier is much less than 1. Also, Numbers in WSJ give multiplier estimate of 0.1. ($14.3T GDP * 0.6% GDP growth = $87B growth, vrs. $800B spent -> 0.1 multiplier)