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I hate to interrupt the flow, but since you're the smartest person I remotely know on economics (seriously), I thought I'd just ask you...


What do you think of the new predictions for a 2008 reccession assuming the economy stays the way it is with consumers keeping their money in their pocket, the dollar declining, the housing market fiasco, and interest rates? It sounds pretty scary to me, but then again I'm just a nublet at economics.

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I hate to interrupt the flow, but since you're the smartest person I remotely know on economics (seriously), I thought I'd just ask you...


What do you think of the new predictions for a 2008 reccession assuming the economy stays the way it is with consumers keeping their money in their pocket, the dollar declining, the housing market fiasco, and interest rates? It sounds pretty scary to me, but then again I'm just a nublet at economics.



a recession is defined as negative change in GDP for two or more successive quarters. the problem with this definition is that you can have high unemployment, high interest rates, and high rates of mortgage and credit default, but STILL have a 'growing' economy because as unemployment increases, you get an uptick in productivity (fewer people doing more work per hour) and as long as productivity increases outpace the slowdown in sales, you still have growth.


that being said, i think a recession is functionally inevitable. i think the slowdown will be rather abrupt in coming quarters and much of it will be due to the credit crunch. i forget the actual statistic, but something like 30% of mortgages are ARMs. and of those, there are millions in the 'sub-prime' category. people are currently seeing their household expendable income shrink month by month. the good news is that since the financial world is imploding under the weight of the sub-prime mess, a lot of home owners have been able to restructure their loan payments so that the banks keep getting paid and dont have to go through the headache and write-downs of foreclosure. but there is a limit to how much of that can be done. at the end of the day there will still be a rapid increase in the glut of homes on the market, a lot of people will lose equity on their homes (equity they had been using to finance their lavish lifestyles), and ultimately this results in a serious slowdown in consumer spending on luxury items. this slowdown will filter through the economy and spawn a recession.


unquestionably, there is a significant worry for new job seekers. its an employer's market because although unemployment is low now, most of the jobs created over the duration of the bush administration were in housing, finance, and temporary sectors. the loss of jobs occurred in high tech industries which demand skilled workers. the net loss in income for the average american was already hitting the people below the belt. but hey, who needs stem cell research, right, 'cause after all, its unethical!


until the high wage jobs return to america, and the policies of our government become more friendly towards research and innovation, wages will continue to fall due to outsourcing and competition. the brain drain is already beginning to occur in america in some sectors. the result is that the loss in income hurts consumer spending and investing. the gain in income at the expense of other nations, should the jobs return, will result in a global redistribution of wealth - which is the ultimate goal of any capitalist nation. marx et al. are quite correct in their analysis that the root of capitalism lies in the exploitation of a group of people. and for america to be healthy, we must keep other nations at bay.


so now that i have meandered around from housing to economic critiques, yes, 2008 will be a very rocky year. i predict a small slowdown in holiday spending this year and a BIG slowdown next year. look for december 26th sales whereever you can. they'll probably be big discounts to move inventory. keep an eye out on retail numbers over the course of the next month or so and look at inventories and sales. you'll know if you should buy post-xmas off those numbers.

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to respond to your rep message, you misunderstand and thats probably because i meandered through everything under the sun in the last post... my bad.


a recession IS coming. the question of how severe it will be depends on how the fed tackles inflation. the steeper the inflation rates, the deeper and longer the recession will be. but this will also require sound fiscal policies pursued by consumers, producers and government.


when the fed plays a delicate balance between the value of the dollar, the interest rates and the rate at which the fed wants investors to invest in america. when they cut rates, people drop the dollar and the dollar loses value. if they increase rates, people buy the dollar and the dollar gains in value. if you cut rates, it spurs growth which leads to inflation. if you increase rates, you slow growth and cause unemployment. when you slow growth with rate hikes, wall street goes bananas and the dow tanks. when you cut rates, wall street goes bananas and we set new record highs. this is a very touch-and-go balance the fed needs to play and thats why they carefully select their words in their public statements so as to ensure that people arent misled or confused on what the fed sees.


the idea behind the recent two rate cuts was to give a quick charge to the economy, but the effects of those rate cuts are technically not seen immediately. but the initial signs dont seem promising (to help clear up credit mess), so the fed has announced that they will hold off on further rate cuts because they see inflation as a big monster in the corner just waiting to rear its ugly head. as a result, wall street has lost 5% value in three days. the biggest worry is the price of imported commodities - metals, oil, natural gas. these raw materials are absolutely essential to the economy and when the dollar is weak, the price is high and that spurs inflation despite a slowing economy. this is what is known as stagflation - high inflation and no economic growth, higher unemployment, etc. we are seeing signs of stagflation currently and its VERY worrisome. since the fed attempts at cutting rates didnt produce any real impact on growth, they have shifted focus from the GDP sde of stagflation to controlling inflation by holding rates steady.


i think this is the more prudent option, but at the same time, unless we ge a control on oil supplies and prices of raw materials, inflation will continue to rise. the time for renewable energy and resource conservation is literally now.


so you SHOULD be worried. the economic climate doesnt look good, the next year will be VERY rocky, and likely a recession IS coming. stagflation is also probably on our doorstep. i feel really bad for people who are expecting to graduate from college in the coming three years. jobs are going to be harder to find because there are going to be experienced professionals who will work for less just to keep their jobs. the best opportunity american students will find over the coming decade are jobs with an international focus. you should keep that in mind.

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If a U.S. employer (or the USFG itself) is paying your salary how does a job with an international focus help? What type of job would that be anyway?

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learn mandarin, become fluent while studying abroad in china.

go to college for international relations, and some international business degree.


work for an american company to work with chinese counterparts or suppliers or wholesalers or whatever. become a salesperson trying to sell american products to chinese retailers. etc etc.


in a global economy, the ability to understand one's economic competitors becomes paramount. knowledge of the customs, culture, and motions is equally important in many areas of the world as the offer you bring to the table.






learn hindi, become fluent while studing abroad in india.

major in biology. go to law school.


work for pharmaceutical companies to apply american procedures to drug trial monitoring around the world.






for people who are looking to the future, there are plenty of opportunities if you seek them out. and most of them are going to have an international component. its where the next sector of growth will be.

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do you know how/where i can find decent stuff to creat a biz con da? in other words, something that says low biz con is good. it's really hard to find.

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thats because there is no such thing as low business confidence being good.


however, it shouldnt be too hard to find cards saying that an economic contraction / market correction is a good thing right now. there are still a lot of bearish calls on the market, and more are growing by the day.


there are some people saying that overall, cutting into america's otherwise seemingly endless supply of foreign credit is a good thing because it will force more fiscal discipline in public and private sectors.

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Did you happen to see Tom Friedman's article a couple of days ago saying students should learn Hindi in part because India is poised to handle the software needs of cap and trade or carbon tax policies?

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Did you happen to see Tom Friedman's article a couple of days ago saying students should learn Hindi in part because India is poised to handle the software needs of cap and trade or carbon tax policies?


That's obscene - shouldn't they learn English instead?

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That's obscene - shouldn't they learn English instead?


I can't tell if you're speaking seriously or ironically. Many people in India speak English, of course. Estimates range from 50 million to 350 million.


I may have overstated Friedman's position. Here's the concluding paragraph:


"So, Mom, Dad, tell your kids: If they're looking for a good stable-growth career--green consultants, green designers, green builders are all going to be in huge demand." And if they can speak a little Hindi--all the better."

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haha. that's weird.

ankur, can you please explain what you mean by foreign credit?


at the end of the day its a generic term to represent the money foreign banks are loaning america. to realize how ridiculous this is, think about it this way: government spends money into an annual deficit. to cover the shortage, the government borrows money from china, japan, etc. we then pay interest back to those countries when we pay back the loans. and guess where we are buying products from? it aint zimbabwe, i'll tell you that.


so we are essentially borrowing from china to pay them for what we want right away, and then we owe them more interest later.


it works in much the same way with private credit as well, with banks borrowing from one another.

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i'm in no mood to cut something like that. haha.

all i need is a link saying that foreign aid t/o with biz con.

or foreign aid causes deficit spending

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So after a week of vacation, here is my next installment of econ news and evidence... And I remind debaters and coaches that my underlining is NOT how the cards should be cut - I am simply indicating the important pieces I think of which I you should have a firm understanding.





Disposable Income - your gross income minus taxes

Discretionary Income - your disposable income minus necessities


Lesson 3: The impact of commodity (oil) prices on the economy


Oil prices are extraordinarily important to the economy for many reasons. Oil, in a way, is a literal version of liquid currency. You can trade it, speculate on its supply and demand, use it or sell it.


The real killer is inflation - Since petroleum is used industrially to make everything from gasoline to plastics, the increasing price of oil puts pressure on producers of goods to increase prices.


But why do they need to raise prices?


Because the cost of their raw materials (oil) is going up. If the cost to make a product is more than the price you can get for selling it, then you are constantly selling at a loss. In a capitalistic society, profit-generation is the only primary long-term goal.


Cant the companies just absorb some of the price increase and make less profit?


The short answer is that they have already been doing that for the past couple years. If you look at corporate earning statements, even for companies with flat revenue or sales, their profitability has steadily decreased due to increasing operating expenses. If the price of oil keeps going up, then producers have no other option than to increase the price of the goods they sell.


Have we noticed any major price increases yet?


Yes. Look at the price of milk. Ask your parents how expensive a gallon of milk was five or ten years ago and compare that to today's price. In the production of milk you need trucks (which burn gas/diesel) to distribute them, and a lot of petroleum products used in agriculture to feed the cows.


So what does increasing prices mean?


To piggyback off of my previous lesson, increasing prices mean that inflation is higher. If wage growth isnt keeping pace with inflation that means consumers are able to purchase less items. Since we are unlikely to give up on food before we give up on Ninetendo Wii games, this means that consumer spending on luxury items (i.e. discretionary income). This is widely supported by news on Wall Street. Sales forecasts at big retailers like May-Federated department stores are down, however forecasts at Walmart are high - People are shifting to lower priced items and that is a reflection of the affordability of those items and the people's change in discretionary income. As mentioned previously, if consumer spending slows down, then businesses fail or need to lay off workers which leads to higher unemployment and the unemployed (obviously) spend very little money other than the meager outlays from unemployment benefits. And it becomes a vicious cycle. Therefore, consumer confidence is very important to the overall economic engine.


So how did the price of oil get so high?


The simple answer is two things: demand and the dollar.


The first cause is simply demand. With the growth that China and India are experiencing, they are using much more oil in industrial processes. But even more so, those two countries have the fastest growing middle class in the world, and the middle class seeks luxury items with their newfound discretionary income. They want cars, electronics, and bottled water. Production, on the other hand, has not kept pace with demand. And to be entirely honest, pumping more oil by sinking new wells isnt a viable option for technical reasons irrelevant to this discussion. If there are more people who want oil than people able to sell oil, then the price goes up - its a simple supply/demand relationship.


But demand hasnt doubled to cause the doubling of the oil price. Enter the second cause - its the dollar stupid! Almost all petroleum in the world is priced in dollars. If the value of the dollar falls, but the value of oil does not, then for every decrease in the value of the dollar, then the price of oil increases proportionately.


So what happens to the world when the price of oil increases?


Because oil is priced in dollars, other countries need to stockpile dollars (by trading with us) in order to have dollars with which they can buy oil and other commodities. So countries have been willing to buy our debt because they get paid interest in dollars which they then use to buy oil from Russia and OPEC. It is, afterall, no coincidence that the countries which are the biggest importers of oil, are also holding some of the largest reserves of dollars outside America. But they are seeing the value of the dollar decrease, and as a result, the value of their investment in America, i.e. purchasing our debt, is falling. At what point investors throw their hands up and say that they have had enough with the devaluating dollar is beyond anyone's guess. Some people say the time is near, others say its far off into the future. This is what I mean by economics disads having poorly defined thresholds. And when those investors throw their hands up, its as much a political situation as it is an economic one. If one of the major economic blocs (e.g. OPEC, EU, tiger economies) decided to drop the dollar as their reserve currency, the dollar would free fall and inflation would skyrocket into high double or even triple digits. That means every year you would pay twice as much for everything. Your $3 gallon of gas today would be $6 next year and $12 the year after. But at the same time - you are still earning the same wages you are earning today. What will that do to your spending? What do you think that means for the economy?


Is there any good news about oil?


Yes. Not all means of extracting oil are created equal. Its fairly cheap to extract oil in the Middle East because its a lot like having a large underground cavern filled with oil. Oil sands in Canada, for example, are very pricey because the you cant just suck oil oil with a straw - you get the sand. For a long time, many oil wells and resources were simply not profitable because it cost more to extract the oil than the price an oil company got for selling it. So the industry shut down those wells long ago. With oil prices nearing all time highs (inflation adjusted), it becomes more opportunistic to bring those old wells into working order. Soon, the world will have a greater access to oil because it will become profitable to do so. When that happens, the supply of oil will start to increase again and in doing so it will have a stabilizing effect on the price of oil.


The key is demand - and thats where you have an opportunity to exploit the affirmative. If you can tie positive health benefits to rapid growth in SSA, then you get to access a multitude of impacts. From this lesson, you have the obvious impact of oil prices increasing, causing a collapse in the dollar, rampant inflation and a global economic meltdown. You also have global warming, air pollution, and political implications of souring relationships with our allies in the Middle East, East Asia and Europe.




Dollar's fall is now a bigger political issue than an economic one

Submitted by cpowell on Sun, 2007-11-25 16:16. Section: Daily Dispatches

Bet Your Bottom Dollar Tensions Will Follow


By Liam Halligan

The Telegraph, London

Sunday, November 25, 2007




The weak dollar used to be an economic issue. But the greenback has now dropped so far, and has so much further to fall, that its decline is of profound political importance. The dollar isn't any old currency. And it isn't just the currency of the biggest economy on earth. The dollar is the world's "reserve currency" -- which means central banks everywhere use it to stockpile wealth. No less than two-thirds of all sovereign foreign exchange holdings are denominated in dollars.


Last week, the dollar dropped to yet another record low -- reaching the verge of $1.50 to the euro. On a trade-weighted basis, the currency has, in four years, lost a third of its value. That's done the US some favours, helping its exports stay competitive. But the dollar's long dive means countries worldwide, having used the currency to store their reserves, are sitting on massive losses. That's why the dollar's demise is of major diplomatic -- and even military -- significance. Before this summer, the dollar was falling for economic reasons. After years of over-consumption, the US had dug itself the world's biggest ever trade deficit -- 6 per cent of GDP.


These huge liabilities, and America's need to issue a steady stream of government debt, had long put pressure on the greenback. US officialdom feigned concern but, in reality, America laughed up its sleeve. A falling dollar shoved the burden of US adjustment on to the rest of the world.


In recent months, though, the dollar has headed south with a vengeance -- after Wall Street recklessly securitised $900 billion of sub-prime loans. And, of course, as US property prices fall and default rates keep rising, this sub-prime crisis gets worse.


Last week, Federal Reserve Chairman Ben Bernanke said $150 billion of loans will end up being written off. The Bank of England, in private, says $200 billion. The reality, as this column has long maintained, will be at least $300 billion.


Whatever the eventual figure, given that "only" $40 billion has so far been written off, there is a whole world of pain to come. And, remember, these ghastly securities are largely dollar-denominated -- so when foreign investors try to dump them that pushes the currency down even more.


On top of that, sub-prime is, of course, playing havoc with the broader US economy -- which is now slipping into recession. That's why the Fed has embarked on a series of interest rate cuts -- which other central banks won't follow due to fears about oil-related inflation.


All these factors -- which have nothing to do with traditional deficit-funding concerns -- are now dragging down the dollar. And the deeper the sub-prime crisis gets, the less attractive US assets look and the more the Fed will cut rates. In other words, as long as sub-prime remains a problem, the dollar will keep on falling.


The US currency then, faces some extreme economic pressures. But they're not nearly as significant as the political forces now in play.


For one thing, Europe has finally had enough of America's "benign neglect" dollar policy. As a large economic area, with a floating exchange rate, the eurozone suffers most. Over the past seven years, the single currency has risen by a shocking 82 per cent against the greenback. That's hammered eurozone exports -- provoking serious trade disputes between the EU and US, the world's two biggest trading blocks. No wonder French President Nicolas Sarkozy describes America's drooping dollar as "a precursor to economic war".


European leaders last week said the US currency's value now threatens the survival of Airbus -- whose cost-base is in euros, but which sells planes in dollars. For once, they weren't bluffing. And Airbus, the symbol of European unity, employs 60,000 across the four EU nations.


But America's currency-related tensions with Europe are as nothing compared to the brewing crisis with China, Russia and the oil-rich Gulf states. As is well known, these countries -- and emerging markets in general -- used to run big trade deficits. Strong exports and expensive oil means they now boast big surpluses. As a result, their foreign exchange reserves have ballooned, with China controlling $1,400 billion, Russia $450 billion, and the Arab world much more than it admits -- the vast majority in dollars.


The greenback's fall, of course, is costing these countries serious money. Until sub-prime, they didn't talk about quitting the dollar -- the world's "reserve currency".


But the decline has now gone so far, and the US looks so wounded, that tomorrow's economic superpowers are now "dollar divesting" -- despite the fact that doing so will further weaken the currency, undermining their reserve values even more.


This sounds technical, but it isn't. During the 19th century, sterling was the world's reserve currency -- when the UK bestrode the world. The dollar muscled in a century or so ago, confirming the start of the US hegemony.


Reserve currency status brings America huge power. It puts the dollar constantly in demand, meaning the US can secure cheaper debts and run bigger deficits at everyone else's expense. It means weaker nations "peg" to the dollar, greatly extending America's sphere of influence.


Incredibly, this long-standing system is now unravelling. Rather than keeping their reserves in falling dollars, the new economic titans are stuffing them into "sovereign wealth funds" -- which they're using to buy-up debt-distressed Western firms, African oil fields and any other canny investment they can find.


These upstart countries no longer want just stability and value preservation. They're looking for, and achieving, asset accumulation -- and all the power that brings.


The importance of "dollar divestment" cannot be overstated. At the very least it means the greenback has much further to fall -- plunging the US into recession. But it begs a bigger, more alarming, question: How will Washington react to the end of the US hegemony?






U.S. Consumers Spent Average of 3.5% Less on Shopping (Update4)

By Cotten Timberlake and Tiffany Kary

Last Updated: November 25, 2007 19:49 EST



Nov. 25 (Bloomberg) -- U.S. consumers spent an average of 3.5 percent less during the post-Thanksgiving Day holiday weekend than a year earlier as retailers slashed prices to lure customers grappling with higher food and energy costs.


Shoppers spent $347.44 on purchases from Nov. 22 through today, choosing to buy less-expensive digital-photo frames and cashmere sweaters, the National Retail Federation said today in a statement. Store visits increased 4.8 percent.


Customers have cut back on spending in the face of increased costs for milk and gasoline and the worst housing slump in 16 years. Wal-Mart Stores Inc. responded by offering holiday discounts more than two weeks earlier than last year while Macy's Inc. and J.C. Penney Co. reduced clothing prices by as much as 60 percent.


``The sense we have this year is that shoppers are very mission-focused,'' said Fred Crawford, managing director for consulting and advisory firm AlixPartners LLP. ``They know who is carrying what, and at what price point.''


More than 147 million consumers visited stores over the weekend, the NRF said, based on a poll it commissioned from BIGresearch. The average spending amount last year was helped by increased sales of high-definition televisions, NRF spokesman Scott Krugman said.


``It's the saturation of HD-TVs into the market, and also retailers recognizing that consumers will be more conservative this year and focusing on lower-priced merchandise,'' he said.


November, December


Sales in November and December represent 20 percent of retailers' annual revenue, according to the NRF. The fourth quarter accounts for almost a third of retailers' annual profit, according to the International Council of Shopping Centers.


Sales on Nov. 23, called Black Friday because it was the day that retailers traditionally turn a profit for the year, rose 8.3 percent from a year earlier to $10.3 billion, Chicago- based research firm ShopperTrak RCT Corp. said.


Combined sales for both Black Friday and yesterday rose 7.2 percent to $16.4 billion, the firm said today.


ShopperTrak measures foot traffic in shopping centers and malls using more than 50,000 video devices. BIGresearch, based in Worthington, Ohio, polled 2,395 consumers on Nov. 22-24.


Krugman, who didn't provide an aggregate spending estimate for the weekend, said overall sales were lifted by the higher number of shoppers, even as they spent less individually.


Shares Rise


Wal-Mart, the world's biggest retailer, rose 87 cents, or 1.9 percent, to $45.73 in New York Stock Exchange composite trading on Nov. 23. Macy's gained $1.53, or 5.4 percent, to $30.03 in New York trading and Target Corp. advanced $3.07, or 5.7 percent, to $57.17.


Online retail spending on ``Cyber Monday'' may surpass $700 million, a single-day record, as customers head to Amazon.com Inc. and Walmart.com to find bargains on flat-panel televisions and toys, research firm ComScore Inc. said today.


Consumer purchases over the Internet rose 29 percent on Thanksgiving Day and 22 percent the day after, Reston, Virginia-based ComScore said. Spending tomorrow probably will exceed either of those days as people return to work from the holiday weekend, it said.


Online visits on Black Friday increased 10 percent from a year earlier, according to data released today by research firm Nielsen Online.


Web sites run by IAC/InterActiveCorp, owner of the HSN shopping channel and ticket broker Ticketmaster, were the most visited by U.S. shoppers from their homes, followed by Amazon.com, Walmart.com and Target Corp., New York-based Nielsen said.


The NRF in September predicted a 4 percent gain in total retail sales for November and December, the smallest gain since a 1.3 percent rise in 2002. The group reiterated its projection today.


The margin of error of the BIGresearch poll was plus or minus 1.5 percentage points.


To contact the reporters on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net ; Tiffany Kary in New York at tkary@bloomberg.net .






Why plutocracy endangers emerging market economies

By Martin Wolf

Published: November 6 2007 19:56 | Last updated: November 7 2007 08:32

Financial Times




Mexico’s Carlos Slim is now the richest man in the world, or so Fortune magazine has told us. His ascension is fascinating. This is not only because he is extraordinarily rich. It is also because the manner in which he has accumulated his wealth tells us much about the capitalism that is spreading across the globe.


Estimated at $59bn, Mr Slim’s fortune is equal to 6.6 per cent of Mexico’s gross domestic product. Bill Gates, in contrast, at about $56bn, is worth a mere 0.4 per cent of US GDP. Even at its peak John D. Rockefeller’s wealth was less than 2 per cent of US GDP. The richest person in the US would need $900bn to possess the same wealth, relative to US GDP, as Mr Slim does relative the Mexico’s.


Does this extraordinary accumulation of wealth in a single man’s hands matter? One reason someone might think so is that it implies extraordinary inequality. If, for example, one assumed a real return of 6 per cent a year, the Slim family’s permanent income would be $3.6bn a year. On World Bank figures, the average income of Mexico’s poorest 10 per cent was $1,200 per head in 2005. So the Slim family’s permanent income equals the current incomes of 3m of Mexico’s poorest people. I am no egalitarian. But this surely needs some justification.


Furthermore, vast concentrations of wealth are sure to have political consequences, inciting corruption and populism. Thus, it seems sure to weaken both the legitimacy and effectiveness of fragile democracies.


These dangers are evident. But one can counter that the drive to accumulate wealth is the spur to entrepreneurship. It matters, therefore, how far wealth is generated in competitive as opposed to relatively protected markets.


How, then, did Mr Slim make his fortune? A part of the answer is that he is a businessman with an eye for opportunity. What, however, was his most important opportunity? In Mr Slim’s case, the gold-mine was Teléfonos de México, or Telmex, in which he obtained a controlling stake from the government in 1990.


Telmex has proved to be a licence to print money, a description once used of ITV, the UK’s first commercial television station. When privatised, Telmex was given what amounts to six years of exclusivity. Moreover, as Brian Winter of USA Today points out, Telmex still controls 92 per cent of the country’s fixed-line market.* According to the Organisation for Economic Co-operation and Development, Mexico has some of the highest telephone charges among its members, both for fixed lines and mobile telephony. Mr Winter reports that voice-over-internet providers, Vonage and Skype, have accused Telmex of intentionally blocking access to their sites, to protect its long-distance services.


Telmex denies these charges. But two points are clear: Telmex is an extremely profitable privatised quasi-monopoly; and Mr Slim’s ownership has catapulted him from being rich to enormously wealthy. No British government could have allowed an individual to become so rich from a single privatisation.


Thirty nine of the 100 richest people in the world, according to Forbes, are Americans. Interestingly, the fortunes of all these people together amount to only 4.5 per cent of US GDP and, so, to relatively less than Mr Slim’s in Mexico. These American super-rich made (or inherited) their money from many different activities (including technology, media, retail and resorts). But it did come from success in competitive markets. Even where this position is controversial, as in the case of Microsoft, most (though not all) would agree that the company played a useful role in standardising products in a dynamic new industry.


To put the point bluntly, there exist more or less useful ways of making a fortune. The least useful are through political connections; the most useful are in competitive markets. These different ways of becoming very rich correspond broadly to the distinction between “limited access” and “open access” economic and political orders made in a paper co-authored by the Nobel-Laureate Douglass North that I cited earlier this year (“As long as it is trapped, the bear will continue to growl”, February 21 2007).**


Are the vast fortunes being made in emerging economies the result of productive entrepreneurship or of rent-seeking? The answer to this question depends on where the economies are likely to go. The bigger the fortunes made by extracting rent from uncompetitive markets, the greater the resistance to the introduction of fiercer competition and so the weaker competition itself is likely to be. As I learnt in Mexico just over a week ago, knowledgeable observers partly ascribe the country’s weak growth to the lack of robust competition across the economy. Guillermo Ortiz, governor of the central bank, is known to share this view. Mr Winter also notes that investment in information and communications technology is only 3.1 per cent of Mexico’s GDP, against 6.7 per cent in Chile, 6.9 per cent in Brazil and 8.8 per cent in the US.


Thus, Mexico retains many characteristics of a limited access order. Other important emerging economies do, too. As many as 14 of the 100 richest individuals in the world are Russians, with an aggregate wealth equal to 26 per cent of the country’s GDP. After the US, no other country has so many people in this list. So how did they make their money? The answer is that they appropriated much of the wealth of a collapsing superpower.


In his article, Mr Winter worries that “as the core of the global economy shifts to countries with weak rule of law and institutions, connections to government, rather than entrepreneurial skill, are becoming the quickest and most effective route to wealth”. Fortunately, there are many counter-examples, such as Azim Premji of Wipro, the Indian software company. Moreover, even where the origin of the fortune rests in connections, the new owners are likely to use their assets more skilfully than governments. Mr Slim’s Telmex is an example. The Russians’ companies are, too.


Yet concerns remain. A capitalism that generates vast wealth, partly on the back of political connections, and rewards those who resist competition is likely to generate the social and political drawbacks of the system without many of the offsetting gains. Not all capitalisms are created equal. Those who support the market economy must never forget this.


* How Slim Got Huge, Foreign Policy, November/December 2007; ** A Conceptual Framework for Interpreting Recorded Human History, NBER working paper 12795, December 2006, http://www.nber.org








Welcome to a world of runaway energy demand

By Martin Wolf

Published: November 13 2007 20:36 | Last updated: November 14 2007 07:59

Financial Times



“The increase in China’s energy demand between 2002 and 2005 was equivalent to Japan’s current annual energy use.” This nugget of information, buried in the International Energy Agency’s latest World Energy Outlook, tells one almost all one needs to know about what is happening to the world’s energy economy.


Neoclassical economics analysed economic growth in terms of capital, labour and technical progress. But, I now think, it is more enlightening to view the fundamental drivers as energy and ideas. Institutions and incentives provide the framework within which the development and application of useful knowledge transforms the fossilised sunlight on which we depend into the stream of goods and services we enjoy.


This is the world of abundance that China and India are now joining. Nothing short of a catastrophe will stop them. For the pessimists, however, particularly climate-change pessimists, catastrophe will follow. What is certain is that the challenges ahead are huge.


Here, then, are the highlights of the new report.


First, if governments stick with current policies (which the IEA calls the “reference scenario”), the world’s energy needs will be more than 50 per cent higher in 2030 than today, with developing countries accounting for 74 per cent, and China and India alone for 45 per cent, of the growth in demand.


Second, this huge increase in overall demand occurs even though energy intensity of gross world product falls at a rate of 1.8 per cent a year.


Third, fossil fuels are forecast to account for 84 per cent of the increase in global energy consumption between 2005 and 2030.


Fourth, world oil resources are, insists the IEA, sufficient to meet demand at prices close to $60 a barrel (in 2006 dollars). But the share of world supply coming from members of the Organisation of the Petroleum Exporting Countries will rise from 42 per cent to 52 per cent. Moreover, “a supply-side crunch in the period to 2015, involving an abrupt escalation in oil prices cannot be ruled out”.


Fifth, coal’s share in global commercial energy is forecast to rise from 25 per cent to 28 per cent between 2005 and 2030, because of its role in power generation. China and India already account for 45 per cent of world coal use and drive over four-fifths of the increase under the “reference scenario”.


Sixth, some $22,000bn (a little under half of 2006 world gross product) will need to be invested in supply infrastructure, to meet demand over the next quarter century.


Seventh, even with radical measures to reduce the energy intensity of growth under the “alternative policy scenario”, global primary energy demand would grow at 1.3 per cent a year, only 0.5 percentage points a year less than in the “reference scenario”.


Eighth, China will become the world’s largest energy consumer, ahead of the US, shortly after 2010.


Ninth, under the reference scenario, emissions of carbon dioxide will jump by 57 per cent between 2005 and 2030. The US, China, Russia and India alone contribute two-thirds of this increase. China becomes the world’s biggest emitter this year and India the third largest by 2015.


Tenth, even under the IEA’s more radical “alternative policy scenario” CO2 emissions stabilise only by 2025 and remain almost 30 per cent above 2005 levels.


The rest of the world, then, wishes to enjoy the energy-intensive lifestyles that have, hitherto, been the privilege of less than a sixth of humanity. This desire does, however, have big consequences for the world’s economic, strategic and environmental future.


The obvious economic question concerns future prices. Today, the price of oil, deflated by the unit value of exports from the high-income countries, is higher than it has been since the beginning of the 20th century. Barring big technological breakthroughs in energy supply or unexpectedly large finds of oil and gas, energy would seem likely to remain relatively expensive.


Yet, to many, a surprise of the 1980s was how much supply finally came on stream and how low demand growth became after the price shocks of the 1970s. Might such an adjustment happen again and, if so, how quickly? Or should we regard the combination of fast-growing giant emerging economies and the dominance of national energy suppliers as fundamentally different?


The big strategic questions concern energy security and the shift in the balance of power towards unattractive regimes, be they Vladimir Putin’s Russia, Hugo Chávez’s Venezuela, Mahmoud Ahmadi-Nejad’s Iran or the House of Saud’s Arabia.


The shift in the balance of power occurs in two ways: first, a growing proportion of the fuels vital for what we now think of as civilised life come from just a few, not necessarily friendly, suppliers; second, these countries are becoming vastly richer. Thus, Opec revenues are forecast to triple (admittedly, in depreciating dollars) between 2002 and this year.




The challenge to security comes partly from the difficulty of replacing oil as a transport fuel. Thus, the concentration of likely supply in the Middle East is, inevitably, a concern. So, too, is Europe’s growing reliance on Russian gas.


Concerns over energy security also come from the potential for competition for supplies among the big consumers. The sensible approach is to rely on the market. But that may be hard when prices shoot up. At some point, American politicians may ask why the US expends blood and treasure in order to achieve security in the Middle East for the benefit of China. True imperialism – the attempt to seize energy resources for one’s own benefit – would be a ghastly error. But to err is all too human.


Finally, we have global warming. Three points shine out on this. First, despite the blather, nothing effective has been done or yet seems likely to be done. Second, effective policy will require big changes in incentives across the globe, including, not least, in the large emerging economies. Third, dramatic changes in technology will also be required, the most important of which will be towards carbon-capture-and-storage at coal-fired power plants.


What is the bottom line? It is simple: commercial energy is the staff of our contemporary life. As demand for energy rises, nothing is more important than ensuring increased supply and efficient use, while curbing environmental damage. Today’s high prices are a start. Fundamental innovation and high prices on greenhouse gas emissions must follow.








Risk of dollar crisis highest in a decade-Merrill

Mon Nov 26, 2007 11:22am EST




NEW YORK, Nov 26 (Reuters) - A dollar crisis that causes U.S. stock, bond and other asset prices to fall is a bigger risk now than at any time over the past decade, foreign exchange strategists at Merrill Lynch (MER.N: Quote, Profile, Research) said on Monday.


In a research note for clients, the bank's strategists wrote they were not predicting such a crisis but acknowledged the chances of one have increased.


Among the potential triggers, they write, is a move by foreign central banks to slow accumulation of dollars or convert some existing dollar reserves into other currencies.


A move by the Middle East oil exporters to revalue their dollar pegs or ditch them altogether could also put pressure on the greenback, the report says, as could more mortgage- and credit-related problems in the U.S. financial system.


High oil prices and a weak dollar have increased inflation pressures in countries such as the United Arab Emirates, which has said it will review its currency policy.


Though there are different definitions, Merrill said it defines a dollar crisis as "intense, usually short-lived, weakness that prompts a decline, or is accompanied by a decline, in other U.S. assets."


Using those criteria, the bank said dollar crises occurred in 1977-1978, late 1987-1988, 1990 and late 1994-early 1995.


The dollar has shed more than 10 percent against a basket of six major currencies (.DXY: Quote, Profile, Research) so far this year. The euro alone has gained 12.5 percent <EUR=> against the greenback in 2007, hitting an all-time high last week of just shy of $1.50.


The Dow Jones Industrial Average (.DJI: Quote, Profile, Research) remains up about 4.3 percent on the year, while the benchmark 10-year Treasury note <US10TY=RR> has also gained in price, with the yield falling to 4 percent on Monday from 4.69 percent at the start of the year.


The dollar's slide has elicited little concern from U.S. officials, who say a strong dollar is in the U.S. interest.


Some economists argue that a weaker currency will put a much-needed dent in the current account deficit, which swelled to more than 6 percent of gross domestic product in 2006.


To finance its deficit, the United States depends on foreigners to purchase U.S. assets.


Merrill said investor perception that "U.S. authorities are pursuing a weak dollar for competitive and cyclical reasons despite lip service to a strong dollar policy" could also trigger a sharper slide.


They noted, though, that a rapid decline would become "self-limiting, as the fall in U.S. asset values eventually makes them attractive from an expected return standpoint." (Reporting by Steven C. Johnson; Editing by Neil Stempleman)






The Wall Street Journal: Wealthy Nations In Gulf Rethink Peg to Dollar

POSTED: Tuesday, November 20, 2007

FROM BLOG: Royal Dutch Shell plc.com - News and information on Royal Dutch Shell Plc



The following blog post is from an independent writer and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.



November 20, 2007; Page A1


For many years, oil-rich Persian Gulf states have pegged their currencies to the dollar. Now that link is stoking a bad bout of inflation in their red-hot economies and putting policy makers in a dilemma: Break the dollar peg and risk undermining the U.S. currency, or keep it and face growing local discontent.


The dollar peg has “served the economy…very well in the past,” said Sultan Nasser al-Suweidi, the governor of the United Arab Emirates’ central bank, last week. “However, we have reached a crossroads.”


Because countries such as the UAE, Saudi Arabia and Qatar sit on large reserves of U.S. dollars, their decisions will have repercussions beyond their borders. If they move away from their strict dollar pegs — perhaps following Kuwait, which earlier this year switched to a basket of currencies — it could undermine demand for dollars and encourage others to diversify their holdings. Many nations have already created sovereign wealth funds to invest their holdings in a broader array of assets.


The Persian Gulf nations originally tied their currencies to the dollar to stabilize their revenue from oil, which is traded in dollars. Also, some nations had little central-banking expertise and found it easier to tie their monetary policy to that of the Federal Reserve in Washington.


Now, however, the Fed is cutting rates to prop up the slowing U.S. economy and forestall damage from the U.S. housing downturn. That’s precisely the wrong prescription for economies trying to tame galloping growth, such as those in the Persian Gulf.


The peg isn’t finished yet, particularly in Saudi Arabia, which maintains a close relationship with Washington. During the summit of the Organization of Petroleum Exporting Countries in Riyadh over the weekend, Venezuela and Iran pushed to mention concerns about the dollar in the meeting’s final statement. Saudi Arabian Foreign Minister Saud al-Faisal rejected the effort, saying such a move could have a damaging impact on the U.S. currency.


Officials in Saudi Arabia, the region’s largest economy, have said they will not break the peg between their currency, the riyal, and the dollar. However, the country has other options. It could revalue its currency at a slightly stronger level, much as China did in 2005, but still link it to the dollar.


A key date in the debate will come in early December, when heads of state of the Gulf Cooperation Council, a loose regional economic bloc, meet in Doha, Qatar. Currency issues will be high on the agenda.


Investors are betting that some change is coming. Contracts that allow investors to lock in exchange rates a year from now reflect expectations that both the UAE dirham and the Saudi riyal will strengthen somewhat. Bank deposits in the UAE have swelled, as local and foreign investors buy dirhams at the current rate and bet on a revaluation.


The countries of the Persian Gulf are struggling with the impact of their own good fortune as rising oil prices bring a windfall. Normally, when the price of a country’s major export rises, that pumps up the local currency, which helps restrain inflation.


Instead, much the opposite has happened. As the price of oil has skyrocketed in recent years, Gulf currencies tied to the dollar have fallen relative to other currencies such as the euro and British pound, making many of their imports more expensive.


The UAE and Qatar have suffered some of the worst inflation, as the oil gusher has triggered a building boom. In Qatar, inflation hit 11.8% last year, and the International Monetary Fund estimates it will average 12% this year. This week, officials in Doha, the capital, raised taxi fares by a third.


Both countries depend on an army of guest workers from South Asia and elsewhere, who send much of their income to their families back home. As costs go up, these workers are spending more of their salary on basic goods and have less to send. What’s more, the falling dollar erodes the value of the Gulf currencies against the workers’ home currencies, meaning their remittances don’t go as far.


In Dubai, which is part of the UAE, thousands of workers have staged sometimes-violent protests at construction sites, protesting their decreased buying power. The UAE government is now mulling a minimum wage. Construction and contracting companies worry that will boost their costs, and some executives have spoken out in favor of revaluing the dirham.


In September, Imran Sheikh, 27 years old, moved to Doha, the Qatari capital, after landing a job working the night shift at a reception desk in one of the city’s new apartment towers. Since then, prices for the basics — food, clothing and taxi fare — have marched higher. He makes about 2,000 Qatari riyal, or about $550, a month. As the cost of living creeps up, he’s sending less cash home to his family in Mumbai, India, and that cash buys fewer Indian rupees.


“The prices are going up,” he says. And because of the dollar, “the salaries are smaller.”


Saudi Arabia, too, is struggling with inflation pressures, and unlike other Gulf countries, it has a large and comparatively poor population. Inflation touched 4.9% in September, the highest level in at least a decade. Last month, King Abdullah summoned the interior minister and provincial governors to account for the rising prices. And for the first time in 27 years, Saudi authorities increased the amount banks must hold in reserve in an attempt to limit the money coursing through the economy.


The challenges faced by the countries of the Persian Gulf resonate in places as disparate as China, which ties its yuan closely to the dollar, Ecuador, where dollars serve as the official currency, and Ukraine, which maintains a de facto dollar peg.


The Gulf is “the front line at the moment, but the pressures are much broader,” says Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. These countries share “one consistent factor, which is they’ve pegged themselves to a falling currency.”


Countries in the Persian Gulf have several options. Kuwait chose in May to link its currency, the dinar, to a basket of currencies. Though the exact weighting of the basket isn’t disclosed, experts say the dollar still accounts for a considerable portion. Since the move, the dinar has strengthened about 5% versus the dollar.


Another option would be to maintain the peg to the dollar, but at a new level reflecting the strength of the local currency. A third choice would be to permit the currency to float freely, but that is unlikely because the Persian Gulf nations aren’t eager to allow volatile swings in their currencies.


• The Situation: Wealthy Persian Gulf nations are going through a bad bout of inflation, forcing them to question tying their currencies to the dollar.


• The Background: U.S. interest rates are falling — precisely the wrong direction for red-hot Gulf economies.


• What’s Next: Currency pegs will be at the top of the agenda when Gulf heads of state meet in early December.


Write to Joanna Slater at joanna.slater@wsj.com and Chip Cummins at chip.cummins@wsj.com

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So, rather than just having a deficit spending disadvantage (which I personally have an aversion to) the link and internal link story could be superior in an inflation disadvantage?


also I have a few questions regarding inflation. a) is inflation just the rising of prices B) is inflation printing more money than you can back up c) are there many different types of inflation, if so what are they?

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my recommendation is a series of internal link scenarios all culminating in the same impact. this gives you an opportunity to really cut your teeth on analysis. its not like you are saying that

A --> B --> impact



its that you are saying A --> permutations of the set {A,B,C,D,E,F...} --> impact


for example, lets say the plan was to give a specific medicine to africa. researching the medicine tells you that it is produced from a petroleum derivative.


increased demand for oil --> increasing prices of raw materials (oil) and its down stream effect on transportation of all goods --> inflation crushes the economy


{expenditures break the budget --> forces higher interest rates to keep dollar stable ---> higher rates crush the economy OR expenditures break the budget --> collapses dollar which feeds part A inflation of raw materials and dollar collapse crushes the economy}


unchecked population growth in Africa creates new global markets which increases demand for raw materials (which feeds part A) and makes America less competitive --> crushes the economy


crushing the economy is bad.





inflation is a general trend towards increasing prices of X. you can have price inflation, wage inflation, etc. it can be caused by many sources - there really isnt a single point source of inflation. for example, helium suffers inflation not due to any reason other than the fact that its in increasingly short supply (even if demand is stable).

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okay, thanks,

for the multiple internal link stories, I presume you wouldn't need a card for each. Just in the sake of time, some of these arguments could be analyts correct?

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yes and no. i mean some things you would be 'cutting from a textbook' and thus while its important to have a card, its not necessary to read it. something for example like "if interest rates rise, the dollar gets stronger"

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c) developing the african economy results in our exploiting them as we exploited asia, thus feeding our trade deficits which hurt the dollar.


I don't understand this.

could you explain it in a longer version?

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the biggest advantage america earned by trading with asia was that asia had a huge labor pool which could be exploited at very little cost. believe it or not, in most industries focused on high volume sales (like most consumer goods), labor is the biggest driver of business cost. already we see that manufacturing jobs which were going overseas to china are now leaving china because there are places in the world where labor is cheaper.


by adopting plan to improve public healthcare in SSA, you are providing the tools of labor (health) to a massive labor pool which can be exploited by western worlds, and now the developing asian and south american economies too.


then tack on some cap bad (if you want to go semi-critical), globalization bad (if you want to stay more policy)

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my recommendation is a series of internal link scenarios all culminating in the same impact. this gives you an opportunity to really cut your teeth on analysis. its not like you are saying that

A --> B --> impact



its that you are saying A --> permutations of the set {A,B,C,D,E,F...} --> impact


for example, lets say the plan was to give a specific medicine to africa. researching the medicine tells you that it is produced from a petroleum derivative.


increased demand for oil --> increasing prices of raw materials (oil) and its down stream effect on transportation of all goods --> inflation crushes the economy


{expenditures break the budget --> forces higher interest rates to keep dollar stable ---> higher rates crush the economy OR expenditures break the budget --> collapses dollar which feeds part A inflation of raw materials and dollar collapse crushes the economy}


unchecked population growth in Africa creates new global markets which increases demand for raw materials (which feeds part A) and makes America less competitive --> crushes the economy


crushing the economy is bad.





inflation is a general trend towards increasing prices of X. you can have price inflation, wage inflation, etc. it can be caused by many sources - there really isnt a single point source of inflation. for example, helium suffers inflation not due to any reason other than the fact that its in increasingly short supply (even if demand is stable).


This is an interesting strategy. Here are my concerns:


1. You're committing a long time to one argument. Let's suppose you run three internal link scenarios. You'll need a uniqueness card, several internal link cards (for example, medicine is made from petroleum; increased petroleum usage increases inflation; inflation crushes economy; plan will be expensive [unless they admit it in cross-ex]; a budget tight uniqueness card; higher expenditures equal higher interest rates; interest rate uniqueness card; higher interest rates crush the economy; increased population growth in Africa increases demand for raw materials; increased demand for raw materials crushes American economic growth), and an economic growth impact card.)


Lots of those cards will be short; it's not like reading K cards. And you might be able to find some cards that have two or more internal links in the same piece of evidence. And you might skimp by asserting things like internal uniqueness in 1NC and reading evidence in the block if necessary. But it's still a lot of cards. You're probably committing 4 minutes to that disadvantage.


2. You're going to need case defense. You probably can't counterplan out of case impacts, because the disadvantage would link to agent counterplans or plan exclusive counterplans. Cases this year have big impacts, often with weak internal links. Without spending some serious time on case, the disadvantage won't outweigh. So I think your negative strategy is probably going to be pretty locked in: T, disadvantage, case defense and turns. There's nothing wrong with that, of course.


3. How do you do impact calculus if the affirmative turns one or more of the internal links? Or if it turns an unstated internal link? Suppose 2AC says "increased petroleum use forces early transition to renewables. Only renewables can save the U.S. economy from imminent demise." Or, "American pharmaceutical industry is on the brink. Plan infuses billions into the pharmaceutical industry, leading to its renaissance. Strong pharmaceutical industry key to stopping economic collapse."


The negative can't kick the disadvantage (it's committed too much time to it). If, at the end of the round, the judge looks at the flow and says, "well, the negative is winning these two internal links, but the affirmative is winning the renewables turn and the pharmaceutical turn", what does the judge do? My guess is that unless the negative is winning some case turns, the judge will likely be persuaded that the risk on case side outweighs the risk on the disadvantage.


I don't hate the strategy of one big disadvantage and case defense/turns. I just don't think multiple internal link scenarios is the best way to go.

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this was just an example i threw together without much thought at all. so dont read into it too deeply.



on length

i dont see any reason why its less desirable than a 4 minute critique. the critique advances a single line of logic while this one advances many lines of logic. i was simply trying to illustrate how a debater can put together concepts with many link stories to get to a common impact - but stories which can QUICKLY diverge if the aff goes for impact turn.



on aff responses to internal links

well, thats why all the disads i would advocate are very interconnected. even if the aff takes out one or two, its not like you took out all. at best the aff can claim that probability of disad is decreased, but they cant win it. often times, the answers the aff could provide might be just as bad. for example, on the breaking budget piece, if the neg reads that breaking budget requires higher interest rates to stabilize dollar and the aff turns it with the fed can cut rates to spur growth which balances the costs, the neg can come right back with that crushing the dollar causing unchecked double or triple digit inflation.


my view is that people who are very well versed in economic theory will do well with these disads as a whole.



on case defense

agreed. not saying you pin 100% of your round on one disad. you're talking to someone who almost never went off case (cept for procedurals). i think case debate is a lost art form far superior to modern negative strategy. but it shouldnt be too hard to capture or turn most aff advantages with econ internals. econ links to all of the following: environment, politics, relations, terrorism, war, healthcare, space race, brain drain, drugs, hege, feminism, racism, science, federalism... the list is quite endless. economics trancends and permeates the boundaries of most disciplines.


you wont capture the newfangled critical impacts in postmodern literature... but then i dont know that running an econ disad against such a case is advisable or worthwhile to begin with...






and at the end fo the day, you dont NEED to run alternate internals/link stories. its just an option afforded to you by the nature of economics. its generally not present in most other disad areas.

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For my faithful readers...


Although this next article isnt evidence worthy (IMO), its a very very good look into this whole credit mess and how it affects a lot of pieces of the economy. Overall, it is well written and well-researched and makes Ankur's reading list because it exposes you to a lot of terms you need to know if you want to speak competently about economics.


I have made in-text additions into the article to explain certain terminology you may not be familiar with. Those additions are italicized.


Hopefully, I will be able to get back in the saddle and churn out some new evidence-worthy articles for you early next week (this week is a killer for me).



It's Not 1929, but It's the Biggest Mess Since

By Steven Pearlstein, business columnist, Washington Post

Wednesday, December 5, 2007; Page D01



It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.


We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.


But let me assure you, you ain't seen nothing, yet.


What's important to understand is that, contrary to what you heard from President Bush yesterday, this isn't just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts.


It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will.


At the center of this still-unfolding disaster is the Collateralized Debt Obligation, or CDO. CDOs are not new -- they were at the center of a boom and bust in manufacturing housing loans in the early 2000s. But in the past several years, the CDO market has exploded, fueling not only a mortgage boom but expansion of all manner of credit. By one estimate, the face value of outstanding CDOs is nearly $2 trillion.


[Collateralized Debt Obligations are basically securitized pools of assets. So what does that mean? To steal from a different website, let me give you an example. Lets pretend that you are a bank offering car loans to customers and now you have a bunch of loans and no more cash to create new loans. In order to get money that you can loan out, you need to sell some of these existing loans, but investors dont buy single loans because the risk of default is too high. So, in order to sell off these loans, you (the bank) group the loans you want to get rid of into different packages based on the risk/creditworthiness of those loans. This way if an investor buys a whole group of loans and a couple default, the investor is still probably ahead of the game. The process of packaging these loans into one block for investors is called securitization.]


But let's begin with the mortgage-backed CDO.


[which means that its a securitized collection of mortgages]


By now, almost everyone knows that most mortgages are no longer held by banks until they are paid off: They are packaged with other mortgages and sold to investors much like a bond.


In the simple version, each investor owned a small percentage of the entire package and got the same yield as all the other investors. Then someone figured out that you could do a bigger business by selling them off in tranches corresponding to different levels of credit risk. Under this arrangement, if any of the mortgages in the pool defaulted, the riskiest tranche would absorb all the losses until its entire investment was wiped out, followed by the next riskiest and the next.


[What the hell is a tranch? The simple version is that the income generated through securitization is not paid evenly to investors. So its divisions in the securitization of assets/loans. See the next paragraph of the article.]


With these tranches, mortgage debt could be divided among classes of investors. The riskiest tranches -- those with the lowest credit ratings -- were sold to hedge funds and junk bond funds whose investors wanted the higher yields that went with the higher risk. The safest ones, offering lower yields and Treasury-like AAA ratings, were snapped up by risk-averse pension funds and money market funds. The least sought-after tranches were those in the middle, the "mezzanine" tranches, which offered middling yields for supposedly moderate risks.


[What are hedge funds? Hedge funds are not much different than any other investment advisor. You give your money to some person who takes a fixed fee for managing your assets and an incentive fee based on how much s/he makes for you. So lets say the hedge fund has 100 million in it and it earns 18 million this year. Lets also assume that the fund has a 2.4% management fee and a 20% incentive fee, then the hedge fund manager takes 2.4% of the 100 million (2.4 million) and 20% of the 18 million (3.6 million) for a total of 6 million dollars. At the end of the day, the hedge fund gained 12 million and the manager gained 6 million. Even if the manager loses you money, the manager still gets the management fee either way. The name hedge funds is derived from the concept of financial managers investing in positions which dilute your risk. Say you make a big bet that the price of heating oil is going to go up over the long term, its good to hedge your bets by betting that oil will go down in the short term based on the Farmer's Almanac saying that this winter will be very warm.]


[The ratings referred to in the above paragrah, AAA is one of a series of long term credit ratings given to companies. The Fitch system rates bonds/companies on the following scale from best to worst: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. The signifiers +/- are also used occasionally for bonds/companies whose rating falls in between the established divisions. The rating is reflective of creditworthiness based on the risk of failure. The more exposed a company is to risk, the lower the rating.]


Stick with me now, because this is where it gets interesting. For it is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired.


It was a marvelous piece of financial alchemy, one that made Wall Street banks and the ratings agencies billions of dollars in fees. And because so much borrowed money was used -- in buying the original mortgages, buying the tranches for the CDOs and then in buying the tranches of the CDOs -- the whole thing was so highly leveraged that the returns, at least on paper, were very attractive. No wonder they were snatched up by British hedge funds, German savings banks, oil-rich Norwegian villages and Florida pension funds.


What we know now, of course, is that the investment banks and ratings agencies underestimated the risk that mortgage defaults would rise so dramatically that even AAA investments could lose their value.


One analysis, by Eidesis Capital, a fund specializing in CDOs, estimates that, of the CDOs issued during the peak years of 2006 and 2007, investors in all but the AAA tranches will lose all their money, and even those will suffer losses of 6 to 31 percent.


And looking across the sector, J.P. Morgan's CDO analysts estimate that there will be at least $300 billion in eventual credit losses, the bulk of which is still hidden from public view. That includes at least $30 billion in additional write-downs at major banks and investment houses, and much more at hedge funds that, for the most part, remain in a state of denial.


As part of the unwinding process, the rating agencies are in the midst of a massive and embarrassing downgrading process that will force many banks, pension funds and money market funds to sell their CDO holdings into a market so bereft of buyers that, in one recent transaction, a desperate E-Trade was able to get only 27 cents on the dollar for its highly rated portfolio.


Meanwhile, banks that are forced to hold on to their CDO assets will be required to set aside much more of their own capital as a financial cushion. That will sharply reduce the money they have available for making new loans.


And it doesn't stop there. CDO losses now threaten the AAA ratings of a number of insurance companies that bought CDO paper or insured against CDO losses. And because some of those insurers also have provided insurance to investors in tax-exempt bonds, states and municipalities have decided to pull back on new bond offerings because investors have become skittish.


If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.


That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.


[What is commercial paper? When comapnies are large and have very good credit ratings (generally AAA), in order to get 'loans' they issue a certificate of deposit themselves. They can offer you, an investor, a 5% return for giving them the money, and that is cheaper than the company going to the bank for a loan which might cost them 7%. By issuing their own debt, they save themselves 2%]


It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.


It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.


And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.


This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

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...3. How do you do impact calculus if the affirmative turns one or more of the internal links? Or if it turns an unstated internal link? Suppose 2AC says "increased petroleum use forces early transition to renewables. Only renewables can save the U.S. economy from imminent demise." ...
Double turn:

1 - Forced transition from increased petroleum usage absurdly expensive and time consuming.

a - Building the infrastructure for electric or fuel cell cars will cost billions and take a decade.

b - Transitioning the power grid away from oil/natural gas will cost billions and take a decade.

c - Development of non-petroleum fertilizers and pesticides will cost billions and take decades.

2 - The increased cost must be absorbed by an ever weakening dollar even while we continue to spend on oil. (links back to impacts)


3 - Ewhen fully realized , renewables cannot generate enough energy to maintain current usage and growth, meaning energy costs of Aff plan can also not be sustained without excessive investment in capital. (links back to impacts)


Ankur is right in pointing out the broad scale of linkage being the strength of the well-run econ position and not the weakness.

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I just disagree. To me, its kind of like running three different politics disadvantages in the same round. You're really just running three econ disadvantages but grouping the links. And I maintain that if the affirmative turns one or more of the multiple links, it's going to be a mess in 2NR to explain how the first link is better than the turn on the second link, etc.


Also, what do you do with the uniqueness for the internal links? Which of the internal link scenarios puts us over the brink? 2AC could spend 3 minutes on increased oil demand inevitable (which, by the way, is true at least in the medium term). Then say, we accept their internal link that increased oil demand increases inflation and crushes the economy. This means that none of the disadvantage is unique. You can only crush the economy once, and it will happen whether or not plan is passed.


The negative block is then forced into the position of arguing that increased oil demand is not inevitable (a difficult task) or arguing that giving some pharmaceuticals made from feeder stocks is the difference between crushing the economy or not. I guess the negative gets some risk there, but it better be winning a whole lot on case.

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