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Forget that dude... are you looking at the futures? The futures are trending own 4.6%. Thats insane!

 

 

 

 

AP

Asia Markets Tumble on US Worries

Monday January 21, 10:34 pm ET

By Yuri Kageyama, AP Business Writer

Asian Markets Extend Losses Amid Worries That US Is Headed for Recession

 

 

TOKYO (AP) -- Global stock markets extended their shakeout into a second day Tuesday, plunging amid worries that a possible U.S. recession will cause a worldwide economic slowdown. The dramatic declines were expected to spread to Wall Street, where stock index futures were already down sharply hours before the trading day began.

 

Japan's Nikkei 225 index, the benchmark for Asia's biggest bourse, skidded 4.4 percent in morning trading to 12,738.31 points, after dropping 3.9 percent Monday. Hong Kong's Hang Seng index was down 5.2 percent after plunging 5.5 percent the day before.

 

"Unless we get some positive 'shock effects,' such as drastic measures from the U.S. government, there is almost no hope for a recovery in stocks," said Koji Takeuchi, senior economist at Mizuho Research Institute in Tokyo.

 

U.S. markets were closed Monday for a holiday commemorating civil rights leader Martin Luther King Jr. But Wall Street future prices were down sharply, portending a plunge when trading begins at 9:30 a.m. Eastern time.

 

Dow Jones industrial average futures were down 436 points, or 3.6 percent, at 11,670, while Standard & Poor's 500 futures were down 57.1 points, or 4.3 percent, at 1,268.

 

Markets have been plunging amid pessimism about the ability of the U.S. government to prevent a recession. The Federal Reserve has indicated it will lower interest rates further, and President Bush has proposed an economic stimulus package that includes $145 billion in tax cuts, but investors around the world are doubtful that the measures will lift the economy quickly.

 

The U.S. economy has been battered by a slump in the housing market and a credit crisis that has led to billions of dollars of losses among major U.S. banks.

 

In Europe Monday, investors also dumped stocks, sending the Britain's benchmark FTSE-100 down 5.5 percent and France's CAC-40 Index sliding 6.8 percent. Germany's blue-chip DAX 30 plunged 7.2 percent to 6,790.19.

 

Takeuchi said investors feel that the selloff is spreading worldwide, setting off fears of a global downturn. Risks of economic contraction have been growing in Japan as both exports and consumer spending are weakening, he said.

 

Kirby Daley, strategist at Newedge Group, said the Nikkei could shed another 10 percent to 15 percent to the 11,000 level in the next few months. Japanese companies depend on exports and capital investments to keep up profits, and both are endangered if there is a U.S. slowdown, he said.

 

"The argument that valuations are cheap for Japanese stocks is flawed," Daley said. "The basis for those earnings valuations doesn't consider ongoing problems in the U.S. economy, which are likely to get worse."

 

Even usually upbeat Japanese Economy Minister Hiroko Ota acknowledged that downsides risks are growing, given the volatile markets and surging oil prices.

 

"The economy keeps recovering as recent production data show, but downside risks are growing these days," Ota told reporters.

 

 

 

 

 

 

 

 

Dow industrials are set to drop 500 By TIM PARADIS, AP Business Writer

24 minutes ago

 

 

 

NEW YORK - Wall Street was expected to plunge at the opening of trading Tuesday, extending its huge losses from last week and taking more cues from heavy selling that has spread throughout the world. Indicators showed the Dow Jones industrial average was set to fall by more than 500 points when trading begins.

 

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Fears of a recession in the United States that could pull down the global economy as well have infected markets around the world, and those declines further unnerved U.S. investors who were unable to trade Monday, when Wall Street was closed for Martin Luther King Jr. Day.

 

Dow futures fell 553, or 4.57 percent, to 11,553. Standard & Poor's 500 index futures fell 67.20, or 5.07 percent, to 1,258.10. Nasdaq 100 index futures dropped 86.50, or 4.68 percent, to 1,763.00.

 

In Asia, Japan's Nikkei stock average closed down 5.65 percent — its biggest percentage drop in nearly a decade. Hong Kong's Hang Seng index lost 8.65 percent a day after showing its biggest losses since the Sept. 11, 2001, terrorist attacks.

 

In afternoon trading, Britain's FTSE 100 fell 0.69 percent, Germany's DAX index lost 2.55 percent and, France's CAC-40 fell 1.39 percent.

 

Some of the more modest moves in major global indexes Tuesday belie the huge drops many saw Monday.

 

A big question on investors' minds is whether the Federal Reserve, scheduled to meet next week, will make an emergency interest rate cut before then. Traders outside the U.S. were pondering whether other central banks would step in with interest-rate cuts to help shore up market sentiment.

 

Last week, each of the major U.S. indexes fell more than 4 percent as investors grew skeptical late in the week that plans by U.S. lawmakers and President Bush to stimulate the U.S. economy will keep the U.S. from tipping into recession. The plan Bush announced Friday, which requires the OK of Congress, outlines $145 billion in tax relief to help spur consumer spending.

 

Bond prices rose sharply as investors searched for safety amid the global stock pullback. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.49 percent from 3.63 percent late Friday.

 

The dollar was mixed against other major currencies.

 

Corporate news weighed on stocks as well as concerns about the widespread pullback in stocks.

 

Bank of America Corp. said its fourth-quarter earnings fell sharply amid credit losses and weak investment banking results. Profits at the bank declined to $268 million, or 5 cents per share, from $5.26 billion, or $1.16 per share, a year earlier.

 

Meanwhile, Wachovia Corp. said its fourth-quarter earnings fell 98 percent after the bank wrote down $1.7 billion in the value of certain portfolios and set aside $1.5 billion to cover bad loans. Earnings fell to $51 million, or 3 cents per share, from $2.3 billion, or $1.20 per share, a year earlier.

 

There was some good news. DuPont, one of the 30 stocks that make up the Dow industrials, said its fourth-quarter profits fell 37 percent from a year ago when earnings benefited from one-time items. Earnings fell to $545 million, or 60 cents per share, from $871 million, or 94 cents per share, in the year-ago period. But excluding items, results topped Wall Street's expectations amid strength in its international business.

 

 

 

 

 

 

 

 

 

Asia, European markets extend decline By TOBY ANDERSON, AP Business Writer

9 minutes ago

 

 

 

LONDON - Turbulence roiled world stock markets again Tuesday, with Asian stocks down for a second day on fears of recession in the US. European stocks fell at the opening but then pared their losses in voaltile trading.

 

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"Some people think there's going to be a deep fall off a cliff" because of a potential recession in the U.S., said Lawrence Peterman, investement director at Eden Financial, a London-based stockbroker. He saw opportunities in British stocks however.

 

The dramatic declines in Asia and Europe so far this week threatened to spread to Wall Street after the three-day Martin Luther King holiday weekend that saw U.S. markets closed Monday. Early indicators suggested prices on Wall Street would plunge when the markets open there Tuesday.

 

By midday, the U.K.'s FTSE 100 was down 0.3 percent at 5,560.90, Germany's DAX down 1.7 percent at 6,671.82, while France's CAC 40 dropped 1.3 percent to 4,681.07.

 

Japan's Nikkei 225 index tumbled 5.7 percent — its biggest percentage drop in nearly 10 years — to 12,573.05, a day after falling 3.9 percent. Australia's benchmark index sank 7.1 percent, its steepest one-day slide in nearly 20 years.

 

Hong Kong's Hang Seng index, which slumped 5.5 percent Monday, finished down 8.7 percent. In China, the Shanghai Composite index lost 7.2 percent to 4,559.75, its lowest close since August.

 

Indian Finance Minister P. Chidambaram urged investors to remain calm after trading in Mumbai was halted for an hour when the stock market there fell 10 percent within minutes of opening. The Sensex rebounded some to close down 5 percent after plunging 7.4 percent Monday.

 

"There is no reason at all to allow the worries of the Western world to overwhelm us," Chidambaram said.

 

Investors have dumped shares in frenetic trading the last two days on worries that the U.S. economy, battered by a credit crisis and housing slump, will shrink in coming months, weakening demand for exports.

 

There is also skepticism that U.S. authorities will be able to prevent a recession. The Federal Reserve has indicated it will lower interest rates further, and President Bush has proposed an economic stimulus package that includes $145 billion in tax cuts, but investors around the world are doubtful that the measures will lift the economy quickly.

 

"Unless we get some positive 'shock effects,' such as drastic measures from the U.S. government, there is almost no hope for a recovery in stocks," said Koji Takeuchi, senior economist at Mizuho Research Institute in Tokyo.

 

Oil and gold prices also fell. Light, sweet crude for February delivery fell to $87.72 a barrel on expectations that slower U.S. growth will lead to less demand for crude. Spot gold, which usually benefits from market uncertainty, fell to a two-week low of $855.20 per troy ounce.

 

In the U.S. stocks are expected to tumble following the long holiday weekend.

 

"U.S indices are heading for carnage at the open," said Martin Slaney, a trader at U.K. spreadbettor GFT Global Markets.

 

U.S. markets were closed Monday for a holiday commemorating civil rights leader Martin Luther King Jr. But Wall Street future prices were down sharply. The Dow Jones industrial average futures were down 523 points, or 4.3 percent, while Standard & Poor's 500 futures were down 64.4 points, or 4.8 percent.

 

Noritsugu Hirakawa, who monitors stock trading at Okasan Securities Co. in Tokyo, said investors were spooked by the drastic falls on Chinese and Indian markets — the two emerging economies that are viewed as sustaining global growth even as the U.S. economy sputters.

 

"The end to the slides in Asian stocks is nowhere in sight," he said. "There is even speculation that China may be exposed to the U.S. subprime mortgage crisis."

 

Indonesia's benchmark index closed the day down 7.7 percent, Singapore's Straits Times index sank 6 percent and Taiwan's market fell 6.5 percent.

 

Asian markets have been in a downward spiral for most of January. Since the start of the year, Japan's Nikkei index has tumbled nearly 18 percent, while the Hang Seng is down a stunning 22 percent.

 

Even the usually upbeat Japanese Economy Minister Hiroko Ota acknowledged that threats were growing.

 

"We must take the approach of working together with other nations on this," she said on nationally televised news.

 

___

 

Associated Press writers Ramola Talwar Badam in Mumbai, Yuri Kageyama in Tokyo and Cassie Biggs in Hong Kong contributed to this report.

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The markets, domestic and international, are getting shellacked. There is no other way to put it. And because of that, it is difficult to find any good articles on the basis that everything is so volatile there is an absurd level of news reporting and its constantly changing. But one thing is for sure:

 

The dollar is in a crisis. As soon as the Fed announced a three quarter point rate cut, the likes of which havent been seen in 20 years, and promised more if necessary, the dollar began tanking. In all my years of watching the currency exchanges, I have never seen the dollar go down (or up, for that matter) by a full percent in a single day. This is what I call an old-fashioned rope-a-dope pounding of the dollar. With lower interest rates and a weaker dollar, inflation is going to be higher this year than the last (when it was an unhealthy 4.7%).

 

Its clear that the Fed is unable to do much of anything and whatever they are doing is hurting the markets. On one hand, they put a defibrillator on the heart of the economy, but the flip side is that they are revving up the inflation engine and pumping it full of an explosive dollar. The reverse could be just as bad - not changing rates would certainly plunge the economy into a recession.

 

I think the Fed is going beyond its means here. An emergency 75 basis point cut wasnt needed nor advisable with a Fed meeting coming up in a week. Inflation is always the big worry and they are casting it aside as a 'short term necessity'. The economy is like a drunk - its better to puke it up and feel really bad right away and recover in hours than suffer through a hangover for the next two days.

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Not necessarily. We are just moving closer and closer to a threshold. Things are far more volatile now and rocking the boat in any direction is going to cause a panic of sorts. Right now is best suited for a 'let the markets play out time'. Running a plan which has a significant economic impact would be disastrous. A anti-patents case would be catastrophic right now.

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I was only partly serious. It will be easier now to make "econ collapse inevitable" arguments for affs. Of course, that hands workability to neg. (Not that anyone runs it any more)

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Problem is spending increases interest rates...so running it ankurs way makes the link tougher to win.

 

Maybe fed cut good, only thing avoiding recession and saving the dollar, and spending would destroy all this progress?

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The problem is inflation. While the cut will certainly have some positive short term effect, the long term inflation will outweigh the benefits of growth. The idea of a perpetually growing economy with no recessions is kind of like an ethical congressperson - a myth we'd all like to believe in.

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This is a series of articles written by Henry C K Liu, chairman of a New York-based private investment group. His website is at http://www.henryckliu.com.

 

Although his view of Greenspan's actions differs from my own, and it provides a lot of fodder for anti-Fed activists like the resident political nutjobs of the Ron Paul ilk, its still a well written piece and for an economics debater, a virtual gold mine of arguments. It would be too complicated to write a synopsis of the entire series because its pages and pages long... but if you have questions about specific parts, then please ask. Chances are if you are confused, so is someone else...

 

 

 

 

==========================================================

THE ROAD TO HYPERINFLATION

Fed helpless in its own crisis

By Henry C K Liu

January 26, 2008

Asia Times Online

http://www.atimes.com/atimes/Global_Economy/JA26Dj04.html

 

After months of denial to soothe a nervous market, the Federal Reserve, the US central bank, finally started to take increasingly desperate steps to try to inject more liquidity into distressed financial institutions to revive and stabilize credit markets that have been roiled by turmoil since August 2007 and to prevent the home mortgage credit crisis from infesting the whole economy.

 

Yet more liquidity appears to be a counterproductive response to a credit crisis that has been caused by years of excess liquidity. A liquidity crisis is merely a symptom of the current financial malaise. The real disease is mounting insolvency resulting from excessive debt for which adding liquidity can only postpone the day of reckoning towards a bigger problem but cannot cure. Further, the market is stalled by a liquidity crunch, but the economy is plagued with excess liquidity. What the Fed appears to be doing is to try to save the market at the expense of the economy by adding more liquidity.

 

The Federal Reserve has at its disposal three tools of monetary policy: open market operations to keep Fed Funds rate on target, the discount rate and bank reserve requirements. The Board of Governors of the Federal Reserve System is responsible for setting the discount rate at which banks can borrow directly from the Fed and for setting bank reserve requirements. The Federal Open Market Committee (FOMC) is responsible for setting the Fed Funds rate target and for conducting open market operations to keep it within target. Interest rates affects the cost of money and the bank reserve requirements affect the size of the money supply.

 

The FOMC has 12 members - the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year to review economic and financial conditions, determine the appropriate stance of monetary policy, and assess the risks to its long-run goals of price stability and sustainable economic growth. Special meetings can be called by the Fed chairman as needed.

 

Using these three policy tools, the Federal Reserve can influence the demand for, and supply of balances that depository institutions hold at Federal Reserve Banks and in this way can alter the federal funds rate target, which is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Changes in the federal funds rate trigger a chain of effects on other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and market prices of goods and services.

 

Yet the effects of changes in the Fed Funds rate on economic variables are not static nor are they well understood or predictable since the economy is always evolving into new structural relationships among key components driven by changing economic, social and political conditions. For example, the current credit crisis has evolved from the unregulated global growth of structured finance with the pricing of risk distorted by complex hedging which can fail under conditions of distress. The proliferation of new market participants such as hedge funds operating with high leverage on complex trading strategies has exacerbated volatility that changes market behavior and masked heightened risk levels in recent years. The hedging against risk for individual market participants has actually increased an accumulative effect on systemic risk.

 

The discount window is designed to function as a safety valve in relieving pressures in interbank reserve markets. Extensions of discount credit can help relieve liquidity strains in individual depository institutions and in the banking system as a whole. The discount window also helps to ensure the basic stability of the payment system more generally by supplying liquidity during times of systemic stress. Yet the discount window can have little effect when a liquidity drought is the symptom rather than the cause of systemic stress.

 

Banks in temporary distress can borrow short term funds directly from a Federal Reserve Bank discount window at the discount rate, set since January 9, 2003 at 100 basis points above the Fed Funds rate. Prior to that date, the discount rate was set below the target Fed Funds rate to provide help to distressed banks but a stigma was attached to discount window borrowing. Healthy banks would pay 50 to 75 basis points in the money market rather than going to the Fed discount widow, complicating the Fed’s task in keeping the Fed Funds rate on target. Part of the reason for raising the discount rate 100 basis point above the Fed Funds rate on January 9, 2003 was to remove this stigma that had kept many banks from using the Fed discount window. (For a historical account of the change of the discount rate, see Central bank impotence and market liquidity, Asia Times Online, August 24, 2007.)

 

Both the discount rate and the Fed Funds rate are set by the Fed as a matter of policy. On August 17, 2007, the discount window primary credit program was temporarily changed to allow primary credit loans for terms of up to 30 days, rather than overnight or for very short terms as before. Also, the spread of the primary credit rate over the FOMC's target federal funds rate has been reduced to 50 basis points from its customary 100 basis points. These changes will remain until the Federal Reserve determines that market liquidity has improved. The Fed keeps the Fed Funds rate within narrow range of its target through FOMC trading of government securities in the repo market.

 

A repurchase agreement (repo) is a loan, often for as short as overnight, typically backed by top-rated US Treasury, agency, or mortgage-backed securities. Repos are contracts for the sale and future repurchase of top-rated financial assets. It is through the repo market that the Fed injects funds into or withdraws funds from the money market, raising or lowering overnight interest rates to the level set by the Fed. (See The Wizard of Bubbleland - Part II: The repo time bomb Asia Times Online, September 29, 2005).

 

Until the regular FOMC meeting scheduled for January 29, 2008, the discount rate had been expected to stay at 4.75% while the Fed Funds target would stay at 4.25%, with a 50 basis points spread, half of normal, which had been set at a spread of 100 basis points since January 9, 2003. From a high of 6% set on May 18, 2000, the Fed had lowered the discount rate in 12 steps to 0.75% by November 7, 2002 and kept it there until January 8, 2003 while the Fed Funds rate target was set at 1.25%, 50 basis points above. On January 9, 2003, the discount rate was set 100 basis points above the Fed Funds rate target. Then the Fed gradually raised the discount rate back up to 6% by May 10, 2006 and again to 6.25% on June 29, 2006. On August 18, 2007, in response to the sudden outbreak of the credit market crisis, the Fed panicked and dropped the discount rate 50 basis points to 5.75%, and continued lowering it down to the current level of 4.75% set on December 12, 2007.

 

On Monday, January 21, a week before the scheduled FOMC meeting, global equities plunged as investor concerns over the economic outlook and financial market turbulence snowballed into a sweeping sell-off. Tumbling Asian shares - which continued to fall early on Tuesday - led European stock markets into their biggest one-day fall since the 9/11 terrorist attacks of 2001 as the prospect of a US recession and further fall-out from credit market turmoil prompted near panic among investors, forcing them to rush to the safety of government bonds.

 

About $490 billion was wiped off the market value of Europe's FTSE Eurofirst 300 index and $148 billion from the FTSE 100 index in London, which suffered its biggest points slide since it was formed in 1983. Germany's Xetra Dax slumped 7.2% to 6,790.19 and France's CAC-40 fell 6.8% to 4,744.45, its worst one-day percentage point fall since September 11, 2001. The price collapse was driven by general negative sentiments and not, so far as was apparent at the time, by any one identifiable event.

 

After being closed on Monday for the Martin Luther King holiday, US stock benchmarks echoed foreign markets with big declines, extending large losses from the previous week, with bearish sentiments accelerated by heavy selling across global markets. About an hour before the NY Stock Exchange open on Tuesday, the Federal Reserve announced a cut of 75 basis points of the Fed Funds rate target to 3.50%, the first time that the Fed has changed rates between meetings since 2001, when the central bank was battling the combined impacts of a recession and the terrorist attacks.

 

Fed officials decided on their move at a videoconference at 6pm US time on Monday, January 21, with one policymaker - Bill Poole, the president of the St Louis Fed, dissenting. In a statement, the Fed said it acted "in view of a weakening of the economic outlook and increased downside risks to growth". It said that while strains in short-term money markets had eased, "broader financial conditions have continued to deteriorate and credit has tightened further for some businesses and households". And new information also indicated a "deepening of the housing contraction" and "some softening in labor markets".

 

Subsequently, French bank Societe Generale SA said that bets on stock index futures by a rogue trader had caused a 4.9 billion-euro ($7.2 billion) trading loss, the largest in banking history. This led to speculation, rejected by the bank, that the market declines in Europe on Monday were in part the consequence of the Societe Generale unwinding trading positions linked to European stock index futures on January 21, when equity markets in France, Germany and the UK fell more than 5% and the day before the Fed rate cut.

 

"It's not possible that our covering operations contributed to the market's fall,'' said Philippe Collas, the head of asset management at the bank, according to a Bloomberg report on January 25.

 

The Fed in announcing its rate cut pledged to act in a "timely manner as needed" to address the risks to growth, implying that it expects to cut the federal funds rate rates still further and will consider doing so at its scheduled policy meeting on January 30.

 

In overnight trade, Asian shares extended their losses. Japan's Nikkei 225 index accumulated its worst two-day decline in nearly two decades, losing more than 5% and falling below 13,000 for the first time since September 2005.

 

Initially, the Fed move caused S&P stock futures to jump but within half an hour they were lower than they had been at the moment the rate cut was announced. The Dow Jones Industrial Average, down 465 points shortly after market open, fluctuated throughout the day before closing with a milder drop of 126.24, or 1.04%, at 11,973.06, the first closing below 12,000 since November 3, 2006.

 

The move was the first unscheduled Fed rate cut since September 17, 2001 and its largest increment since regular meetings began in 1994. It was a sharp departure from traditional gradualism preferred by the Fed and wild volatility in the market can be expected as a result. S&P equity volatility as measured by the Vix index surged 38%, eclipsing the high set in August when the credit crisis first surfaced.

 

The aggressive Fed action triggered a rebound in European stock markets, but was not enough to stop the US equity market - which had been closed when markets fell globally on Monday - from trading lower. At midday the S&P 500 index was at 1,302.24 down 1.7% on the day and 11.3% so far this year amid mounting concern over the prospect of a US recession and further credit market turmoil. While financial stocks had rebounded 1.8% in morning trading, other main sectors were sharply lower, by a 3.4% decline in technology shares.

 

While the Fed has the power to independently set the discount rate directly and keep the Fed Funds rate on target indirectly through open market operations, the impact of short-term rates on monetary policy implementation has been diluted by long-term rates set separately by deregulated global market forces. When long-term rates fall below short-term rates, the inverted rate curve usually suggests future economic contraction.

 

Both discount and Fed funds loans are required to be collateralized by top-rated securities. Since August 2007, the Fed has been faced with the problem of encouraging distressed banks to borrow from the Fed discount window without suffering the usual stigma of distress, accepting as collateral bank holdings of technically still top-rated collateralized debt obligations (CDOs) which in reality have been impaired by their tie to subprime home mortgage debt obligations that have lost both marketability and value in a credit market seizure.

 

As economist Hyman Minsky (1919-1996) observed insightfully, money is created whenever credit is issued. The corollary is that money is destroyed when debts are not paid back. That is why home mortgage defaults create liquidity crises. This simple insight demolishes the myth that the central bank is the sole controller of a nation’s money supply. While the Federal Reserve commands a monopoly on the issuance of the nation's currency in the form of Federal Reserve notes, which are "legal tender for all debts public and private", it does not command a monopoly on the creation of money in the economy.

 

The Fed does, however, control the supply of "high power money" in the regulated partial reserve banking system. By adjusting the required level of reserves and by injecting high power money directly into the banking system, the Fed can increase or decrease the ability of banks to create money by lending the same money to customers multiple times, less the amount of reserves each time, relaying liquidity to the market in multiple amounts because of the mathematics of partial reserve. Thus with a 10% reserve requirement, a $1,000 initial deposit can be loaned out 45 times less 10% reserve withheld each time to create $7,395 of loans and an equal amount of deposits from borrowers.

 

But money can be and is created by all debt issuers, public and private, in the money markets, many of which are not strictly regulated by government. While a predominant amount of global debt is denominated in dollars, on which the Fed has monopolistic authority, the notional value used in structured finance denominated in dollars, which reached a record $681 trillion in third quarter 2007, is totally outside the control of the Fed. Virtual money is largely unregulated, with the dollar acting merely as an accounting unit. When US homeowners default on their mortgages en mass, they destroy money faster than the Fed can replace it through normal channels. The result is a liquidity crisis which deflates asset prices and reduces monetized wealth.

 

As the debt securitization market collapses, banks cannot roll over their off-balance sheet liabilities by selling new securities and are forced to put the liabilities back on their own balance sheets. This puts stress on bank capital requirements. Since the volume of debt securitization is geometrically larger than bank deposits, a widespread inability to roll over short term debt securities will threaten banks with insolvency.

 

The Fed can create money, not wealth

Money is not wealth. It is only a measurement of wealth. A given amount of money, qualified by the value of money as expressed in its purchasing power, represents an account of wealth at a given point in time in an operating market. Given a fixed amount of wealth, the value of money is inversely proportional to the amount of money the asset commands: the higher the asset price in money terms, the less valuable the money. When debt pushes asset prices up, it in effect pushes the value of money down in terms of purchasing power. In an inflationary environment, when prices are kept high by excess liquidity, monetized wealth stored in the underlying asset actually shrinks. This is the reason why hyperinflation destroys monetized wealth.

 

When the central bank withdraws money from the market by selling government securities, it in essence reduces sovereign credit outstanding because a central bank never needs to borrow its own currency, which it can issue at will, the only constraint being the impact on inflation, which can become a destroyer of monetized wealth when inflation is tolerated not as a stimulant for growth but merely to prop up an overpriced market in a stagnant economy.

 

Yet debt can only be issued if there are ready lenders and borrowers in the credit market. And the central bank is designed to serve as "lender of last resort" when lenders become temporarily scarce in credit markets. But when borrowers are scarce not due to short-term cash flow problems but due either to low credit rating or insufficient borrower income to service debts, the central bank has no power to be a "borrower of last resort".

 

The role of "borrower of last resort" belongs to the federal government, as Keynes observed when he advocated government deficit spending to moderate business cycles. The Bush administration, through the Treasury, sells sovereign bonds to finance a hefty fiscal deficit. The only problem is that it spends both taxpayer money and proceeds from sovereign bonds mostly on wars overseas, leaving the domestic economy in a liquidity crisis.

 

To address an impending recession, the Bush 2008 proposal of a $150 billion stimulus package of tax relief, representing 1% of GDP, would target $100 billion to individual taxpayers and about $50 billion toward businesses. Economists said a reasonable range for tax cuts in the package might be $500 to $1,000 per tax payer, averaging $800. Bush said the income tax relief "would help Americans meet monthly bills and pay for higher gas prices". The policy objective is to keep consumers spending to stimulate the slowing economy, as consumer spending accounts for about 70% of the US economy.

 

Speaking after the president, Secretary of the Treasury Henry Paulson said he was confident of long-term economic strength, but that "the short-term risks are clearly to the downside, and the potential cost of not acting has become too high." He added that 1% of GDP would equate to $140 billion to $150 billion, which is along the lines of what private economists say should be sufficient to help give the economy a short-term boost.

 

"There's no silver bullet," Paulson said, "but, there's plenty of evidence that if you give people money quickly, they will spend it."

 

Yet the Republican proposal favors a tax rebate, meaning that only those who actually paid taxes would get a refund. That means a family of four with an annual income of $24,000 would receive nothing and only those with annual income of over $100,000 would get the full $800 rebate per taxpayer, or $1,600 for joint return households.

 

Further, against a total US consumer debt (which includes installment debt, but not home mortgage debt) of $2.46 trillion in June 2007, which came to $19,220 per tax payer, the Bush rebate of $800 would not be much relief even in the short term. In 2007, US households owed an average of $112,043 for mortgages, car loans, credit cards and all other debt combined. Outstanding credit default swaps is around $45 trillion, which is three times larger than US GDP of $15 trillion and 3,000 times larger than the Bush relief plan of $150 billion.

 

Bush did not push for a permanent extension of his 2001 and 2003 tax cuts, many of which are due to expire in 2010, eliminating a potential stumbling block to swift action by Congress, since most the controlling Democrats oppose making the tax cuts permanent. The 2008 tax relief proposal harks back to the Bush 2001 and 2003 tax cuts, which were at variance with established principles that an effective tax stimulus package needs to maximize the extent to which it directly stimulates new economic activity in the short-term and minimize the extent to which it indirectly restrains new activity by driving up interest rates.

 

The Bush tax cuts were implemented without first adopting an overall stimulus budget; without designing business incentives to provide reasons for new investment, rather than windfalls for old investment; nor designing household tax cuts to maximize the effects on short-term spending; without focusing on temporary (one-year) items for businesses and households, not permanent ones. Most significant of all, they failed to maintain long-term fiscal discipline.

 

The flawed 2001 Bush tax stimulus package included five items: 1) A permanent tax subsidy (through partial expensing) of business investment; 2) permanent elimination of the corporate alternative minimum tax; 3) permanent changes in the rules applying to net operating loss carry-backs; 4) acceleration of some of the personal income tax reductions scheduled for 2004 and 2006 and 5) a temporary household tax rebate aimed at lower- and moderate-income workers who actually paid income taxes, a condition that reduced its effectiveness.

 

The 2001 Bush tax stimulus package included permanent changes that were less effective at stimulating the economy in the short run than temporary changes but more expensive. And its acceleration of the recently enacted tax cuts for higher-income taxpayers was poorly targeted and potentially counter-productive. A more effective stimulus package would combine the household rebate aimed at lower- and moderate-income workers with a temporary incentive for business investment. Yet for the last two decades, even in boom time, the US middle class has not been receiving its fair share of income while increasingly bearing a larger share of public expenditure. The long-term trend of income disparity is not being addressed by the bipartisan short-term stimulus package.

 

War costs

The Congressional Research Service (CRS) report, updated November 9, 2007, shows that with enactment of the FY2007 supplemental on May 25, 2007, Congress has approved a total of about $609 billion for military operations, base security, reconstruction, foreign aid, embassy costs, and veterans’ health care for the three operations initiated since the 9/11 attacks: Operation Enduring Freedom (OEF) Afghanistan and other counter terror operations; Operation Noble Eagle (ONE), providing enhanced security at military bases; and Operation Iraqi Freedom (OIF). A 2006 study by Columbia University economist Joseph E Stiglitz, the 2001 Nobel laureate in economic, and Harvard professor Linda Bilmes, leading expert in US budgeting and public finance and former Assistant Secretary and Chief Financial Officer of the US Department of Commerce, concluded that the total costs of the Iraq war could top $2 trillion.

 

Greenspan sees no Fed cure

Alan Greenspan, the former Fed chairman, wrote in a defensive article in the December 12, 2007 edition of the Wall Street Journal: "In theory, central banks can expand their balance sheets without limit. In practice, they are constrained by the potential inflationary impact of their actions. The ability of central banks and their governments to join with the International Monetary Fund in broad-based currency stabilization is arguably long since gone. More generally, global forces, combined with lower international trade barriers, have diminished the scope of national governments to affect the paths of their economies."

 

In exoteric language, Greenspan is saying that short of moving towards hyperinflation, central banks have no cure for a collapsed debt bubble.

 

Greenspan then gives his prognosis: "The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated and home price deflation comes to an end ... Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the US economy, and the global economy more generally, will be able to get back to business."

 

Greenspan did not specify whether "getting back to business" as usual means onto another bigger debt bubble as he had repeatedly engineered during his 18-year-long tenure at the Fed. Greenspan is advocating first a manageable amount of pain to moderate moral hazard, then massive liquidity injection to start a bigger bubble to get back to business as usual. What Greenspan fails to understand, or at least to acknowledge openly, is that the current housing crisis is not caused by an oversupply of homes in relation to demographic trends. The cause lies in the astronomical rise in home prices fueled by the debt bubble created by an excess of cheap money.

 

Mortgage crisis to corporate debt crisis

Many homeowners with zero or even negative home equity cannot afford the reset high payments of their mortgages with current income which has been rising at a much slower rate than their house payments. And as housing mortgage defaults mount, the liquidity crisis deepens from money being destroyed at a rapid rate, which in turn leads to counterparty defaults in the $45 trillion of outstanding credit swaps (CDS) and collateralized loan obligations (CLO) backed by corporate loans that destroy even more money, which will in turn lead to corporate loan defaults.

 

Proposed government plans to bail out distressed home owners can slow down the destruction of money, but it would shift the destruction of money as expressed by falling home prices to the destruction of wealth through inflation masking falling home value.

 

Credit insurers such as MBIA, the world's largest financial guarantor, whose shares have dropped 81% in 2007 to $13 from a high of $73, are on the brink of bankruptcy from their deteriorating capital position in light of rating agencies reviews of residential mortgage-backed securities and collateralized debt obligations that have been insured by MBIA, or similar insurers, reviews that are expected to stress claims-paying ability.

 

On December 10, 2007, MBIA received a $1 billion boost to its cash reserves from private equity firm Warburg Pincus in an effort to protect its credit rating. By January 10, 2008, MBIA announced it would try to raise another $1 billion in "surplus notes" at 12% yield. The next day, traders reported that the deal was facing problems in attracting investors and might have to raise the yield to 15%. But Bill Ackman of Pershing Square Capital Management told Bloomberg that regulators can be expected to block payment to surplus note holders. Further, raising enough new capital to retain credit ratings would so dilute existing shareholder value as to remove all incentive to save the enterprise.

 

Maintaining an AAA credit rating is of utmost important to bond insurers like MBIA because they need a strong credit rating in order to guarantee debt. Moody's, Standard & Poor's and Fitch are all reviewing the financial strength ratings of bond insurers, which write insurance policies and other contracts protecting lenders from defaults.

 

For the insurers to maintain the necessary triple-A rating, their capital reserve would have to be repeatedly increased along with the premium they charge. There will soon come a time when insurance premium will be so high as to deter bond investors. Already, the annual cost of insuring $10 million of debt against Bear Stern defaulting has risen from $40,000 in January 2007 to $234,000 by January of 2008. To buy credit default insurance on $10 million of debt issued by Countrywide, the big subprime mortgage lender, an investor must as of January 11, 2008 pay $3 million up front and $500,000 annually. A month ago, the same protection could be bought at $776,000 annually with no upfront payment.

 

Credit-default swaps tied to MBIA's bonds soared 10 percentage points to 26% upfront and 5% a year, according to CMA Datavision in New York. The price implies that traders are pricing in a 71% chance that MBIA will default in the next five years, according to a JPMorgan Chase & Co valuation model. Contracts on Ambac Financial, the second-biggest insurer, rose 12 percentage points to 27% upfront and 5% a year. Ambac's implied chance of default is 73%.

 

MBIA and competitors such as Ambac and ACA Capital insure mortgage-backed securitized debt and bonds, which came under pressure as the subprime fallout all but wiped out mortgage credit. The credit ratings agencies have since tried to determine whether the bond insurers' ability to pay claims against a sudden rise in defaulted debt has been impacted by the deterioration of the home mortgage market. A ratings downgrade has broad fallout, causing billions of bonds insured by the firms to also lose value. Banks have been major buyers of debt insurance on the bonds they hold.

 

MBIA is also facing a series of class action suits for misrepresenting and/or failing to disclose the true extent of MBIA exposure to losses stemming from its insurance of residential mortgage-backed securities (RMBS), including in particular its exposure to so-called "CDO-squared" securities that are backed by residential mortgage-backed securities. Other class action suits involve alleged violation of the Employee Retirement Income Security Act of 1974 (ERISA) relating to MBIA 401(k) plan.

 

Synthetic CDO-squared are double-layer collateralized debt obligations that offer investors higher spreads than single-layer CDOs but also may present additional risks. Their two-layer structures somewhat increase their exposure to certain risks by creating performance "cliffs" that cause seemingly small changes in the performance of underlying reference credits to produce larger changes in the performance of a CDO-squared.

 

If the actual performance of the reference credits deviates substantially from the original modeling assumptions, the CDO-squared can suffer unexpected losses. On January 11, MBIA announced in a public filing it has $9 billion of exposure to the riskiest structures known as CDO of CDO, or CDO-squared, $900 million more than the company disclosed only three weeks earlier. MBIA also said it now had $45.2 billion of exposure to overall residential mortgage-backed securities, which comprises 7% of MBIA’s insured portfolio, as of September 30, 2007.

 

The triple-A credit rating of the bigger bond insurers is crucial because any demotion could lead to downgrades of the $2.4 trillion of municipal and structured bonds they guarantee. This could force banks to increase the amount of capital held against bonds and hedges with bond insurers - a worrying prospect at a time when lenders such as Citigroup and Merrill are scrambling to raise capital. Significant changes in counterparty strengths of bond insurers could lead to systemic issues. Warren Buffett’s Berkshire Hathaway set up a new bond insurer in December 2007 after the New York State insurance regulator pressed him to do so.

 

If credit insurers turn out to have inadequate reserves, the credit default swap (CDS) market may well seize up the same way the commercial paper market did in August 2007. The $45 trillion of outstanding CDS is about five times the $9 trillion US national debt. The swaps are structured to cancel each other out, but only if every counterparty meets its obligations. Any number of counterparty defaults could start a chain reaction of credit crisis. The Financial Times reported that Jamie Dimon, chief executive of JPMorgan, said when asked about bond insurers: "What [worries me] is if one of these entities doesn't make it ...? The secondary effect ...? I think could be pretty terrible."

 

The danger of high leverage

The factor that has catapulted the subprime mortgage market into content crisis proportion is the high leverage used on transactions involving the securitized underlying assets. This leverage multiplies profits during expansive good times and losses in during times of contraction. By extension, leverage can also magnify insipid inflation tolerated by the Fed into hyperinflation.

 

As big as the residential subprime mortgage market is, the corporate bond market is vastly larger. There are a lot of shaky outstanding corporate loans made during the liquidity boom that probably could not be refinanced even in a normal credit market, let alone a distressed crisis. A large number of these walking-dead companies held up by easy credit of previous years are expected to default soon to cause the CLO valuations to plummet and CDS to fail.

 

Commercial real estate is another sector with disaster looming in highly leveraged debts. Speculative deals fueled by easy cheap money have overpaid massive acquisitions with the false expectation that the liquidity boom would continue forever. As the economy slows, empty office and retail spaces would lead to commercial mortgage defaults.

 

Emerging markets will also run into big problems because many borrowers in those markets have taken out loans denominated in foreign currencies collateralized by inflated values of local assets that could be toxic if local markets are hit with correction or if local currencies lose exchange value.

 

The last decade has been the most profligate global credit expansion in history, made possible by a new financial architecture that moved much of the activities out of regulated institutions and into financial instruments traded in unregulated markets by hedge funds that emphasized leverage over safety. By now there are undeniable signs that the subprime mortgage crisis is not an isolated problem, but the early signal of a systemic credit crisis that will engulf the entire financial world.

 

Myth of poor folk over-saving

Both former Fed chairman Greenspan and his successor Ben Bernanke have tried to explain the latest US debt bubble as having been created by global over-saving, particularly in Asia, rather than by Fed policy of easy credit in recent years.

 

Yet the so-called global savings glut is merely a nebulous euphemism for overseas workers in exporting economies being forced to save to cope with stagnant low wages and meager worker benefits that fuel high profits for US transnational corporations. This forced saving comes from the workers’ rational response to insecurity rising from the lack of an adequate social safety net. Anyone making around $1,000 a year and faced with meager pension and inadequate health insurance would be suicidal to save less than half of his/her income. And that’s for urban workers in China. Chinese rural workers make about $300 in annual income. For China to be an economic superpower, Chinese wages would have to increase by a hundredfold in current dollars.

 

Yet these underpaid and under-protected workers in the developing economies are forced to lend excessive portions of their meager income to US consumers addicted to debt. This is because of dollar hegemony under which Chinese exports earn dollars that cannot be spent domestically without unmanageable monetary penalties.

 

Not only do Chinese and other emerging market workers lose by being denied living wages and the financial means to consume even the very products they themselves produce for export, they also lose by receiving low returns on the hard-earned money they lend to US consumers at effectively negative interest rates when measured against the price inflation of commodities that their economies must import to fuel the export sector. And that’s for the trade surplus economies in the developing world, such as China. For the trade deficit economies, which are the majority in the emerging economies, neoliberal global trade makes old-fashion 19th-century imperialism look benign.

 

Central banks support fleecing

The role central banking plays in support of this systematic fleecing of the helpless poor everywhere around the world to support the indigent rich in both advanced and emerging economies has been to flood the financial market with easy money, euphemistically referred to as maintaining liquidity, and to continually enlarge the money supply by financial deregulation to lubricate and sustain a persistently expanding debt bubble.

 

Concurringly, deregulated financial markets have provided a free-for-all arena for sophisticated financial institutions to profit obscenely from financial manipulation. The average small investor is effectively excluded from reaping the profits generated in this esoteric arena set up by big financial institutions. Yet the investing public is the real victim of systemic risk. The exploitation of mortgage securitization through the commercial paper market by special investment entities (SIVs) is an obvious example.

 

When the Fed repeatedly pulls magical white rabbits from its black opaque monetary policy hat, the purpose is always to rescue overextended sophisticated institutions in the name of preserving systemic stability, while the righteous issue of moral hazard is reserved only for unwitting individual borrowers who are left to bear the painful consequences of falling into financial traps they did not fully understand, notwithstanding that the root source of moral hazard always springs from the central bank itself.

 

Local governments versus financial giants

The city of Baltimore is filing suit against Wells Fargo, alleging the bank intentionally sold high-interest mortgages more to blacks than to whites - a violation of federal law. Cleveland is filing suit against investment banks such as Deutsche Bank, Goldman Sachs, Merrill Lynch and Wells Fargo for creating a public nuisance by irresponsibly buying and selling high-interest home loans, resulting in widespread defaults that have depleted the cities’ tax base and left entire neighborhoods in ruins. The cities hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.

 

"To me, this is no different than organized crime or drugs," Cleveland Mayor Frank Jackson said in an interview with local media. "It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects."

 

The Baltimore and Cleveland efforts are believed to be the first attempts by major cities to recover social costs and public financial losses from the foreclosure epidemic, which has particularly plagued cities with significant low-income neighborhoods. Cleveland’s suit is more unique because the city is basing its complaints on a state law that relates to public nuisances. The suit also is far more wide-reaching than Baltimore’s in that instead of targeting the mortgage brokers, it targets the investment banking side of the industry, which feeds off the securitization of mortgages.

 

Greenspan blames Third World - not the Fed

Greenspan in his own defense describes the latest credit crisis as a result of a sudden "re-pricing of risk - an accident waiting to happen as the risk was under-priced over the past five years as market euphoria, fostered by unprecedented global growth, gained traction." Greenspan spoke as if the Fed had been merely a neutral bystander, rather than the "when in doubt, ease" instigator that had earned its chairman wizard status all through the years of easy money euphoria.

 

The historical facts are that while the Fed kept short-term rates too low for too long, starting a downward trend from January 2001 and bottoming at 0.75% for the discount rate on November 6, 2002, and 1% for the Fed Funds rate target on June 25, 2003, long-term rates were kept low by structured finance, a.k.a. debt securitization and credit derivatives, with an expectation that inflation would be perpetually postponed by global slave labor. The inflation rate in January 2001 was 3.73%. By November 2002, the inflation rate was 2.2%, while the discount rate was at 0.75%. In June 2003, the inflation rate was 2.11% while the Fed Funds rate target was at 1%. For some 30 months, the Fed provided the economy with negative real interest rates to fuel a debt bubble.

 

Greenspan blames "the Third World, especially China" for the so-called global savings glut, with an obscene attitude of the free-spending rich who borrowed from the helpless poor scolding the poor for being too conservative with money.

 

Yet Bank for International Settlements (BIS) data show exchange-traded derivatives growing 27% to a record $681 trillion in third quarter 2007, the biggest increase in three years. Compared this astronomical expansion of virtual money with China’s foreign exchange reserve of $1.4 trillion, it gives a new meaning to the term "blaming the tail for wagging the dog". The notional value of outstanding over-the-counter (OTC) derivative between counterparties not traded on exchanges was $516 trillion in June, 2007, with a gross market value of over $11 trillion, which half of the total was in interest rate swaps. China was hardly a factor in the global credit market, where massive amount of virtual money has been created by computerized trades.

 

Belated warning on stagflation

I warned in May 9, 2007 (Liquidity boom and looming crisis, Asia Times Online):

The Fed's stated goal is to cool an overheated economy sufficiently to keep inflation in check by raising short-term interest rates, but not so much as to provoke a recession. Yet in this age of finance and credit derivatives, the Fed's interest-rate policy no longer holds dictatorial command over the supply of liquidity in the economy. Virtual money created by structured finance has reduced all central banks to the status of mere players rather than key conductors of financial markets. The Fed now finds itself in a difficult position of being between a rock and a hard place, facing a liquidity boom that decouples rising equity markets from a slowing underlying economy that can easily turn toward stagflation, with slow growth accompanied by high inflation.

Seven months after my article, on December 16, Greenspan warned publicly on television against early signs of stagflation as growth threatens to stall while food and energy prices soar.

 

Crisis of capital for finance capitalism

The credit crisis that was detonated in August 2007 by the collapse of collateralized debt obligations (CDOs) waged a frontal attack on finance institution capital adequacy by December. Separately, commercial and investment banks and brokerage houses frantically sought immediate injection of capital from sovereign funds in Asia and the oil states because no domestic investors could be found quickly. But these sovereign funds investments have reached the US regulatory ceiling of 10% equity ownership for foreign governmental investors before being subject to reviews by the inter-agency Committee on Foreign Investment in the US (CFIUS), which investigates foreign takeover of US assets.

 

Still, much more capital will be needed in coming months by these financial institutions to prevent the vicious circle of expanding liabilities, tightening liquidity conditions, lowering asset values, impaired capital resources, reduced credit supply, and slowing aggregate demand feeding back on each other in a downward spiral. New York Federal Reserve President Tim Geithner warned of an "adverse self-reinforcing dynamic".

 

Ambrose Evans-Pritchard of The Telegraph, who as a Washington correspondent gave the Clinton White House ulcers, reports that Anna Schwartz, surviving co-author with the late Milton Friedman of the definitive study of the monetary causes of the Great Depression, is of the view that in the current credit crisis, liquidity cannot deal with the underlying fear that lots of firms are going bankrupt. Schwartz thinks the critical issue is that banks and the hedge funds have not fully acknowledged who is in trouble and by how much behind the opaque fog that obscures the true liabilities of structured finance.

 

While the equity markets are hanging on for dear life with the Fed’s help through stealth inflation, the bond markets have collapsed worldwide, with dollar bond issuance falling to a stand still, euro bonds by 66% and emerging market bonds by 75% in Q3 2007. Lenders are simply afraid to lend and borrowers are afraid to take on more liabilities in an imminent economic slowdown. The Fed has a choice of accepting an economic depression to cut off stagflation, or ushering hyperinflation by flooding the market with unproductive liquidity. Insolvency cannot be solved by injecting liquidity without the penalty of hyperinflation.

 

 

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THE ROAD TO HYPERINFLATION, Part 2

A failure of central banking

By Henry C K Liu

January 30, 2008

Asia Times Online

http://www.atimes.com/atimes/Global_Economy/JA30Dj02.html

 

It has been forgotten by many that before 1913, there was no central bank in the United States to bail out troubled commercial and associated financial institutions or to keep inflation in check by trading employment for price stability. Few want inflation but fewer still would trade their jobs for price stability.

 

For the first 137 years of its history, the US did not have a central bank. The nation then was plagued with recurring business cycles of boom and bust. For the past 94 years the Federal Reserve, the US central bank, has assumed the role of monetary guardian for the nation, yet recurring business cycles of boom and bust have continued, often with the accommodating participation of the Fed. Central banking has failed in its fundamental functions of stabilizing financial markets with monetary policy, succeeding neither in preventing inflation nor sustaining growth nor achieving full employment.

 

Since the Fed was founded in 1913, US inflation has registered 1,923%, meaning prices have gone up 20 times on average despite a sharp rise in productivity.

 

For the 18 years (August 11, 1987 to January 31, 2006) of his tenure as chairman of the Fed, Alan Greenspan repeatedly bought off the collapse of one debt bubble with a bigger debt bubble. During that time, inflation was under 2% in only two years, 1998 and 2002, both times not caused by Fed policy. Paul Volcker, who served as Fed chairman from August 1979 to August 1987, had to raise both the fed funds rate and the discount to 20% to fight hyperinflation of 18% in 1980 back down to 3.66% in 1987, the year Greenspan took over the Fed just before the October 1987 crash, when inflation rose to 4.53%.

 

Under Greenspan's market accommodating monetary policy, US inflation reached 4.42% in 1988, 5.36% in 1989 and 6.29% in 1990. The inflation rate was moderated to 1.55% by the 1997 Asian financial crisis, when Asian exporting economies devalued their currencies to lower their export prices, but Greenspan allowed US inflation rate to rise back to 3.76% by 2000. The fed funds rate hit a low of 1.75% in 2001 when inflation hit 3.76%; it hit 1% when inflation was 3.52% in 2004; and it hit 2.5% when inflation rose to 4.69% in 2005.

 

For those years, US real interest rate was mostly negative after inflation. Factoring in the falling exchange value of the dollar, the Fed was in effect paying US transnational corporate borrowers to invest in non-dollar markets, and paying US financial institution to profit from dollar carry trade, ie borrowing dollars at negative rates to speculate in assets denominated in other currencies with high yields.

 

In recent years, the US has been allowing the dollar to fall in exchange value to moderate the adverse effect of high indebtedness and using depressed wages, both domestic and foreign, to moderate US inflationary pressure. This trend is not sustainable because other governments will intervene in the foreign exchange market to keep their own currencies from appreciating against the dollar to remain competitive in global trade. The net result will be a moderating of drastic changes in the exchange rate regime but not a halt of dollar depreciation.

 

What has happened is a global devaluation of all currencies with the dollar as the lead sinking anchor in terms of purchasing power. The sharp rise of prices for assets and commodities around the world has been caused by the sinking of the purchasing power of all currencies. This is a trend that will end in hyperinflation while the exchange rate regime remains operational, particularly if central banks continue to follow a coordinated policy of holding up inflated asset and commodities prices globally with loose monetary policies, ie releasing more liquidity every time markets face imminent corrections.

 

Politics of central banking

The circumstances that created the political climate in the United States for the adoption of a central bank came ironically from internecine war on Wall Street that spread economic devastation across the nation during the recession of 1907-08, the direct result of one dominant money trust trying to cannibalize its competition.

 

In 1906, the powerful Rockefeller interests in Amalgamated Copper executed a plan to destroy the Heinze combination, which owned Union Copper Co. By manipulating the stock market, the Rockefeller faction drove down Heinze stock in Union Copper from US$60 to $10. The rumor was then spread that not only Heinze Copper but also the Heinze banks were folding under Rockefeller pressure. J P Morgan joined the Rockefeller enclave to announce that he thought the Knickerbocker Trust Co would be the first Heinze bank to fail. Panicked depositors stormed the teller cages of Knickerbocker to withdraw their money. Within a few days the bank was forced to close its doors. Similar fear spread to other Heinze banks and then to the whole banking world. The crash of 1907 was on.

 

Millions of depositors were sold out penniless, their savings wiped out by bank failures and homeowners rendered homeless by bank foreclosure of their mortgages. The destitute, the hungry and the homeless were let to fend for themselves as best they could, which was not very well. Money still in circulation was hoarded by those who happened to still have some, so before long a viable medium of exchange became practically non-existent in a dire liquidity crisis. The 1907 depression was much more severe for the average family than the one in 1930.

 

Many otherwise healthy businesses began printing private IOUs and exchanging them for raw materials as well as giving them to their remaining workers for wages. These "tokens" were passed around as a temporary medium of exchange to keep the economy functioning minimally. At this critical juncture, J P Morgan offered to salvage the last operating Heinze bank (Trust Co of America) on condition of a fire sale of the valuable Tennessee Coal and Iron Co in Birmingham to add to the monopolistic US Steel Co, which he had earlier purchased from Andrew Carnegie.

 

This arrangement violated then existing anti-trust laws, but in the prevailing climate of depression crisis the proposed transaction was quickly approved by a thankful Washington. Morgan was also intrigued by the paper IOUs that various business houses were being allowed to circulate as temporary media of exchange. Using the argument of the need to create order out of monetary chaos, the same argument that Rockefeller used to build the Standard Oil Trust, Morgan persuaded Congress to let him put out $200 million in such "tokens" issued by one of the Morgan financial entities, claiming this flow of Morgan "certificates" would revive the stalled economy. The nominal GDP fell from $34 billion in 1907 to $30 billion in 1908 and did not recover to $34 billion until 1911, even with an average annual inflation rate of over 7%.

 

Getting rich from making money

As these new forms of Morgan "money" began circulating, the public regained its "confidence" and hoarded money began to circulate again as well in anticipation of inflation. Morgan circulated $200 million in "certificates" created out of nothing more than his "corporate credit" with formal government approval. This is the equivalent of $100 billion in today's money. It was a superb device to get fabulously rich by literally making money.

 

Eight decades later, GE Capital, the finance unit of the world’s largest conglomerate that incidentally also manufactures hard goods, did the same thing in the 1990s with commercial paper and derivatives to create hundreds of billions in profits. Soon, every corporation and financial entities followed suit and the commercial paper market became a critical component of the financial system. This was the market that seized in August 2007, starting the current credit crisis.

 

"The commercial paper market, in terms of the asset-backed commercial paper market, is basically history," said William H Gross, chief investment officer of the bond management firm Pacific Investment Management Company, known as Pimco.

 

The commercial paper market historically was best known as an alternative market funding source for non-financial corporations at times when bank loans were seen as too expensive or possibly not available due to tight monetary policy. Finance companies, especially those affiliated with major auto companies and well-known consumer-credit lenders, have also issued paper tied to non-financial industrial entities. In the mid-1990s, non-financial corporate issues were still nearly 30% of total paper outstanding. This share began to drop precipitously just before the recession of 2001 and has stabilized but not recovered. By March 2006, the non-financial segment constituted a mere 7.8% of the total, the lowest in the 37-year history of the data.

 

Financial companies have also altered their approach to the market. Some paper is still backed by companies' general financial resources, but other commercial paper is backed by specific loans, including automobile and credit card debt and home mortgages. Most ominously, commercial paper is used to finance securitized credit instruments that move debt liabilities off the balance sheets of the borrowers.

 

Some conspiracy theorists assert that the seeds for the Federal Reserve system had been sown with the Morgan certificates. On the surface, J P Morgan seemed to have saved the economy - like first throwing a child into the river and then being lionized for saving him with a rope that only he was allowed to own, as some of his critics said. On the other hand, Woodrow Wilson wrote: "All this trouble [the 1907 depression] could be averted if we appointed a committee of six or seven public-spirited men like J P Morgan to handle the affairs of our country." Both Morgan and Wilson were elite internationalists.

 

The House of Morgan then held the power of deciding which banks should survive and which ones should fail and, by extension, deciding which sector of the economy should prosper and which should shrink. The same power today belongs to the Fed, whose policies have favored the financial sector at the expense of the industrial sector. At least the House of Morgan then used private money for its predatory schemes of controlling the money supply for its own narrow benefit. The Fed now uses public money to bail out the private banks that own the central bank in the name of preventing market failure.

 

The issue of centralized private banking was part of the Sectional Conflict of the 1800s between America’s industrial North and the agricultural South that eventually led to the Civil War. The South opposed a centralized private banking system that would be controlled by Northeastern financial interests, protective tariffs to help struggling Northeast industries and federal aid for transportation development to open up the Midwest and the West for investment intermediated through Northeastern money trusts backed by European capital.

 

Money as political instrument

Money, classical economics' view of it notwithstanding, is not neutral. Money is a political issue. It is a matter of deliberate choice made by the state with consequential implications in support of a strategic political and geopolitical agenda. In a democracy, that choice should be made by the popular will, rather than by a small select group of political appointees. The supply of money and its cost, as well as the allocation of credit, have direct socio-political implications beyond finance and economics. Policies on money reward or punish different segments of the population, stimulate or restrain different economic sectors and activities. They affect the distribution of political power. Democracy itself depends on a populist monetary policy.

 

Economist Joseph A Schumpeter (1883-1950) observed that in the first part of the 19th century, mainstream economists believed in the merit of a privately provided and competitively supplied currency. Adam Smith differed from David Hume in advocating state non-intervention in the supply of money. Smith, an early advocate of progressive taxation, argued that a convertible paper money could not be issued to excess by privately owned banks in a competitive banking environment, under which the Quantity Theory of Money is a mere fantasy and the Real Bills doctrine was reality.

 

Smith never acknowledged or understood the business cycle of boom and bust. He denied its existence by proposing to forbid its emergence by the use of governmental powers. The policy of laissez-faire, or government non-intervention in trade, broadly attributed by present-day market fundamentalists to Adam Smith who himself never used the term, nor did any of his British colleagues such as Thomas Malthus and David Ricardo, requires government intervention to be operative.

 

The anti-monopolistic and anti-regulatory Free Banking School found support in agrarian and proletarian mistrust of big banks and paper money. This mistrust was reinforced by evidence of widespread fraud in the banking system, which appeared proportional to the size of the institution. Paper money was increasingly viewed as a tool used by unconscionable employers and greedy financiers to trick working men and farmers out of what was due to them in a free market.

 

A similar attitude of distrust is currently on the rise as a result of massive and pervasive corporate and financial fraud in the brave new world of banking, fueled by structured finance in the under-regulated financial markets of the 1990s though not focused on paper money as such, but on electronic money used in derivative transactions, which is paperless virtual money built on debt.

 

The $7 billion loss cause by alleged fraud committed by a low-level trader at Societe Generale, one of the largest and most respected banks in France, was shocking not because it happened but because for a whole year, the fraud was not discovered while the unauthorized trades were profitable. It would not be unreasonable for the counterparties that had suffered losses in these unauthorized trades to sue SoGen for recovery.

 

Andrew Jackson, who in 1835, managed to reduce the federal debt to only $33,733, the lowest it has been since the first fiscal year of 1791, vetoed the bill to renew the charter of the Second Bank of the United States. In his farewell speech in 1837, Jackson addressed the paper-money system and its natural association with monopoly and special privilege, the way Dwight D Eisenhower in 1961 warned a paranoid nation gripped by Cold War fears against the domestic threat of a military-industrial complex at home. The value of paper, Jackson stated, "is liable to great and sudden fluctuations and cannot be relied upon to keep the medium of exchange uniform in amount."

 

In his veto message, Jackson said the bank needed to be abolished because it concentrated excessive financial strength in one single institution, exposed the government to control by foreign investors, served mainly to make the rich richer and exercised undue control over Congress.

 

"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes," wrote Jackson. In 1836, Jackson issued the Specie Circular, which required government lands to be paid in "specie" (gold or silver coins), which caused many banks that did not have enough specie to exchange for their notes to fail, leading to the Panic of 1837 as the bursting of the speculative bubble threw the economy into deep depression. Jacksonian Democrat partisans to this day blame the severe depression on bank irresponsibility, both in funding rampant speculation and by abusing paper money issuance to cause inflation. It remains to be seen if the credit crisis of 2007 will cause the elections of 2008 to revive the Jacksonian populism that founded the modern Democrat Party.

 

Jackson's farewell message read:

.... The planter, the farmer, the mechanic, and the laborer all know that their success depends upon their own industry and economy and that they must not expect to become suddenly rich by the fruits of their toil. Yet these classes of society form the great body of the people of the United States; they are the bone and sinew of the country; men who love liberty and desire nothing but equal rights and equal laws and who, moreover, hold the great mass of our national wealth, although it is distributed in moderate amounts among the millions of freemen who possess it. But, with overwhelming numbers and wealth on their side, they are in constant danger of losing their fair influence in the government, and with difficulty maintain their just rights against the incessant efforts daily made to encroach upon them.

It is clear that the developing pains of the credit crisis of 2007 are not evenly borne by all, with a select few who had caused the crisis walking away with millions in severance compensation, and the few who are selected to restructure the financial mess no doubt will gain millions, while the mass of victims are losing homes, jobs and pensions, with no end in sight. The trouble with unregulated finance capitalism is not just that it inevitably produces boom and busts, but that the gains and pains are distributed in obscene uneven proportions.

 

Merit of central banking overstated

The monetary expansion that preceded and led to the recession of 1834-37 did not come from a falling bank reserve ratio but rather from the bubble effect of an inflow of silver into the United States in the early 1830s, the result of increased silver production in Mexico, and also from an increase in British investment in the United States. Thus a case could be made that the power of central banking in causing or preventing recessions through management of the money supply is overstated and oversimplified.

 

Libertarians hold the view that the state has neither the right nor the skill to regulate any commercial transactions freely entered into between consenting individuals, including the acceptance of paper currency. Thus all legal tenders, specie or not, are government intrusions. Yet the key words are "freely entered into", a condition most markets do not make available to all participants. Market conditions invariably compel participants to enter into disadvantaged transactions for lack of alternatives because of uneven market power.

 

For example, a family must buy food regardless of the price set by agribusiness, since inflation is not a matter that the average consumer can control. When it comes to money, a medium of exchange based on bank liabilities and a fractional reserve system and/or government taxing capacity is essential to an industrializing economy. But today, when bank liability can be masked by off-balance sheet securitization, the credibility of money is threatened. Back in 1837, instead of eliminating abuse of the fractional reserve system, the hard-money advocates had merely unwittingly removed a force that acted to restrain it.

 

After 1837, the reserve ratio of the banking system was much higher than it had been during the period of the Second Bank of the United States. This reflected public mistrust of banks in the wake of the panic of 1837, when out of 850 banks in the United States 343 closed entirely and 62 failed partially. This lack of confidence in the paper-money system led to the myth that it could have been ameliorated by central-bank liquidity, which would have required a lower reserve ratio, more availability of credit and an increase of money supply during the 1840s and 1850s.

 

The myth contends that with central banking, the evolution of the US banking system would have been less localized and fragmented in a way inconsistent with large industrialized economics, and the US economy would have been less dependent on foreign investment. This did not happen until 1913 because central banking was genetically disposed to favor the center against the periphery, which conflicted with democratic politics.

 

President Martin Van Buren was harshly judged and lost reelection because of his ideologically commitment of keeping the government out of banking regulation. Many economic historians feel Van Buren extended the effects of the Panic, which lasted until 1843, while others consider his approach to have minimized potentially destructive interference.

 

This problem continues today with central banking in a globalized international finance architecture. It remains a truism that it is preferable to be self-employed poor than to be working poor. Thus economic centralism will be tolerated politically only if it can deliver wealth away from the center to the periphery to enhance economic democracy. Yet central banking in the past two decades has centralized wealth. Central banking carries with it an institutional bias against economic nationalism or regionalism as well as a structural bias in favor of economic centralism. It obstructs the delivery of wealth created at the periphery back to the periphery.

 

After 1837, the US federal government had no further connection with the banking industry until the National Bank Act of 1863. Although the Independent Treasury that operated between 1846 and 1921, which had to pay out its own funds in specie money and be completely independent of the banking and financial system of the nation, did restrict reckless speculative expansion of credit, it also created a new set of economic problems.

 

In periods of prosperity, revenue surpluses accumulated in the Treasury, reducing hard-money circulation, tightening credit, and restraining even legitimate expansion of trade and production. In periods of depression and panic, on the other hand, when banks suspended specie payments and hard money was hoarded, the government's insistence on being paid in specie tended to aggravate economic difficulties by limiting the amount of specie available for private credit. The Panic of 1907 exposed the inability of the Independent Treasury to stabilize the money market and led to the passage of the Federal Reserve Act in 1913, which allowed the Federal Reserve Bank, a private corporation, to coin money and regulate the value of the common currency.

 

Taking money from the people

The 1863 US National Bank Act amended and expanded the provisions of the Currency Act of the previous year. Any group of five or more persons with no criminal record was allowed to set up a bank, subject to certain minimum capital requirements. As these banks were authorized by the federal government, not the states, they are known as national banks, not to be confused with a national bank in the Hamiltonian sense. To secure the privilege of note issue they had to buy government bonds and deposit them with the comptroller of the currency.

 

When the Civil War began in 1861, newly installed President Abraham Lincoln, finding the Independent Treasury empty and payments in gold having to be suspended, appealed to the state-chartered private banks for loans to pay for supplies needed to mobilize and equip the Union Army. At that time, there were 1,600 private banks chartered by 29 different states, and altogether they were issuing 7,000 different kinds of banknotes.

 

Lincoln immediately induced the Congress to authorize the issuing of government notes (called greenbacks) promising to pay "on demand" the amount shown on the face of the note, not backed by gold or silver. These notes were issued by the US government as promissory notes authorized under the borrowing power specified by the constitution. The total cost of the war came to $3 billion. The government raised the tariff, imposed a variety of excise duties, and imposed the first income tax in US history, but only managed to collect a total of $660 million during the four years of Civil War. Between February 1862 and March 1863, $450 million of paper money was issued. The rest of the cost was handled through war bonds, which were successfully issued through Jay Cooke, an investment banker in Philadelphia, at great private profit. The greenbacks were supposed to be gradually turned in for payment of taxes, to allow the government to pay off these greenback notes in an orderly way without interest. Still, during the gloomiest period of the war when Union victory was in serious doubt, the greenback dollar had a market price of only 39 cents in gold.

 

Undoubtedly these greenback notes helped Lincoln save the Union. Lincoln wrote: "We finally accomplished it and gave to the people of this Republic the greatest blessing they ever had - their own paper to pay their own debts." The importance of the lesson was never taught to Third World governments by neo-liberal monetarists.

 

In 1863, Congress passed the National Bank Act. While its immediate purpose was to stimulate the sale of war bonds, it served also to create a stable paper currency. Banks capitalized above a certain minimum could qualify for federal charter if they contributed at least one-third of their capital to the purchase of war bonds. In return, the federal government would give these banks national banknotes to the value of 90% of the face value of their bond holdings. This measure was profitable to the banks, since with the same initial capital they could buy war bonds and collect interest from the government and at the same time put the national banknotes in circulation and collect interest from borrowers. As long as government credit was sound, national banknotes could not depreciate in value, since the quantity of banknotes in circulation was limited by war-bond purchases. And since war bonds served as backing for the notes, the effect was to establish a stable currency.

 

The system did not work perfectly. The currency it provided was not sufficiently elastic for the needs of an expanding economy. As the government redeemed war bonds, the quantity of notes in circulation decreased, causing deflation and severe hardship for debtors. Money seemed to be concentrated in the Northeast, while Western and Southern farmers continued to suffer chronic scarcity of cash and credit, not unlike current conditions faced by Third World debtor economies.

 

After the Civil War, the Independent Treasury continued in modified form, as each administration tried to cope with its weaknesses in various ways. Treasury secretary Leslie M Shaw (1902-07) made many innovations; he attempted to use Treasury funds to expand and contract the money supply according to the nation's credit needs. The panic of 1907, however, finally revealed the inability of the system to stabilize the money market; agitation for a more effective banking system led to the passage of the Federal Reserve Act in 1913. Government funds were gradually transferred from sub-treasury "vaults" to district Federal Reserve Banks, and an act of Congress in 1920 mandated the closing of the last sub-treasuries in the following year, thus bringing the Independent Treasury System to an end.

 

Populism and monetary politics

John P Altgeld, a German immigrant populist who became the Democratic governor of Illinois in 1890, attacked big corporations and promoted the interest of farmers and workers, to give the state an able, courageous and progressive administration. The question of currency was central to the US populist movement. Farmers knew from first-hand experience that the fall in farm prices was caused by the policy of deflation adopted by the federal government after the Civil War and only ineffectively checked by the Bland-Allison Act of 1878, coining silver at a fixed ratio of 16:1 with gold, and the Sherman Silver Purchase Act of 1890. The Treasury's redemption of silver with gold increased the value of money and deflated prices.

 

Despite the rapid growth of business, the government engineered a sharp fall in the per capita quantity of money in circulation. The National Bank Act of 1863 also limited banks' notes to the amount of government bonds held by banks. The Treasury paid down 60% of the national debt and reduced considerably the monetary base, not unlike the bond-buyback program of the Treasury in 1999. To farmers, it was unfair to have borrowed when wheat sold for $1 per bushel and to have to repay the same debt amount with wheat selling for 63 cents a bushel, when the fall in price was engineered by the lenders. To them, the gold standard was a global conspiracy, with willing participation by the US Northeastern bankers - the money trusts who were agents of international finance, mostly British-controlled.

 

President Grover Cleveland, despite winning the 1892 election with populist support within the Democratic Party, gave no support to populist programs. Cleveland saw his main responsibilities as maintaining the solvency of the federal government and protecting the gold standard. Declining business confidence caused gold to drain from the Treasury at an alarming rate. The Treasury then bought gold at high prices from the Morgan and Belmont banking houses at great profit to them. Populists saw this effort to save the gold standard as a direct transfer of wealth from the people to the bankers and as the government's capitulation to international finance capital. Cleveland even sent federal troops to Illinois to break the railroad strike of 1894, over the vigorous protest of governor Altgeld.

 

The election of 1896 was about the gold standard. Cleveland lost control of the Democratic Party, which nominated 36-year-old William Jenning Bryan, who declared in one of the most famous speeches in US history (though mostly shunned these days): "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." The banking and industrial interests raised $16 million for William McKinley to defeat Bryan, who suffered a defeat worse than Jimmy Carter's by Ronald Reagan. With the McKinley victory, the Hamiltonian ideal was firmly ordained, but with most of its nationalist elements sanitized and replaced with a new finance internationalism. It was not dissimilar to the Reagan victory over Carter in 1980 in many respects.

 

The 16th amendment to the US constitution calling for a "small" income tax was enacted to compensate for the anticipated loss of revenue from the lowering of tariffs from 37% to 27% as authorized by the Underwood Tariff of 1913, the same year the Federal Reserve System was established. "Small" now translates into an average of 50% with federal and state income taxes combined. Free trade is only free in the sense that it is funded by the income tax.

 

The supply-side argument that corporate tax cuts stimulate economic growth only holds if at least half of the benefits of the tax cut are channeled toward rising wages instead of higher return on capital with the additional benefit of lower capital gain tax. Thus a case can be made to couple all corporate tax cuts with an index on wage rises to match or exceed corporate earnings. One of the reasons why strong corporate earnings have not helped the current credit crisis can be traced to the disproportional rise in equity prices having come from stagnant wages in the same corporations.

 

The Glass-Owen Federal Reserve Act was passed in December 1913 under the administration of President Woodrow Wilson. The system set up five decades earlier by the National Bank Act of 1863 had two major faults: 1) the supply of money had no relation to the needs of the economy, since the money in circulation was limited by the amount of government bonds held by banks; and 2) each bank was independent and enjoyed no systemic liquidity protection. These problems were more severe in the South and the West, where farmers were frequently victimized by bank crises often created by Northeastern money trusts to exploit the seasonal needs of farmers for loans. To this day, the Fed operates a seasonal discount rate to handle this problem of farm credit.

 

The Northeastern money elite in 1913 wanted a central bank controlled by bankers, along Hamiltonian lines, but internationalist rather than nationalist to make the US a global financial powerhouse. But the Wilson administration, faithful to Jacksonian tradition despite political debts to the moneyed elite, insisted that banking must remain decentralized, away from the control of Northeastern money trusts, and control must belong to the national government, not to private financiers with international links, despite the internationalist outlook of Wilson.

 

Twelve Federal Reserve Banks were set up in different regions across the country, while supervision of the whole system was entrusted to a Federal Reserve Board, consisting of the Treasury secretary, the comptroller of the currency and five other members appointed by the president for 10-year terms. All nationally chartered banks were required and state-chartered banks were invited to be members of the new system. All private banknotes were to be replaced by Federal Reserve notes, exchangeable at regional Federal Reserve Banks not only for bonds or gold but also for top-rated commercial paper, with the hope of causing the money supply to expand and contract along with the volume of business.

 

With the reserves of all banks deposited with the Federal Reserve, systemic stability was supposed to be assured. Unfortunately, systemic stability has been an elusive objective of the Fed throughout its history of 94 years, largely due to the Fed fixation on the market rather than the economy. To the Fed's thinking, even today, the market drives the economy, not the other way around. Take care of the market, and the economy will take care of itself. Unfortunately for the Fed, this fixation has been proven wrong throughout history. The market is but a gauge on the economy. If the economy is running empty, fixing the gauge does not fix the real problem.

 

Fed's ineffectual response to 2007 crisis

The equity market's decade-long joyride on the Fed's easy money policy came abruptly to an end in August 2007. In response to the outbreak of the credit crisis, which the Fed adamantly but mistakenly thought to be containable, the Federal Open Market Committee (FOMC) on August 17 lowered the discount rate 50 basis points to 5.75% but kept the Fed Funds rate target unchanged at 5.25%. As the credit market continued to deteriorate, the FOMC was then forced on September 18 to again lower the discount rate another 50 basis point to 5.25% and the fed funds rate target 50 basis points to 4.75%.

 

Six weeks later, on October 31, the FOMC, trying to correct a massive credit market failure and to inject liquidity into the severely distressed banking system, lowered the discount rate another 25 basis points to 5% and the fed funds rate target another 25 basis points to 4.5%.

 

In an accompanying statement on October 31, the Fed continued to paint a comforting picture that economic growth was solid in the third quarter of 2007, and strains in financial markets had eased somewhat on balance since August. However, the Fed qualified its denial by saying: "The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction." That action, combined with the policy action taken in September, was expected "to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."

 

By November 27, the DJIA intraday low had dropped 1,000 points to 12,711.98 from the October 31 intraday low of 13,711.59, having reached an intraday high of 14.168.51 on October 12. Market anticipation of more Fed interest rate cuts to lift the market pushed the DJIA back up to 13,727.03 by December 11, on which day a panicked Fed again lowered the discount rate by 25 basis points to 4.75% and the fed funds rate target by 25 basis points to 4.25%. A disappointed market, which had expected a 50 basis point, cut saw the DJIA drop 295 points to close at 13,432.77.

 

The Fed was reduced to playing short-term yo-yo with interest rates driven by the stock market at the expense of its mandate to guard against long-term inflation. The Bureau of Labor Statistics (BLS) reported that the Headline Consumer Price Index (HCPI) for November 2007 was 4.3% higher than November 2006, and 5 basis points higher than the Fed Funds rate target of 4.25%.

 

Cuts put downward pressure on dollar

The Fed's interest rate actions put continued downward pressure on the both the exchange rate and the real purchasing power of the dollar, thus further increasing inflation in import and domestic product prices, especially oil for which the US is both an importer and a producer. January oil price futures for April 2008 delivery jumped $1.35, to $88.75 a barrel. Since April 2006, core inflation has remained within the 2.2 - 2.3% range, higher than the unofficial targeted inflation rate of 1.6% to 1.9%. This hampers the Fed’s ability to lower interest rates further without unleashing inflation down the road.

 

Core and headline inflation

For the typical household, the total or headline inflation, which includes volatile food and energy price components, is what counts because headline inflation measures the rate at which the cost of living is rising against relatively stagnant household income. A high headline inflation rate relative to income growth causes household standard of living to fall.

 

For the purpose of calibrating monetary policy, however, the Fed focuses on the core rate of inflation: the total excluding food and energy prices, on account that the core is less volatile and is deemed a better reflection of the interplay of supply and demand in domestic product markets. Thus, the core traditionally is a better gauge of the underlying rate of inflation in the absence of external supply shocks.

 

By contrast, food and energy prices can be extremely volatile from month to month due to temporary supply disruptions related to weather or to political crises. In those instances, headline inflation tends to be less representative of the underlying rate of inflation. Headline inflation has relatively minor macroeconomic impact; it tends to shift revenue from one sector to another. When oil prices rise, oil company revenue increases while consumer expenditure rises. The net result is a higher GDP figure but not necessarily a larger economy. Yet this rationale is less operative in the current situation, where both energy and food prices have risen dramatically with volatility along an upward curve and imported oil payment has become a major item in the US trade deficit.

 

The historical record of the US economy is that headline and core inflation have averaged about the same over the long run. Over the past two decades, annual inflation as measured by the Personal Consumption Expenditure (PCE) deflator averaged 2.6%, while price increases as measured by the core PCE deflator averaged 2.5%. Data from the past 10 years pose a challenge to the rationale for focusing on the core. Over that period, crude oil prices have been volatile, rising from below $10 per barrel in early 2000 to near $100 currently. Food prices and that of other commodities are also rising at an above normal rate.

 

Such rises are no longer expected to be temporary. They tend to stay high for long periods because of the long-term decline of the dollar, which has become the main factor behind global hyperinflation trends. Thus even if the headline inflation rate eventually moderates from month to month, prices can stay high relative to income. Inflation readings from price levels independent of income levels are not informative on the health of the economy.

 

Readings on core inflation were interpreted by the Fed as having improved modestly in October 2007, but increases in energy and commodity prices in the second half of the year, among other factors, might put "renewed upward pressure on inflation". In that context, the FOMC judged that "some inflation risks remained, and it would continue to monitor inflation developments carefully." The FOMC, after its October 31 action, judged "the upside risks to inflation roughly balance the downside risks to growth." The committee would "continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth".

 

The single dissenting vote against the FOMC easing action was Thomas M Hoenig, who argued for no cuts in the federal funds rate at the meeting. In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5%. In taking this action, the board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St Louis, and San Francisco.

 

Market disappointment

On December 11, when the Fed disappointed the markets with its 25 basis point cuts of the discount and Fed Funds rates, the market interpreted Fed language as failing to offer a clear signal of more cuts to come. The DJIA decline of 295 points was accompanied by the S&P 500 closing down 2.5% at 1,477.65, after being up 0.4% before the decision was released. Still, the yield on the two-year Treasury note fell to 2.92%, down from 3.14%, exerting downward pressure on the dollar. By January 8, 2008, the DJIA had fallen 843 points to 12,589.07.

 

The Fed said the deterioration in financial market conditions had "increased the uncertainty surrounding the outlook for economic growth and inflation". But while it dropped its assessment that the risks to growth and inflation were "roughly balanced", the Fed did not say that it now believed the risks to growth outweighed the risks to inflation. It offered no assessment of the balance of risks, saying it would act "as needed" to foster price stability and sustainable economic growth. This formula in effect meant the Fed was keeping its options open pending incoming data which are notoriously inaccurate and inevitably have to be revised in subsequent months.

 

Some market participants still inferred a willingness on the part of the Fed to consider future rate cuts, but the signal was weaker than many had expected. This reflected the fact that the Fed remained more concerned about the risks to inflation than most market participants, who are more concerned with short-term profitability than the long-term health of the economy.

 

Once market sentiment starts to turn negative and more market participants anticipate a slowing economy if not a recession, market dynamics will shift the smart money toward new profit opportunities, such as going short on shares that depend on growth and going long on shares that will flourish in a recession. This will exert further negative pressure on the market in a self-reinforcing downward spiral.

 

Also not mentioned was the effect further interest rate cuts would have on the exchange value of the dollar which had been falling, particularly against the euro. The Fed is always cautious regarding pronouncement on the dollar’s exchange rate because that is the exclusive mandate of the Treasury, which the Fed is required by law and constitution to support as a matter of national economic security.

 

Rise of the Euro

The International Monetary Fund reports that the euro’s share of known foreign exchange holdings rose to 26.4% in the third quarter of 2007, reflecting its increasing strength in foreign exchange markets. That was up from 25.5% in the previous three months and from 24.4% in the third quarter of 2006. The dollar’s share of known official foreign reserves, calculated in dollar terms, fell to 63.8% in the third quarter, down from 66.5% in the same three months of 2006.

 

The trend of rising preference of the euro will strengthen the illusion held by European policymakers that the euro is maturing into a significant rival to the dollar while in fact the euro remains only a derivative currency of the dollar. The euro has been losing purchasing power along with the dollar, and the rise in its exchange value against the dollar merely signifies that the euro is depreciating at a slightly slower rate than the dollar. Dollar hegemony is a geopolitical phenomenon with a financial dimension, by virtue of the fact that all key commodities are denominated in dollars. When the European Central Bank (ECB) intervenes to halt the rise in exchange value of the euro, it in effect accelerates the decline of the euro’s purchasing power. The same holds true for the Japanese yen or the Chinese yuan.

 

The Fed said on December 11, 2007 that "incoming information suggests that economic growth is slowing" reflecting an "intensification of the housing correction" and "some softening in business and consumer spending." It acknowledged that "strains in financial markets have increased in recent weeks". However, the US central bank still had made almost no changes to its cautionary language on inflation, reiterating that "energy and commodity prices, among other factors, may put upward pressure on inflation."

 

Six weeks later, on January 22, in response to sharp declines in all markets around the world from the bursting of the debt bubble, the Fed reversed itself diametrically and dramatically to announce a cut of 75 basis points of the fed funds rate target to 3.50%, throwing inflation concern to the wind. Yet the DJIA closed on January 22, 2008 at 11,973.06, down 126.24 points, or 1.04% from the previous Friday, but still higher than the October 17, 2006 close of 11,950.02, and 4,586.79 points, or 63% higher than the October 9, 2002 close of 7,286.27. Evidently, the Fed cast a visible vote for inflation to sustain the bursting debt bubble.

 

Fed introduces discount loan auction

The Fed is not expected to eliminate the discount rate borrowing penalty altogether because such a step would allow a large number of small banks to obtain funds at less than their usual spread over the fed funds rate, and would complicate efforts to manage the fed funds rate through the open market. At the same time, the Fed was considering ways to try to reduce the "stigma" associated with using the discount window for the big banks, in order to make it more effective as a backstop to the money markets.

 

As a solution, the Fed overhauled the way it provides liquidity support to financial markets, following a negative market reaction to the timid December 11 interest rate cut. The overhaul took the shape of a new liquidity facility that will auction loans to banks. This would allow the Fed to provide liquidity directly to a large number of financial institutions against a wide range of collateral without the stigma of its existing discount window loans. The idea is that this would ease severe strains in the market for interbank loans and help restore more normal conditions in credit markets generally as banks were getting reluctant to lend to each others for fear of counterparty default.

 

In a speech in early December, Fed vice-chairman Donald L Kohn said: "The effectiveness of the direct lending operation was still being undermined by banks' fear that using it would be seen as a sign that they needed emergency funds. The problem of stigma is even greater in the UK where, following the Northern Rock debacle, banks are afraid of tapping funds from the Bank of England."

 

Kohn said all central banks - not just the Fed - had to find new ways to ensure that their liquidity support facilities remained effective in times of crisis. "Making the Fed discount window more usable is particularly important because all banks can pledge a wide range of securities in return for cash at this facility. Only a small number of primary dealers can access cash from the Fed through its main market liquidity facility - open market operations to control the Fed Funds rate - and the list of collateral that can be pledged is much narrower," Kohn said.

 

Coordinated effort by central banks

Euro money market rates tumbled after the ECB injected an unprecedented $500 billion equivalent into the banking system on December 18, 2007 as part of a global effort to ease gridlock in the credit market. The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45%. The rate had soared 83 basis points in the previous two weeks as banks hoarded cash in anticipation of a squeeze on credit through year-end. The ECB loaned a record 348.6 billion euros ($501.5 billion) for two weeks at 4.21% on that day, almost 170 billion euros more than it estimated was needed. Bids were received from 390 banks, ranging from 4% to 4.45%.

 

A coordinated effort by central bankers helped the credit markets and specifically the London Interbank Offer Rate (LIBOR), which had drifted to an 85-basis-point spread from the Fed Funds rate. That widening spread was a clear signal of distress in the credit markets. It showed that banks were risk averse in their lending habits and were reluctant to lend to each other out of concern for counterparty risk. Getting LIBOR back in line, within 10-12 basis points of the Fed Funds rate historically, was a top priority to soothing the pain in the credit markets. The Financial Times quoted Goldman Sachs economist Erik Nielson: "This is basically Father Christmas to those who have access [to central bank funds]. They are bailing out people who have not really adjusted their balance sheets to the new reality."

 

Fighting deflation with negative rates

Low and frequently negative real interest rates over long periods of time had created the debt bubble, the bursting of which resulted in the credit crisis of August 2007. Central banks are now responding to the bursting of the debt bubble by cutting interest rates yet again. Central banks seem to be letting unreliable incoming raw economic data on the previous month to drive interest rate policy which at best can only have longer-term effect. The addiction to negative real interest rates to sustain the debt bubble will eventually lead to a toxic financial overdose.

 

Lessons of the Great Depression of the 1930s and the protracted Japanese recession of the 1990s have left all central banks with a phobia about asset deflation, against which monetary policy of zero nominal interest rate can have little effect. Since nominal rates cannot go below zero, deflation, or negative inflation, implies positive real interest rates even as nominal rate is zero, causing central banks to lose their ability to provide needed economic stimulus by monetary means.

 

In a deflationary environment, borrowers will find it more costly to repay loans of even zero interest rate. The history lesson learned by central bankers is that when an asset-price bubble bursts with threats of deflationary recession, monetary policy therapy has to be dramatic, timely and visible to be effective.

 

 

 

 

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January 26 / 27, 2008

The Profile of a Third World Country

How Bush Destroyed the Dollar

By PAUL CRAIG ROBERTS

http://www.counterpunch.com/roberts01272008.html

 

It is difficult to know where Bush has accomplished the most destruction, the Iraqi economy or the US economy.

 

In the current issue of Manufacturing & Technology News, Washington economist Charles McMillion observes that seven years of Bush has seen the federal debt increase by two-thirds while US household debt doubled.

 

This massive Keynesian stimulus produced pitiful economic results. Median real income has declined. The labor force participation rate has declined. Job growth has been pathetic, with 28% of the new jobs being in the government sector. All the new private sector jobs are accounted for by private education and health care bureaucracies, bars and restaurants. Three and a quarter million manufacturing jobs and a half million supervisory jobs were lost. The number of manufacturing jobs has fallen to the level of 65 years ago.

 

This is the profile of a third world economy.

 

The "new economy" has been running a trade deficit in advanced technology products since 2002. The US trade deficit in manufactured goods dwarfs the US trade deficit in oil. The US does not earn enough to pay its import bill, and it doesn't save enough to finance the government's budget deficit.

 

To finance its deficits, America looks to the kindness of foreigners to continue to accept the outpouring of dollars and dollar-denominated debt.

 

The dollars are accepted, because the dollar is the world's reserve currency.

 

At the meeting of the World Economic Forum at Davos, Switzerland, this week, billionaire currency trader George Soros warned that the dollar's reserve currency role was drawing to an end: "The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars."

 

If the world is unwilling to continue to accumulate dollars, the US will not be able to finance its trade deficit or its budget deficit. As both are seriously out of balance, the implication is for yet more decline in the dollar's exchange value and a sharp rise in prices.

 

Economists have romanticized globalism, taking delight in the myriad of foreign components in US brand name products. This is fine for a country whose trade is in balance or whose currency has the reserve currency role. It is a terrible dependency for a country such as the US that has been busy at work offshoring its economy while destroying the exchange value of its currency.

 

As the dollar sheds value and loses its privileged position as reserve currency, US living standards will take a serious knock.

 

If the US government cannot balance its budget by cutting its spending or by raising taxes, the day when it can no longer borrow will see the government paying its bills by printing money like a third world banana republic. Inflation and more exchange rate depreciation will be the order of the day.

 

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

 

 

======================================================================================

Lastly, here is an interesting background on Petrodollars. Its not debate evidence worthy... not really since its written by a blogger.... but its an interesting read for next year thats for sure...

 

 

http://economicrot.blogspot.com/2008/01/dollar-faltering-foundation-of-us.html

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Problem is spending increases interest rates...so running it ankurs way makes the link tougher to win.

 

Maybe fed cut good, only thing avoiding recession and saving the dollar, and spending would destroy all this progress?

 

You could make the argument that deficit spending causes higher interest rates which puts additional burden on the current subprime securitization problems which ultimately cause the collapse of banks. Considering we already have evidence of bank insolvency, its legitimate to say that we are at the threshold and thats why the fed is currently lowering rates to ease the subprime mess which threatens to take down the entire banking system.

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There was a whole smattering of news stories out this week.

 

The first article refers to oil having surged higher than $100 a barrel and this time its not the result of a lone rogue trader - its a product of the still weaker dollar. Future demand projections for the US & Europe are down, but with the high rate of subsidization in Asia and elsewhere, auto fuels are cheap and demand growth is to be expected in those areas.

Side Note: One of the big areas for future business growth is oil exploration/drilling and processing services. During the days of cheap oil in the 90's and early 00's, growth in demand was not expected to grow as quickly as it has. As a result, new oil fields were not discovered let alone tapped for future use. It generally takes 5 to 10 years between identification of a new field and bringing it online into the global petroleum market. With oil at $100/barrel, some companies are racing to throw up new wells and increase production. That means the petro-services sector has some solid business growth ahead of it... but only until the point at which maximum production has been achieved. My guess is that over the next five years, there would be a significant growth in valuation of the petro-service sector.

As I have mentioned before, this sustained high price of oil has downstream impacts on producer, wholesale and consumer costs. While companies will eat profits to remain competitive, at some point, the higher cost of energy is pushed downstream towards the consumers.

 

That brings me to data on the wholesale inflation (article 2). Wholesale inflation is ramping up quickly and is now growing at the fastest pace in a quarter century. If wholesale prices are getting pushed up, that means producers are no longer eating profits. They have already begun to push their higher costs to the wholesalers. Now, the wholesalers are going to be faced with a choice - eat profits or push the cost onwards? For the time being it would appear that its a mixed result on that front, but it is only a matter of time before that cost gets pushed to the consumers and this will affect the CPI (Consumer Price Index) resulting in widespread inflation for the consumers. This is significant because it shows that the sandbags the Fed was piling up on the levee arent getting piled up fast or high enough. Frankly, its a miracle that producers ate profits this long. But this is showing that we are closer to a brink of sorts between a small economic contraction and a bigtime recession and dare I use the D-word?

 

This brings me to my third and fourth articles. The price of wheat has reached an all time high. Not only is this a sign of population growth, but its a sign of demand for different purposes. Whith China's growing wealth, they want more meat. More meat means grains get redirected from feeding the poor to feeding the livestock. Many countries have placed export controls on wheat. It is possible to use this wheat info as a specific internal link to a disad on this SSA resolution. The fourth article is specific to the UN rationing global food aid because of the high price of food. This could have serious impacts on the African continent considering much food aid is delivered to Africa, SSA in particular.

 

The fifth article is specific to consumer confidence which is touched upon in the second article. Confidence is plumetting and while it is up from its lows, its no where near pleasant. People are weighing the downturn in the stock markets, higher unemployment, stagnant wages, increasing inflation, rising foreclosures, and falling property values.

 

The sixth and seventh articles refer specifically to foreclosures increasing and property values falling by 9% in the 4th quarter. Four straight quarters like that (something not out of the realm of possibility) would shave 30% off the value of a home. To put that in perspective, something like that would mean that many people would owe more than their home is worth. So even if they were able to sell their house at market value in order to get out of the real estate market, they would still be burdened by the monthly payments on their mortgage. This is a sign that more waves of foreclosures are on the way. In any case, there is going to be a ton of vacant property available in the country over the next couple years. A number of real estate trusts with short positions have begun snapping up condo developments for a steal.

 

The eighth article could be used to develop a specific nation disad. If the aff plan can be linked to Nigeria, then the possibility to impact light sweet crude oil is huge. For example, if the plan causes an outbreak of civil war in Nigeria and the oil spigot gets turned off, then the price of light sweet crude would skyrocket causing shortages and rampant inflation as well as other economic shocks. Therefore stability in Nigeria is critical to global energy markets. China is also set to overcome American energy usage by 2010. This would be the first time we would lose our standing as the biggest consumer of energy in the world. The difference is that the Chinese are not very efficient. Per unit of GDP, China uses 4 times as much energy as the US. Therefore, if Chinese growth continues, the impact is huge. Battling China for softpower and energy supplies in Africa could also be a unique scenario.

 

The ninth article goes back to energy and points out something interesting - gasoline demand in the US is virtually stagnant. Though our imports of oil and overall demand for oil goes up, its not being put into our cars. So where is it going? My guess is all of the other industrial applications to oil - asphalt, agriculture, plastics, etc. There is room for solvency/disads off this article for next year's topic on energy largely because it criticizes the President's plan for boosting ethanol production for use in transportation.

 

 

 

 

 

 

==========================================================

AP

Oil Prices Head Toward $101 a Barrel

Tuesday February 26, 1:07 pm ET

By Adam Schreck, Associated Press Writer

Oil Prices Surge Back Past $100 a Barrel As Traders Stay Bullish Despite US Economic Worries

http://biz.yahoo.com/ap/080226/oil_prices.html

 

NEW YORK (AP) -- Oil futures surged back above $100 a barrel Tuesday as traders took their cue from supply concerns and stock market bulls rather than signs that the U.S. economy remains shaky.

Crossing the psychologically significant hurdle once again -- oil prices last topped $100 last week -- may have helped fuel the rally by triggering automatic computer programs set to buy at certain levels and enticing fresh speculators into the market, said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

 

"You see additional buying among people who think they're missing something," he said. "Any time you move above ($100 a barrel), you're going to ignite some fresh buying."

 

Investors who recently were selling on weak economic data seemed to take in stride news from the Conference Board, a business-backed research group, that its Consumer Confidence Index fell to 75.0 this month from a revised 87.3 in January. The reading was the lowest since February 2003, and was far below what analysts had been expecting; it indicated that consumers might continue to curb their spending in the coming months.

 

Meanwhile, the Labor Department reported that wholesale inflation jumped by 1 percent in January, more than twice what analysts had been forecasting. That report, coupled with the consumer confidence index, pointed to an economy that is slowing even as prices are rising.

 

But traders in both the energy market and the stock market, which also advanced, seemed unfazed.

 

Light, sweet crude for April delivery jumped $1.67 to $100.90 a barrel on the New York Mercantile Exchange.

 

"We're seeing a solid tone to the stock market," Ritterbusch said. "I think the oil market is using the stock market as a proxy for future economic activity."

 

Also supporting prices were concerns about supply disruptions from unrest in Iraq, a major oil exporter, and warnings by Iran against further international sanctions. Turkish ground forces pushed their offensive against Kurdish rebels deeper into the north of Iraq, seizing seven guerrilla camps, officials said.

 

The increases came despite expectations that a government report due out Wednesday will show U.S. crude stocks rose for the seventh week in a row.

 

But oil has risen in recent days amid an increase in speculative buying. Some traders believe that global demand will be high enough to support higher crude prices even if the U.S. economy is slowing. Last week, March oil rallied to a new settlement record of $100.74 and a new trading record of $101.32 before expiring.

 

In other Nymex trading Tuesday, heating oil futures gained 2 cents to trade at $2.8119 a gallon, after settling at a record $2.7853 a gallon Monday.

 

Gasoline prices were nearly flat at $2.55 a gallon. Gas prices at the pump rose to $3.142 from $3.137 Monday, according to AAA and the Oil Price Information Service.

 

The government inventories report is expected to show supplies of distillates, which include heating oil and diesel, fell last week. Cold weather across the Midwest and Northeast has also helped push heating oil prices higher.

 

The report by the U.S. Energy Department's Energy Information Administration is tipped to say that stocks of distillates fell 2 million barrels for the week ended Feb. 22, according to a Dow Jones Newswires poll of analysts. Vienna's JBC Energy, in its daily newsletter said the expected drop in distillates is anticipated "despite an expected increase in (U.S.) refinery runs."

 

The EIA report is also expected to show that crude oil stocks rose last week by 2.6 million barrels, which would be the seventh straight week of gains. Gasoline inventories are tipped to rise by 300,000 barrels.

 

Natural gas futures jumped 6.8 cents to $9.254 per 1,000 cubic feet after Gazprom, Russia's natural gas monopoly, again threatened to cut supplies to neighboring Ukraine, according to Russian news agency reports.

 

In London, Brent crude futures rose $1.81 to sell for $99.50 a barrel on the ICE Futures exchange.

 

AP Business Writer George Jahn in Vienna, Austria contributed to this report.

 

 

 

 

AP

Wholesale Prices Jump in January

Tuesday February 26, 12:30 pm ET

By Martin Crutsinger, AP Economics Writer

Higher Costs for Food, Energy and Medicine Push Wholesale Prices Up Sharply

http://biz.yahoo.com/ap/080226/economy.html

 

WASHINGTON (AP) -- Battered by bad economic news, consumer confidence plunged while wholesale food, energy and medicine costs soared, pushing inflation up at the fastest pace in a quarter century.

The Labor Department said Tuesday that wholesale inflation jumped by 1 percent in January, more than double the increase that analysts had been expecting.

 

Meanwhile, the New York-based Conference Board reported that its confidence index fell to 75.0 in February, down from a revised January reading of 87.3. The drop was far below the 83 reading that analysts had forecast and put the index at its lowest level since February 2003, a period that reflected anxiety in the leadup to the Iraq war.

 

Consumers have been shaken by a prolonged slump in housing that has pushed the country close to a recession.

 

A third report Tuesday showed that home prices, measured by the S&P/Case-Shiller Index, dropped by 8.9 percent in the fourth quarter of last year, the steepest drop in the 20-year history of the index.

 

"Home prices across the nation and in most metro areas are significantly lower than where they were a year ago," said Robert Shiller, one of the index's creators. "Wherever you look, things look bleak."

 

The January inflation surge left wholesale prices rising by 7.4 percent over the past 12 months, the fastest pace in more than 26 years.

 

The worse-than-expected performance was certain to capture attention at the Federal Reserve, which has chosen to combat a threatened recession by aggressively cutting interest rates in the belief that weaker economic growth will keep a lid on prices.

 

But the combination of rising inflation and weaker growth raises the threat of "stagflation," the economic malady that plagued the country through the 1970s, when a series of oil shocks left households battered by the twin problems of stagnant growth and rising inflation.

 

The 1 percent jump in wholesale prices followed a 0.3 percent decline in December and was the biggest one-month increase since a 2.6 percent increase in November. That gain had been driven by sharply higher energy costs.

 

The big jump in wholesale prices followed a report last week that consumer prices had risen by a worse-than-expected 0.4 percent, reflecting higher costs for food, energy and health care.

 

The wholesale report said that energy prices jumped 1.5 percent, as gasoline prices rose by 2.9 percent and the cost of home heating oil jumped by 8.5 percent.

 

Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.

 

Core wholesale inflation, which excludes food and energy, posted a 0.4 percent increase, the biggest increase in 11 months. This gain was led by a 1.5 percent spike in the cost of prescription and non-prescription drugs.

 

The cost of book publishing was up 1.7 percent while the price of light trucks and passenger cars both rose by 0.3 percent.

 

Prices excluding food and energy are up 2.5 percent over the past 12 months, the fastest 12-month gain since a 2.5 percent rise in the 12 months ending in October.

 

 

 

 

Wheat Tops $12 a Bushel for First Time on Rising Food Demand

By Jae Hur and Danielle Rossingh

http://www.bloomberg.com/apps/news?pid=20601082&sid=a3OKsrHqeToQ

 

Feb. 26 (Bloomberg) -- Wheat climbed above $12 a bushel for the first time in Chicago, as investors poured money into agricultural commodities on signs that crop production isn't keeping pace with demand.

 

Global wheat stockpiles probably will fall to a 30-year low this year, while corn inventories are headed for the lowest since 1984, the U.S. Department of Agriculture said Feb. 8. Almost $1.5 billion flowed into farm commodities in the week to Feb. 19, investment bank UBS AG said yesterday. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has jumped 15 percent this year.

 

Wheat, soybeans, corn and palm oil are among commodities that have touched records this month, stoking prices of bread, noodles and crackers worldwide. The gains have driven up costs for food companies from Kellogg Co. to Premier Foods Plc and complicated efforts to curb prices in China, India and Malaysia.

 

``Agricultural commodities such as wheat are the place to be right now,'' Eugen Weinberg, a commodities analyst at Commerzbank AG in Frankfurt, said in an interview today. ``Production may be rising, but not at the pace necessary to keep up with increased demand.''

 

Wheat for May delivery rose 90 cents, or 8 percent, to $12.145 a bushel at 12:15 p.m. on the Chicago Board of Trade. The exchange expanded the trading limit after the contract surged by the previous 60-cent limit yesterday.

 

High-Protein Grain

 

Supplies of high-protein spring wheat have dwindled because many of the world's farmers sold their grain months before it was harvested. Some growers sold for $5.50 to $6 a bushel because that was considered a good price at the time, analysts said.

 

Buyers are scrambling for limited inventories. India said today it may import 2 million tons in the year starting July 1 after dry weather cut domestic production. The country said it expects to buy 1.8 million tons in the year that ends June 30.

 

Export sales from the U.S., the world's largest shipper of the grain, are up 56 percent since June 1 compared with the same period a year earlier, USDA data show.

 

On the Minneapolis Grain Exchange, where most of the spring wheat is traded in North America, wheat futures for May delivery rose the exchange limit of $1.35, or 7.9 percent, to $18.4325 a bushel. Wheat for March delivery yesterday rose 25 percent to $24, the first time any U.S. wheat contract topped $20. The contract has no limit because it's closest to delivery.

 

``We came in after the weekend and had a bunch of perceived demand news on wheat,'' said Clark Neighbors, a commodities broker at Bump Investor Services in Cedar Rapids, Iowa. ``Minneapolis wheat still continues to be the main player.''

 

Stockpile Decline

 

Global stockpiles may fall to 109.7 million tons, the lowest in 30 years, the USDA said on Feb. 8. Drought curbed production in Canada and Australia and an April freeze followed by excessive rainfall hurt yields in the U.S., where inventories are expected by the USDA to drop to 272 million bushels, or 7.4 million tons, the lowest in 60 years.

 

The U.S. is the biggest exporter of the grain, followed by Canada, Russia, Argentina, Kazakhstan and Australia.

 

Kazakhstan said today it may impose export duties on wheat on March 1 to curb an inflation rate that reached almost 19 percent in December, the highest since March 2000, because of rising food costs. The move would copy Russia's December addition of export tariffs on wheat, Agriculture Minister Akhmetzhan Yesimov said, according to a government Web site.

 

U.S. Planting Outlook

 

Wheat planting in the U.S. will rise 6 percent to 64 million acres in the year ending May 31, 2009, USDA's acting chief economist, Joe Glauber, said Feb. 21. Inventories are expected to jump to 538 million bushels, USDA data show.

 

Some analysts and economists said the USDA may be overestimating how much growers will be able to increase spring seeding, and that the shortage of high-protein varieties may continue for another year.

 

``I do not expect a large increase in spring wheat acres in North Dakota,'' said Andrew Swenson, a farm management specialist at North Dakota State University in Fargo. ``The 2008 prices of competing crops have also increased. Wheat seed has increased greatly relative to seed costs for other crops. Nitrogen fertilizer is very high, which is a negative to high- nitrogen usage crops such as corn and wheat.''

 

Cheaper Crops

 

Soybeans, which jumped to a record $14.855 a bushel in Chicago yesterday, require less fertilizer than wheat.

 

``In eastern North Dakota, where wheat competes with corn and soybeans, I do not think wheat acres will increase,'' Swenson said. ``Statewide, my prediction is a fairly strong increase in soybean acres, a drop in corn acres, a fairly strong increase in durum acres and some increase in spring wheat acres, but not much.''

 

Spring wheat in the state also has to battle for acres with oilseeds such as sunflowers, canola and flax, he said. ``Those crops will hold their own in competing with wheat,'' Swenson said.

 

``These kinds of rises are not sustainable,'' Commerzbank's Weinberg said, adding that wheat may fall as low as $10 a bushel next month. ``It's overdone for the short-term, however, still a good investment for the long term.''

 

Hedge-fund managers and other large speculators increased their net-long position in Chicago wheat futures in the week ended Feb. 19, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 20,108 contracts, the Washington-based commission said in its Feb. 22 report.

 

``Speculators keep jumping into the market as supplies are very tight globally, especially spring wheat,'' said Takaki Shigemoto, an analyst with Tokyo-based commodity broker Okachi & Co. Dry conditions in some wheat-producing areas in northern China also lent support, he said.

 

Rising Costs

 

Rising prices for edible commodities are slicing into cash flows across the food industry. Fourth-quarter earnings at Kellogg Co., the largest U.S. cereal maker, fell 3.3 percent as price increases failed to keep pace with the higher expense of making Eggos, Frosted Mini-Wheat cereal and cookies.

 

Premier Foods, the maker of Hovis bread, fell for a second day in London trading and posted the steepest decline in Europe's Dow Jones Stoxx 600 Index. Premier shares slid 4.6 percent to 92.5 pence at 4:35 p.m. in London.

 

Farm animals, which eat 16 percent of the world's wheat, are also driving consumption as feed made from alternatives such as corn gets more expensive. The appeal of corn-based ethanol is increasing as the U.S. government sets mandates for alternative energy sources.

 

Crop Prices

 

Palm oil, the world's most-used cooking oil, dropped the most in a month on the Malaysian Derivatives Exchange today after surging to a record yesterday. Prices have almost doubled in the past year on demand from China and India.

 

Corn in Chicago declined as much as the daily price limit, falling for the first time in eight sessions, and soybeans fell for the first in four after they reached records yesterday.

 

Corn futures for May delivery, which reached $5.55 a bushel yesterday, fell 4.5 cents, or 0.8 percent, to $5.425 a bushel in Chicago, after earlier dropping the 20-cent limit to $5.27. Corn is up more than 17 percent this year.

 

Soybeans for May delivery rose 14 cents, or 1 percent, to $14.8325 a bushel. The futures have gained 90 percent in the past year after U.S. farmers planted the fewest acres in more than a decade.

 

To contact the reporters for this story: Jae Hur in Singapore at jhur1@bloomberg.net ; Danielle Rossingh in London at drossingh@bloomberg.net

Last Updated: February 26, 2008 13:46 EST

 

 

 

 

High food prices may force aid rationing

By Javier Blas in Washington and Gillian Tett in London

http://www.ft.com/cms/s/0/451604c4-e30b-11dc-803f-0000779fd2ac.html

Published: February 24 2008 22:02 | Last updated: February 24 2008 22:02

 

The United Nation’s agency responsible for relieving hunger is drawing up plans to ration food aid in response to the spiralling cost of agricultural commodities.

 

The World Food Programme is holding crisis talks to decide what aid to halt if new donations do not arrive in the short term.

 

Why are food prices rising?

View our multimedia feature on the factors that contribute to global food price inflation

Josette Sheeran, WFP executive director, told the Financial Times that the agency would look at “cutting the food rations or even the number or people reached” if donors did not provide more money.

 

“Our ability to reach people is going down just as the needs go up,” she said.

 

WFP officials hope the cuts can be avoided, but warned that the agency’s budget requirements were rising by several million dollars a week because of climbing food prices.

 

The WFP crisis talks come as the body sees the emergence of a “new area of hunger” in developing countries where even middle-class, urban people are being “priced out of the food market” because of rising food prices.

 

The warning suggests that the price jump in agricultural commodities – such as wheat, corn, rice and soyabeans – is having a wider impact than thought, hitting countries that have previously largely escaped hunger.

 

“We are seeing a new face of hunger in which people are being priced out of the food market,” said Ms Sheeran.

 

Hunger is now “affecting a wide range of countries”, she said, pointing to Indonesia, Yemen and Mexico. “Situations that were previously not urgent – they are now.”

 

The main focus of the WFP to date has been to provide aid in areas where food was unavailable. But the programme now faces having to help countries where the price of food, rather than shortages, is the problem.

 

Ms Sheeran said that in response to rising food costs, families in developing countries were moving in some cases from three meals a day to just one, or dropping a diverse diet to rely on one staple food.

 

In response to increasing food prices, Egypt has widened its food rationing system for the first time in two decades while Pakistan has reintroduced a ration card system that was abandoned in the mid-1980s.

 

Countries such as China and Russia are imposing price controls while others, such as Argentina and Vietnam, are enforcing foreign sales taxes or export bans. Importing countries are lowering their tariffs.

 

Food prices are rising on a mix of strong demand from developing countries; a rising global population; more frequent floods and droughts caused by climate change; and the biofuel industry’s appetite for grains, analysts say. Soyabean prices on Friday hit an all-time high of $14.22 a bushel while corn prices jumped to a fresh 12-year high of $5.25 a bushel.

 

The price of rice and wheat has doubled in the past year while freight costs have also increased sharply on the back of rising fuel prices.

 

The world’s poor countries will have to pay 35 per cent more for their cereals imports, taking the total cost to a record $33.1bn (in the year to July 2008, even as their food purchases fall 2 per cent, according to the UN’s Food and Agriculture Organisation.

 

The US Department of Agriculture warned this week that high agricultural commodities prices would continue for at least the next two to three years.

Copyright The Financial Times Limited 2008

 

 

 

 

AP

Job Worries Sink Consumer Confidence

Tuesday February 26, 11:38 am ET

By Eileen Alt Powell, AP Business Writer

Consumer Confidence Plunges in February on Worries About Business Conditions, Jobs

http://biz.yahoo.com/ap/080226/consumer_confidence.html

 

NEW YORK (AP) -- Consumer confidence plunged in February as Americans worried about less-favorable business conditions and job prospects, a business-backed research group said Tuesday.

The Conference Board said its Consumer Confidence Index fell to 75 this month from a revised 87.3 in January.

 

The reading was the lowest since the index registered 64.8 in February 2003, just before the U.S. invaded Iraq, researchers said, and was far below the 83 expected by analysts surveyed by Thomson/IFR.

 

The index measures how consumers feel about the economy. It has been weakening since July, suggesting that wary consumers may retrench financially, which could fatigue the economy further.

 

The expectations index, which measures consumers' outlook over the next six months, fared even worse. The expectations index dropped to 57.9 from 69.3 in January. The February figure was a 17-year low, the Conference Board said, standing just a bit above the 55.3 of January 1991.

 

In midmorning trading, the Dow Jones industrial average rose 17.99, or 0.14 percent, to 12,588.21. Broader indexes, including the Nasdaq composite and Standard & Poor's 500, were down.

 

Lynn Franco, director of The Conference Board's Consumer Research Center, said in a statement that the consumer confidence survey -- which is based on a sample of 5,000 U.S. households -- indicated that consumers felt economic conditions were deteriorating.

 

"The weakening in consumers' assessment of current conditions, fueled by a combination of less-favorable business conditions and a sharp rise in the number of consumers saying jobs are hard to get, suggest that the pace of growth in early 2008 has slowed even further," Franco said in a statement accompanying the report.

 

She pointed to the low "expectations" reading and added: "With so few consumers expecting conditions to turn around in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase."

 

A third reading, the index looking at current conditions, also dropped in February to 100.6 from 114.3 the month before.

 

Those saying jobs were "hard to get" rose to 23.8 percent in February from 20.6 percent in January, while those claiming jobs were "plentiful" decreased to 20.6 percent from 23.8 percent.

 

Anthony Chan, managing director and chief economist with JPMorgan Private Client Services in New York, said he believed "jobs and energy prices are weighing down on consumer confidence."

 

The weakening job situation also has been reflected in growing numbers of claims for unemployment benefits, he noted. The four-week average for claims, released by the Labor Department, rose to 360,500 last week -- the highest level since claims spiked in October 2005.

 

Chan said he expects the first two quarters of this year to be "challenging," with a 50 percent to 55 percent chance of a recession. He expects economic growth to resume in the second half because of Federal Reserve interest rate action and the Bush administration's tax rebates this summer.

 

"The Fed began easing last August and began lowering rates in September ... and monetary policy impacts the economy with lags," he said. "And the stimulus package in the second half of the year will be a nice shot in the arm for consumer spending."

 

In Washington, meanwhile, the Labor Department reported that inflation at the wholesale level soared in January, pushed higher by rising costs for food, energy and medicine. The monthly increase carried the annual inflation rate to its fastest jump in a quarter century.

 

The department said wholesale prices rose 1 percent last month, more than double the 0.4 percent increase that economists had been expecting. The January surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years.

 

And Standard & Poor's said Tuesday that U.S. home prices lost 8.9 percent in the final quarter of 2007, marking a full year of declining values and the steepest drop in the 20-year history of its housing index.

 

The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.

 

http://www.conference-board.org

 

 

 

 

AP

US Home Foreclosures Soar in January

Tuesday February 26, 7:40 am ET

By Alex Veiga, AP Business Writer

Number of US Homes Facing Foreclosure Jumps 57 Percent in January

http://biz.yahoo.com/ap/080226/foreclosure_rates.html

 

LOS ANGELES (AP) -- The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.

 

Nationwide, some 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc. Nearly half of the total involved first-time default notices.

 

The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions

 

"You have more people going into default and a higher percentage of the properties going back to the banks," said Rick Sharga, RealtyTrac's vice president of marketing.

 

The U.S. foreclosure rate last month was one filing for every 534 homes.

 

The Cape Coral-Fort Myers area in Florida posted the highest foreclosure rate of any metro area in the nation, with one of every 86 homes in some stage of foreclosure, said RealtyTrac Inc.

 

Stockton, Calif., was ranked second, with one of every 97 homes involved in a foreclosure filing, while the Riverside-San Bernardino metro area in Southern California had the third-highest foreclosure rate with filings for one of every 101 properties.

 

January's tally represented an 8 percent hike from December.

 

RealtyTrac follows default notices, auction sale notices and bank repossessions. Lenders typically consider borrowers delinquent after they fall three months behind on mortgage payments.

 

Attempts to help struggling home owners have fallen short.

 

"The loan workout modification programs aren't having a significant material effect on keeping properties from going back to the banks," Sharga said.

 

One dramatic trend last month was a 90 percent spike in the number of properties that were repossessed by banks, compared to January 2007.

 

"It suggests that there's little or no equity in a lot of these homes, because they're not even being sold to investors at auctions, and it suggests a continuing weakness in a lot of markets in terms of real estate sales," Sharga said.

 

Falling home values and tighter lending standards have extended the housing slump, making it tougher for homeowners unable sell their homes or refinance when they face mortgage payments they can't afford.

 

A wave of adjustable rate mortgage resets expected in May and June threatens to push many other homeowners into default.

 

During the past year, 30 states saw an increase in the number of homes that had received at least one filing.

 

Nevada led the nation, with 6,087 properties receiving at least one filing, up 95 percent from a year earlier but down 45 percent from December, the firm said.

 

That translates to a rate of about one foreclosure for every 167 households.

 

Rounding out the top 10 states with the highest foreclosure rates were California, Florida, Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan.

 

California had 57,158 properties reporting at least one filing, the most of any state. The total increased 120 percent from a year ago and 7 percent from December.

 

Florida had 30,178 homes on the foreclosure track, up about 158 percent from a year earlier and down 3 percent versus December, RealtyTrac said.

 

RealtyTrac Inc.: http://www.realtytrac.com

 

 

 

AP

S&P: US Home Prices Down Sharply

Tuesday February 26, 12:36 pm ET

By J.W. Elphinstone, AP Business Writer

Key Home Price Index Shows Record Decline in 2007, Double-Digit Drops in 8 Metro Areas

http://biz.yahoo.com/ap/080226/home_prices.html

 

NEW YORK (AP) -- U.S. home prices dropped 8.9 percent in the final quarter of 2007 compared with a year ago, Standard & Poor's said Tuesday, the steepest decline in the 20-year history of its housing index.

 

"We reached a somber year-end for the housing market in 2007," said one of the index's creators Robert Shiller. "Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look, things look bleak."

 

The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.

 

The 10-city index also set a record annual decline of 9.8 percent in December, while the 20-city index dropped 9.1 percent.

 

Home prices also plunged 5.4 percent from the previous three-month period, by far the largest quarter-to-quarter decline in the index's history. The previous record was the revised 1.8 percent drop in the third quarter of 2007.

 

The quarterly index tracks prices of existing-family homes nationwide compared with a year earlier.

 

A government report Tuesday said U.S. home prices posted their first annual decline in 16 years. The Office of Federal Housing Enterprise Oversight said nationwide prices dipped 0.3 percent in the fourth quarter from the year-ago period.

 

The OFHEO index is narrower in scope and is calculated using mortgages of $417,000 or less that are bought or backed by Fannie Mae or Freddie Mac. That excludes properties bought with some of the riskier types of home loans.

 

"It will only get worse. This record will be shattered by subsequent declines," said Peter Schiff, author of "Crash Proof: How to Profit from the Coming Economic Collapse" about the S&P/Case-Shiller report. "We will experience the most substantial decline in history because before this we had experienced the most unprecedented rise in U.S. real estate history."

 

After 14 years of rising prices, the housing market is unwinding, taking victims from Main Street to Wall Street. Homeowners are losing their houses to foreclosures at an increasingly rapid rate as interest rates on home loans adjust higher and declining values eat into equity.

 

Irvine, Calif.-based RealtyTrac Inc. said Tuesday that the number of homes facing foreclosure climbed 57 percent in January from the previous year and more lenders are being forced to take possession of homes they couldn't dump at auctions.

 

Investors are taking huge losses to rewrite the declining value of securities backed by mortgages. Bond insurers also are taking a hit and could have trouble paying back bond holders if default levels soar. Stalled by swelling inventories and weak demand, homebuilders have been recording record losses quarter after quarter.

 

Economists worry the housing slump will plunge the broader economy into a recession. The economy grew an anemic 0.6 percent in the fourth quarter.

 

Earlier this month, Congress passed a $168 billion rescue package with provisions aimed to help beleaguered homeowners refinance into more affordable loans. The Federal Reserve also has aggressively slashed interest rates to spur growth.

 

The S&P/Case-Shiller index showed the Miami market was the weakest surveyed, posting a 17.5 percent annual decline. Las Vegas and Phoenix followed with a 15.3 percent drop each. Los Angeles, San Diego, San Francisco, Detroit and Tampa, Fla., all recorded double-digit annual declines.

 

Only three metro areas -- Charlotte, N.C., Portland, Ore., and Seattle -- showed year-over-year increases in prices, but Seattle's growth was up a slim 0.5 percent.

 

On Monday, the National Association of Realtors said sales of existing homes in January fell to the lowest level in nearly a decade while the median price for a home slid for the fifth straight month. The Commerce Department is set to report on January's new home sales Wednesday.

 

 

 

 

 

 

Energy Sector Trends Paint

“A Very Alarming Picture”

by Joseph Dancy, LSGI Advisors, Inc. | February 22, 2008

Print

http://www.financialsense.com/fsu/editorials/dancy/2008/0222b.html

 

While energy demand may be tempered by a slowdown in global economic growth, longer term growing energy demands and supply constraints will continue to present incredible challenges. Much more capital will need to be allocated to the sector to address supply issues, which should create opportunities for investors. We noted the following developments in the energy sector last month:

 

• The concept of 'peak oil' has been derided by the big oil companies for years, but last week the chief executive of the oil giant Royal Dutch Shell, Jeroen van der Veer, released a study forecasting the end of easy oil. Dr. Jim Buckee, retired president and chief executive of major independent Talisman Energy, claims he was not surprised that Royal Dutch Shell admitted oil supplies were getting tighter. Dr. Buckee says 'peak oil' is either here, or very close. "It is the underlying decline of the world's major fields that is the dominant driving factor here," he said.

 

"If you think that at the moment the world is consuming 30-plus billion barrels a year of oil and is finding seven or eight billion barrels a year, and this state of affairs has been going on now for 20 or more years. . . It's obviously unsustainable and the world is increasingly drawing on the bigger, older fields. You couple that notion with the irreversibility of decline and you've got a very alarming picture."

 

Dr. Buckee says the cost of a barrel of oil could reach as high as $200 by the third or fourth quarters of this year, and that prices would have to get that high before it would have any particular impact on demand. "I don't think that really we've seen any rationing of consumption by price," he said. Source: (ABC Premium News (Australia))

 

• Oil at $100 a barrel gives exporters an incentive to pump more, but their difficulty in doing so indicates the world is struggling to sustain production. A growing number of leading industry figures, including the CEO’s of Total and ConocoPhillips, now question mainstream forecasts for supply. They suggest the era of "plateau oil" is nearer than many in the business have admitted.

 

Some argue it may not be possible to boost flows beyond the current rate of 86 million barrels per day (bpd). Conventional supply from non-OPEC producers have missed forecasts in recent years and appear for now to have hit an "effective plateau", according to the International Energy Agency (IEA), adviser to industrialized countries. (Reuters)

 

• Global demand for oil is likely to grow by about 1.4 million barrels a day in 2008 according to forecasts by Lehman Brothers. Current global demand is roughly 86 million barrels per day. Some experts predict lower economic growth will reduce demand. Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation, expects global demand to grow by less than a million barrels a day in 2008 due to slowing economic growth. (New York Times)

 

• Nigeria has warned energy companies it wants to renegotiate oil and gas exploration and production contracts covering offshore oilfields in the next three months, claiming record prices are yielding a windfall to Western oil firms operating in that region. It is the first time Nigeria has come up with a timeframe for renegotiating the complex agreements. The government signaled late last year it would review the contracts in an effort to secure a greater share of profits from offshore production.

 

The Nigerian move reinforces a global trend of oil-exporting countries demanding better concession terms to reflect surging prices. Oil executives say the government's decision to follow the example of countries such as Russia, Algeria and Venezuela. Militant violence in Nigeria has shut in a fifth of output since 2006. (Financial Times)

 

Royal Dutch Shell, the largest foreign company in the strife-torn Niger River Delta, said it would take a $716 million charge against earnings due to the deteriorating security situation. Industry sources say that in addition to the production shutdown about 435 miles of pipeline and thousands of barrels a day of crude oil and condensates have been stolen. Much of the pipeline has been used for pillars in house construction. Nigeria's government is also not paying its share of joint-venture investments in the Shell venture, claiming it cannot fund its portion. Nigeria has budgeted only $5 billion of the $9 billion it was supposed to invest in the Shell operated project in 2008.

 

Nigeria is one of the major OPEC exporters of light, sweet crude oil, so any disruptions in supply will quickly impact world markets. (Washington Post, BusinessWeek)

 

• With oil markets booming Gulf states will enjoy a staggering, unprecedented increase in wealth over the next decade that will give them vast financial power across the globe. By one estimate, the five oil-and-gas-exporting nations – Saudi Arabia, United Arab Emirates, Kuwait, Qatar and Oman, with a combined population of 23 million citizens – will add $6.2-trillion (U.S.) to their revenues over the next 14 years. That's roughly the equivalent of adding Canada's total annual output to their revenues every two years. Those estimates assume oil prices of $70 per barrel. The producer’s revenues would increase at higher average selling prices.

 

• The International Energy Agency (IEA), a state-backed oil watchdog for industrialized countries, attributed recent record oil prices to pressures caused by strong demand and falling stock levels. In its monthly oil market report for January, the IEA forecast demand in 2008 of 87.8 million barrels per day (bpd), an increase of 2.3 percent, or 2 million bpd from 2007 levels. (AFP)

 

• Average gasoline demand last month was 7 percent higher compared to the same week last year, even with prices 30% higher, according to a MasterCard report.

 

• China is set to become the world's largest consumer of energy by about 2010 according to a study by the International Energy Agency (IEA). The World Energy Outlook report predicts that China will overtake the US in its energy use.

 

The Chinese economy has expanded by 11.4% over the past year, reaching its fastest growth rate in 13 years. The Chinese economy is very energy inefficient. It takes more than four times as much energy to generate a unit of GNP in China than in does in the U.S. according to a recent study published by Gordon Feller (chart at right).

 

• China's crude oil imports rose 12.4 percent in 2007 to a new record. Crude oil imports for 2006 increased 16.9 percent from the previous year. (Xinhua)

 

• China is facing widespread, temporary electric power shortages that could affect global energy markets if they aren't resolved soon. The distribution system is having trouble keeping up with the country's rising demand for electricity. Regulators said yesterday that 13 provinces and major regions, including the industrial-and-export hub of Guangdong in the south, will experience a total shortfall of about 70 gigawatts of electricity - one-tenth of China's total. Coal stockpiles have fallen to less than half typical levels, analysts said. (Wall Street Journal)

 

• China’s Prime Minister Wen Jiabao responded to growing public anxiety about inflation by announcing that China would freeze energy prices in the near term, even as international crude oil futures have continued to surge. Inflation has hit an 11-year high in China.

 

• Crude oil production in Mexico's huge Cantarell oil field will continue to decline this year at around the same pace as in 2007, Pemex announced. Average daily production at Cantarell is forecast to drop by 200,000 barrels in 2008, increasing pressure on the state-owned oil monopoly to ramp up output at smaller oil fields.

 

The decrease in production would be a drop of 16 percent from Cantarell's December 2007 output of 1.26 million barrels per day (bpd), its lowest level of the year. Yields at Cantarell declined 16 percent during 2007, slightly more than forecast. Pemex aims to keep its total crude output at around 3.1 million bpd by increasing production at other fields. Total Mexican output in 2007 declined by 5.3 percent. (Reuters)

 

• The Energy Information Administration reported a record-high 274 Bcf natural gas draw from storage for the week ended January 25th. The five-year average draw is 185 Bcf. The draw from storage surpassed the previous record-high withdrawal of 260 Bcf (in January 1997) and comes on the back of powerful heating degree days that were 21% above normal.

 

Low nuclear utilization is one reason for the strong incremental gas demand. Imports from Canada are also lagging. For the month the draw was 659 Bcf compared to a five year average draw of 580 Bcf. Working gas in storage now totals 4% above the five-year average and 13% below last year’s levels.

 

Depending on the weather the next couple of months the volumetric draw from storage could be the largest we have ever seen. The chart at right from AmericanOilman.com tells the story. From a five year high (blue line) in week 49 of 2007 we have fallen quickly (yellow line) in 2008.

 

If trends continue we will need to inject much more natural gas into storage this spring and summer than we did in 2007, which should help keep prices firm.

 

• Before 2010, the price for a thousand cubic feet of natural gas will be $10 per thousand cubic feet, T. Boone Pickens predicted at a presentation last month. Crude oil prices will reach $100 a barrel again before the end of 2008. "We are importing 62 percent of our oil now, and the two largest producers are Saudi Arabia and Russia,” Pickens said. "And the two largest consumers of oil are ourselves and China. . . We have kind of got ourselves in a bit of a spot that is going to get even more uncomfortable.” (NewsOK.com)

 

• The latest production figures published on theOilDrum.com website indicate that liquids production has jumped upward the last few months after more than two years of flat production. ‘Liquids’ includes both crude oil and natural gas liquids. Data is from the Energy Information Administration (red line) and the International Energy Agency (blue line), both credible sources.

 

If 2008 global demand forecasts of nearly 88 million barrels per day are correct, even the spike in production will not meet the growing demand. In that case demand would have to be met by draw-downs in inventories. Or supplies would need to be rationed by higher prices.

 

• While OPEC decided against expanding output in a meeting last month, some oil traders say that OPEC members such as Saudi Arabia, United Arab Emirates and Angola have allegedly added around one million barrels a day to world supply since early last fall. If so, this spare capacity will assist in meeting growing demand and natural resource depletion rates inherent in many of the older fields. (Wall Street Journal)

 

We think the supply and demand trends in the energy sector are long term issues, and that they present very attractive opportunities for investors.

 

 

 

 

 

Treating oil addiction

Published: February 24 2008 18:08 | Last updated: February 25 2008 09:59

http://www.ft.com/cms/s/1/0bf26e56-e303-11dc-803f-0000779fd2ac.html

 

Driving is as American as apple pie. At more than 9m barrels a day, gasoline accounts for almost half of US oil demand, and more than a 10th of that of the world. Capitol Hill wants to curb this. Use of biofuels, mainly ethanol, is to be expanded five-fold to 2.4m b/d by 2022. In addition, new cars must achieve

35 miles per gallon by 2020, up from 21 mpg today.

 

Will it make a difference in 10 years? Ethanol provides only two-thirds the energy gasoline does, and the dominant corn-based variety requires a lot of energy to make. So the extra 1.3m b/d of ethanol possibly on the market by 2017 would actually displace only 700,000 b/d of gasoline consumption.

 

With regard to better vehicle efficiency, Michael Canes of the LMI Research Institute has analysed the potential gains. Assume average mpg for new vehicles improves evenly, and the total vehicle pool turns over at

a rate of 7 per cent a year. Then adjust for factors such as more traffic on the roads and the fact that greater fuel efficiency tends to encourage more driving. By 2017, average actual fuel efficiency might be 23.5 mpg, implying “savings” of another 1.3m b/d. In theory, then, biofuels and less thirsty cars should more than offset an expected 1.5m b/d of incremental US gasoline demand by 2017. The savings would equate to perhaps one seventh of global incremental oil consumption.

 

How realistic is this benign view? Vehicle efficiency forecasts look robust – just reducing the weight of America’s bloated cars would help. The annual increase in fuel efficiency mandated by Washington – about 3 per cent – might seem ambitious. But vehicle manufacturers did much better than that in the decade after fuel efficiency standards were first passed in 1975, clocking up a 5.5 per cent improvement each year.

 

A biofuels breakthrough, however, requires big technological strides, and quickly. Start-ups such as Coskata, backed by General Motors, are developing such wonders as swamp bacteria that turn old tyres and other waste into fuel. But expanding a laboratory process into a nationwide industry is a huge challenge.

 

The bigger near-term risk to oil prices is the economy. Gasoline demand growth in the US has slowed to zero already. It turned negative in the recession at the start of the 1990s. China and the Middle East are now the centres of incremental demand, fuelled in part by domestic price subsidies. A US recession seems unlikely to slow them to a stop but could have a noticeable short-term effect and recalibrate demand forecasts beyond that.

 

Washington’s policy will have a real impact nonetheless, on a 10-year view. GSW Strategy Group, a US energy consultancy, points out that all the presidential frontrunners have committed themselves to initiatives such as greenhouse gas cap-and-trade schemes. A bubble may be developing in alternative energy. But that does not mean all the technologies it spawns will be duds. And their use would not be confined to just one country – China, for example, also worries about energy security.

 

If the history of the last oil shock is anything to go by, the one thing that could really undermine efficiency efforts would be a sudden drop in the price of crude. This time, however, fears for the climate and security concerns are creating, if not an alliance, at least a coalition of the willing encompassing such diverse interests as green activists and defence hawks. That even Detroit’s dinosaurs seem to view greener cars as one way of reinventing themselves suggests the trend will hold.

 

Beyond the near term, therefore, the efficiencies being planned now will affect the pricing of oil futures more and more. In that context, the stance of Opec keeping the market tight, even if that fuels efforts to make gasoline from bugs, perhaps makes more sense. If the trends pushing greater energy efficiency look unstoppable, the oil cartel might as well maximise profits up front.

 

 

 

 

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This article deals with the downstream economic and environmental impacts of ethanol use. This could be a potential specific link for AFV cases next year. It could spawn a number of impacts - economics, famines, turn the environmental advantages etc.

 

 

Ethanol Demand in U.S. Adds to Food, Fertilizer Costs (Update3)

By Alan Bjerga

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUIPybKj4IGs

 

Feb. 21 (Bloomberg) -- U.S. plans to replace 15 percent of gasoline consumption with crop-based fuels including ethanol are already leading to some unintended consequences as food prices and fertilizer costs increase.

About 33 percent of U.S. corn will be used for fuel during the next decade, up from 11 percent in 2002, the Agriculture Department estimates. Corn rose 20 percent to a record on the Chicago Board of Trade since Dec. 19, the day President George W. Bush signed a law requiring a fivefold jump in renewable fuels by 2022.

Increased demand for the grain helped boost food prices by 4.9 percent last year, the most since 1990, and will reduce global inventories of corn to the lowest in 24 years, government data show. While advocates say ethanol is cleaner than gasoline, a Princeton University study this month said it causes more environmental harm than fossil fuels.

``We are mandating and subsidizing something that is distorting the marketplace,'' said Cal Dooley, a former U.S. congressman from California, who represents companies including Kraft Foods Inc. and General Mills Inc. as president of the Grocery Manufacturers Association in Washington. ``There are no excess commodities, and prices are rising.''

The energy bill requires the U.S. to use 36 billion gallons of renewable fuels by 2022, of which about 15 billion gallons may come from corn-based ethanol. The nation's current production capacity is about 8.06 billion gallons.

Alternative Energy

Oil prices tripled since the end of 2003, causing the government to consider alternative fuels. Now, the competition for corn is leading to higher costs for food companies, raising prices for everything from cattle to dairy products.

Corn doubled in the past two years, touching a record $5.29 a bushel today in Chicago. The price of young cattle sold to feedlots gained 8.7 percent in the past year, reaching a record $1.1965 a pound on Sept. 6 on the Chicago Mercantile Exchange. Average whole milk rose 26 percent to $3.871 a gallon in January from a year earlier, the Department of Labor said yesterday.

``For thousands of years, humans grew food and ate it,'' said Andrew Redleaf, 50, chief executive officer of Whitebox Advisors LLC, a Minneapolis hedge fund that manages $3 billion. ``Now we are burning crops to make fuel.''

Whitebox bought three U.S. grain depots in the past year to profit from the growth in demand.

Updated Forecast

Farmers will have to increase planting of corn for ethanol by 43 percent to 30 million acres by 2015 to meet the government's requirements, said Bill Nelson, a vice president at A.G. Edwards Inc. in St. Louis. This year, growers outside the Midwest are focused on more profitable crops such as soybeans and wheat, the USDA said today in a crop forecast.

Corn planting will fall 3.8 percent this year to 90 million acres as farmers sow 12 percent more land with soybeans and 6 percent more with wheat, Joe Glauber, USDA acting chief economist, said today at the department's annual conference in Arlington, Virginia. The USDA said Feb. 8 that world corn reserves would drop for the seventh year in the past eight.

Increased planting has caused some fertilizer costs to double. Diammonium phosphate, a nutrient used on corn fields, reached $792.50 a ton on Feb. 15 from $297 a year earlier, USDA data show.

Greenhouse Gases

Researchers led by Timothy Searchinger at Princeton University said their study showed greenhouse-gas emissions will rise with ethanol demand. U.S. farmers will use more land for fuel, forcing poorer countries to cut down rainforests and use other undeveloped land for farms, the study said.

Searchinger's team determined that corn-based ethanol almost doubles greenhouse-gas output over 30 years when considering land-use changes. Bob Dinneen, president of the Renewable Fuels Association in Washington, said the study used a flawed model and overestimated how much land will be needed.

Ethanol is important in reducing emissions, ending energy dependence on the Middle East and creating jobs in rural areas, Dinneen said today at the USDA conference.

``There are still some who want us to choose between food and fuel,'' said Dinneen, whose organization represents ethanol producers including Archer Daniels Midland Co. ``I don't think we have to choose.'' Research shows cellulosic ethanol made from grasses and crop waste may contribute 21 billion gallons by 2022, and farmers will be able to boost yields, he said.

Food Costs Rise

U.S. food costs, which account for about a fifth of the consumer-price index, rose 0.7 percent in January, the Labor Department said Feb. 20. They will increase as much as 4 percent this year, Glauber said in remarks at the forum.

``Food prices through 2010 will rise greater than the overall inflation rate,'' because of rising energy and commodity costs, he said.

Ethanol's contribution to inflation is limited, USDA economist Ephraim Leibtag said in an interview. A 50 percent jump in corn prices in 2007 from the 20-year average only added 1.6 cents to the cost of an 18-ounce box of Kellogg Co. Corn Flakes cereal, Leibtag said. The cost is less than 2 percent per box, JPMorgan Chase & Co. estimates.

Ethanol's boom helps restrain government spending on farm subsidies, said House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat. The USDA expects taxpayers to spend $941 million on the two main subsidy programs tied to price this year, down from $9.1 billion in 2006.

Smithfield, Tyson

For food companies, demand for ethanol translates into lower profits and job cuts.

Smithfield Foods Inc., the largest U.S. hog producer, said Feb. 19 it will cut output by as much as 1 million animals a year, or 5 percent, because feed costs are too high. The company is based in Smithfield, Virginia.

Tyson Foods Inc., the largest U.S. meat company, forecast an increase in grain costs this year of more than $500 million. Springdale, Arkansas-based Tyson also reported a 40 percent drop in first-quarter profit and said it will close a beef plant in Kansas, firing 1,800 workers.

Ethanol ``has caused a domino effect,'' CEO Richard L. Bond said in a statement Jan. 28. ``For the foreseeable future, consumers will pay more and more for food.''

To contact the reporter on this story: Alan Bjerga in Washington at abjerga@bloomberg.net .

 

 

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Here's the next installment of articles. I'll get back to lessons in economics soon, but these days I am having a hard enough time keeping current with all the financial news flying around. Its a very volatile time period and its tough to get a handle of whats really going on.

 

 

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This first article has multiple uses.

First, it can be used to rebut to aff answers to a neg econ disad when the aff says a crash is inevitable - that inevitability is based on the credit crunch. This article clearly show that the energy crisis is enrmous and the financial crisis is drwafed by energy.

Second, it gives inherency to next years alternative energy topic. It puts in perspective the difference in spending between financial rescue and energy infrastructure rescue.

Third, the article specifically identifies that cutting resource demand is the only method by which significant cuts in commodity prices will be achieved. This is good for next year and it has implications for this year's topic. If you create millions of healthy Africans without fighting the high birth rates in Africa, the demand for resources goes up with population growth. The article also gives a good link into deforestation for agricultural production which is an inevitable and foregone conclusion with higher agricultural prices due to higher demand.

Furthermore, if the policy proposal for next year is biofuels based on crops, this will show added pressures on global prices and corresponding actions as a result.

 

 

Twin shocks of finance and resources facing global economy

By Tim Bond

Published: March 6 2008 02:00 | Last updated: March 6 2008 02:00

http://www.ft.com/cms/s/0/4f25cd52-eb1f-11dc-a5f4-0000779fd2ac.html?nclick_check=1

 

The global economy is facing twin shocks. Natural resource markets are delivering a supply shock of 1970s dimensions, while the financial system is delivering a shock comparable to the bank and thrift crises of the 1988-1993 period. The magnitude of each shock is very different. The financial markets require a recapitalisation of the banking system, with estimates ranging from $300bn to $1,000bn.

 

By contrast, prospective capital requirements in the resource markets dwarf the current needs of the banking system. According to the International Energy Agency, the global energy sector alone needs a real $22,000bn over the next two decades to meet the anticipated rise in primary energy demand. There is also the unavoidable necessity to reduce the CO 2 intensity of energy production, a good 80 per cent of which is derived from the dirtiest of fossil fuels. While an accurate quantification of the size of the required green energy investment is not possible, it is likely to be of a similar scale to the expansion of energy supply.

 

The energy sector is just one example of the more generalised supply problems afflicting the natural resources markets. Scarcity is endemic across most commodity markets, as existing capacity has struggled to meet a demand shock from the rapidly developing middle income economies. Historically low stock-to-consumption ratios show how severely the supply-demand imbalance has eaten into the margins of comfort in many - if not most - commodity markets. Global grain inventories, for example, are at 40-year lows, equivalent to just 15-20 per cent of annual demand. Most industrial metal inventories are at a 30-year trough relative to consumption.

 

The broad story is of depletion. Most of the easily obtainable resource deposits have already been exploited and most usable agricultural land is already in production. Natural resource discoveries, where they continue to occur, tend to be of a lower quality and are more costly to extract. Meanwhile, the dwindling supply of unutilised land faces competing demands from biodiversity, biofuels and food production.

 

Predictably, the scale of response to each of these crises is in inverse proportion to their respective magnitude. In the US, the credit crunch has elicited an instantaneous fiscal package to the tune of $168bn, or 1.2 per cent of nominal GDP. In contrast, the latest annual budget appropriation for renewable energy spending is just $1.72bn - 0.01 per cent of GDP.

 

The US monetary policy response has also focused exclusively on the credit crisis. The more subdued response in Europe shows the European Central Bank and other central banks are opportunistically using the credit crunch to tame incipient inflation. In contrast, the US has chosen to reflate aggressively. The risk that inflation expectations might drag their anchor has been broadly ignored.

 

The US policy response has reduced the chance of global growth slowing enough to ease the inflation in natural resource prices. A phase of commodity disinflation is what is needed to prevent economic participants from concluding that rising prices are a one way bet. Since the appropriate size of the stimulus cannot be calibrated with any precision, the aggressive reflation runs the risk of providing a monetary accommodation to the inflationary supply shock. Longer term, a more severe contraction in demand is likely to become necessary to re-anchor inflation expectations.

 

Indeed, in a global economy, where individual central banks' control over inflation is limited, the costs of re-anchoring straying inflation expectations are likely to be punitive. Even if the stimulus proves insufficient, policymakers will still have sent a strong signal in support of existing price levels. This explicit statement of policy priorities is unlikely to be lost on consumers and businesses.

 

On cue, since Washington started to ease policy, investor flows into commodities and other real assets have soared. Meanwhile, in spite of the slide into near-recession, forward inflation expectations in the bond market have risen to match the highest levels seen this century. The message is clear enough, but it is unlikely that anyone will pay much attention in an election year.

 

Tim Bond is head of asset allocation strategy at Barclays Capital.

 

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For anyone who is following the markets this week (and I really hope that my work here has encouraged you to pay more attention to the markets), its been an interesting rollercoaster.

 

First, the stock markets plummetted considerably on worsening credit news with banks saying they will be writing off billions more. Then the Fed, in an attempt to energize lending, decided they were going to pump 200 billion into the markets and this is more than the total amounts they have injected into the economy to date (I think to date is 160 billion). This made the stock markets rally in one of the biggest one-day climbs ever. 4% on the NADAQ, 3.5% on the Dow. This was followed up with continued sour news and two consecutive days of downward trends on the stock market (including today, so far). So what are we seeing here?

 

First is inflation. Inflation numbers for February came out today and they were milder than expected based on two key factors:

1) oil prices had stabilized in Feb resulting in stable gasoline prices and transportation costs had gone down slightly as a result.

2) the cost of food stocks (grains, pork, milk, etc) went down slightly, but this was again attributed to the lower energy costs which play a significant role in food cost (due to transportation and production)

 

Everyone on the markets are making bets as to whether or not the Fed will cut rates again on Tuesday (March 18, 2008). On one hand, you have analysts saying that inflation slowed, therefore the Fed has the room to cut rates (and thus try and spur the economy) without risking runaway inflation. On the other hand, you have analysts saying that in the month of March, so far, the price of oil has gone up 10% (to $110/barrel) which will undoubtedly accelerate the March inflation numbers across the board (transportation, agriculture, energy, consumer goods). Gold is up over $1000/ounce which shows the loss of faith in the future of global economies (people are flocking out of paper currency and to gold).

 

Its an interesting dynamic and regardless of which direction the Fed goes on Tuesday, there will certainly be supporters and critics. There will be tons of interesting articles out next week on moves by the Fed and the economy (and especially the impact on the dollar, which just hit serious historical lows against both Euro and Yen).

 

 

For those interested in petro-economics... this is a very good article. It is very dense with charts and whatnot, so you might need to pay deeper attention to it. But its neato for sure.

 

And for people who are prepping for next year with peak oil on their minds, here is a reading list I found. I havent read anything on the list... but I read some of the synopses on Amazon and found some of it interesting.

 

Also, here is a list of links for energy websites. This will certainly come in handy for you next year.

 

 

 

 

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Article 1: February inflation numbers are stable

Article 2: Retail sales down, inflation indicators up

Article 3: Retail sales down

Article 4: Fed loans to banks arent causing banks to lend

Article 5: The dollar decline might acclerate?

Article 6: Oil is up to $110

Article 7: UAE is considering removing the dollar peg?

 

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Inflation Rate Is Mildest in 6 Months

Friday March 14, 10:10 am ET By Martin Crutsinger, AP Economics Writer

Consumer Prices Post Best Reading in 6 Months As Energy Prices Temporarily Fall

http://biz.yahoo.com/ap/080314/economy.html?.v=35

 

WASHINGTON (AP) -- Consumer inflation, after pushing relentlessly higher, posted its mildest reading in six months in February thanks to energy and food costs moderating. The relief, however, was expected to be short-lived, given that energy prices have resumed their upward climb. The Labor Department reported Friday that consumer prices were unchanged last month, a better performance than the expected 0.3 percent gain. Core inflation, which excludes energy and food, also held steady in February after a worrisome 0.3 percent jump in January. The better-than-expected February inflation reading probably will be reversed in the coming months because of the recent spike in energy prices. Crude oil hit a record high this week above $110 per barrel and gasoline pump prices jumped to a national record of $3.28. But for February, energy prices posted a 0.5 percent decline. Gasoline prices fell by 2 percent, the biggest drop since last August. Gains in food costs eased, too. They rose by 0.4 percent after a 0.7 percent jump in January. The price of vegetables, fruit, poultry and pork declined. But the price of cereal and bakery products shot up by 1.8 percent, the largest monthly increase since January 1975. The higher costs partly reflect higher energy prices, which raise transportation costs. Also food prices have come under pressure because of the increased demand for corn in ethanol production. The flat reading for core inflation in February left underlying inflation rising by 2.3 percent over the past 12 months. That still is above the Federal Reserve Board's comfort range of 1 percent to 2 percent. But the good reading in February should bolster the view that the central bank will move aggressively to cut interest rates next Tuesday in an effort to battle spreading economic weakness. Many private analysts believe the Fed will cut rates by as much as one-half to three-fourths of a percentage point, seeking to either prevent a full-blown recession or at least moderate its effects. Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the February performance on inflation may mean that "at least some of the inflation hysteria can now subside." The unchanged reading for overall prices followed gains of 0.4 percent in January and December and 0.9 percent in November. Clothing costs, having risen for five straight months, posted a 0.3 percent decline in February. The cost of new vehicles declined by 0.3 percent and airline fares fell by 0.3 percent. The decline in airline tickets was not expected to continue in the face of rising energy prices. The cost of medical care posted an increase of 0.1 percent even though doctors' fees fell. Medical care, the fastest-rising price category outside of energy, has risen by 4.5 percent over the past year. For all of 2007, consumer inflation jumped by 4.1 percent, the biggest increase in 17 years. That big increase has raised concerns about stagflation, the malady that beset the economy in the 1970s when economic growth stagnated at the same time that inflationary pressures increased. Federal Reserve Chairman Ben Bernanke has said that he does not believe the country is at risk of another bout of stagflation.

Consumer Price Index report: http://tinyurl.com/228ayx

 

 

 

The Fed's worst nightmare

Ugly retail sales and a somber forecast from CFOs point to recession, but rising oil and gold prices and a weak dollar show inflation. What's Ben Bernanke to do?

By Paul R. La Monica, CNNMoney.com editor at large

Last Updated: March 13, 2008: 12:48 PM EDT

http://money.cnn.com/2008/03/13/markets/morningbuzz/index.htm?postversion=2008031311

 

NEW YORK (CNNMoney.com) -- It's days like today that will make many investors wish they stayed in bed. And they're not the only ones. Something tells me that Ben Bernanke and the rest of the Federal Reserve's policy-making committee would like to run and hide as well. Where to begin? Retail sales for February were shockingly weak, with sales falling 0.6% during the month compared to economists' forecasts of a 0.2% gain. Those numbers put dents in the argument that consumers would keep spending in the face of the housing downturn. Wall Street is also digesting some sobering results from a survey of chief financial officers released by Duke University and CFO magazine late Wednesday.

TalkBack: Should the Fed keep cutting rates?

According to the survey of more than 1,000 CFOs, conducted last week, three-quarters of the respondents said the economy is either in a recession already or will hit one this year, and nearly 90% of CFOs surveyed said they didn't think the economy would rebound until late 2009. So this means the Fed should slash interest rates at its next meeting on March 18, right? After all, according to federal funds futures, investors are pricing in a 72% chance of a three-quarters of a percentage point cut.

But not so fast.

Gold hit $1,000 an ounce for the first time ever Thursday morning. Oil is slouching towards $111 a barrel. And the dollar hit a 12-year low against the yen and a new record low against the euro. Can you say inflation? Actually, it's worse than mere inflation. The combination of rising commodity prices and the weakening growth forecast for the economy has people worried about 1970s style stagflation. I hope Bernanke can dig up a pair of old bell bottom pants. Do the hustle! "Clearly, the Fed needs to switch to Plan B," noted Duke professor Campbell R. Harvey in a release about the CFO survey. But what is Plan B exactly? It's difficult to figure out just what the Fed can do other than let the credit markets and housing markets work themselves out, and hope the actions the central bank has already taken stimulate the economy at some point.

Time may be the Fed's only ally

Even though the Fed's series of rate cuts since last September - as well as the hundreds of billions in cash and Treasurys that the central bank has pledged to loan capital-constrained financial institutions - have failed to encourage more lending just yet, investors and consumers need to realize there is a lag effect of several months before Fed policy moves have an impact. History shows that Fed easing will eventually work their magic. Hopefully, the rate cuts will encourage more banks to loosen their lending standards again, and will spur consumers and corporations to start spending more by the end of 2008 or early 2009. Plus, even though there is a debate about whether the tax rebate checks that consumers will receive in the next few months will really help the economy that much, it's hard to see how the rebates can hurt. But as I've said earlier this week in this column and numerous times before that, the Fed cannot drop the ball on inflation even if there are more signs of severe economic weakness. On Friday morning, we'll find out how much consumer prices rose in February. Economists are predicting a 0.3% rise in the headline Consumer Price Index (CPI) number and a 0.2% increase in the so-called core number, which excludes volatile food and energy costs. If the CPI figures are higher than expected, the Fed may have no choice but to disappoint Wall Street next week and only cut interest rates by a half-point, or perhaps even only by a quarter-point. A quick fix for the economy is not what's needed. The Fed has to ensure that its actions don't lead to the type of double-dip, or W-shaped recession, that some economists and market strategists are now talking about. Harvey indicated this could be the longest slowdown since the double-dip of 1979 to 1981. But if the Fed holds firm and doesn't stoke even greater inflation by lowering its key federal funds rate that much further, perhaps there's a chance this slowdown will turn into, at worst, just your garden-variety recession - and not an unwelcome rerun of what happened in the 1970s.

 

 

 

 

Recession fears revived as store sales tumble

Retail sales were much worse than expected in February, a sign that consumers are cutting back.

http://money.cnn.com/2008/03/13/news/economy/feb_retailsales/index.htm?postversion=2008031312

By Parija B. Kavilanz, CNNMoney.com senior writer

Last Updated: March 13, 2008: 12:23 PM EDT

 

NEW YORK (CNNMoney.com) -- Monthly retail sales suffered a surprising drop last month as American households continued to curtail their spending amid higher energy and food prices and a weakening jobs market.

 

The Commerce Department reported Thursday that total retail sales fell 0.6%, compared to a revised 0.4% increase in January. January sales were originally reported to have increased 0.3%.

 

Economists surveyed by Briefing.com expected a 0.2% gain in retail sales for the month.

 

"The basic story from these numbers is that consumer spending growth has slowed, which is consistent with our assessment that the economy is in a mild recession," said Scott Hoyt, director of consumer economics at Moody's Economy.com.

 

A steep 1.9% decline in auto purchases led to the overall sales decline in February.

 

Stripping out volatile auto sales, sales fell 0.2% compared to a revised 0.5% gain in January. January sales, excluding autos, were originally reported to have increased 0.3%.

 

Economists had anticipated a 0.2% gain in the measure.

 

Excluding both auto and gas station sales, February's core monthly retail sales performance was the weakest since April 2003, said Hoyt.

 

Sales fell across a wide spectrum of retail categories, including furniture, electronics, gasoline station and department stores.

 

Furniture store sales fell 0.5%, sales of electronics declined 0.4%, department store purchases slipped 0.2% and sales of building materials dropped 0.7%.

 

Higher food prices resulted in a 0.3% decrease in grocery store sales last month as consumers either substituted higher-priced items with cheaper alternatives or cut back on the quantity of food and beverage products.

 

Gasoline station purchases, which have been bolstered recently by record-high fuel prices, also tumbled 1%.

 

Hoyt said consumers were responding to escalating gas prices by either cutting back on car usage or combining trips. "New car sales data also shows that more consumers are looking to buy fuel-efficient models," he said.

 

Among the few positive areas, consumers did buy new clothes for spring, resulting in a 0.2% gain in sales.

 

Will rebate checks provide relief?

The Bush administration is hoping that consumer spending will get a boost from the approximately $105.7 billion in tax rebate checks that will be distributed to taxpayers over the summer.

 

The National Retail Federation (NRF), the industry's largest trade group, expects as much as $43 billion of that additional stimulus will get directly pumped into the retail sector.

 

However, Hoyt remains skeptical about that outcome.

 

"The rebate money could have some impact on boosting consumer spending but we have to see to what extent it will be offset by soaring energy, food and gas prices," he said.

 

Besides those factors, Hoyt said the critical part of the consumer spending equation is the labor market, which also delivered very dour news this month. The Labor Department reported that job losses in February were the worst in almost five years.

 

"A worsening labor market, combined with inflationary pressures in the market, will lead to a downward spiral for the economy," said Hoyt.

 

At the same time, Hoyt said steady growth in income levels is the only reason that he's still "anticipating a mild recession" in 2008.

 

First Published: March 13, 2008: 8:39 AM EDT

 

 

 

 

 

 

Fed loans not easing credit crunch

Banks are still afraid to lend money even with cash infusions from Federal Reserve.

http://money.cnn.com/2008/03/10/news/economy/fedauction/index.htm?postversion=2008031012

By Tami Luhby, CNNMoney.com senior writer

March 10, 2008: 12:52 PM EDT

 

The Fed throws a lifeline

 

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NEW YORK (CNNMoney.com) -- Banks could very well trip over themselves Monday as they bid on $50 billion in loans in the latest Federal Reserve auction.

 

But despite this eagerness to accept the government's "liquidity" injections, banks aren't significantly increasing their lending, experts said. In fact, some banks seem to be pulling back even further - for example, Citigroup Inc.'s (C, Fortune 500) last week said that it will scale back its mortgage business.

 

"It's still not enough to get the banks to loosen their lending terms," said Walker Todd, a research fellow at the American Institute for Economic Research and former attorney and economist at the New York Fed.

 

Banks have already borrowed a total of $160 billion since the Fed started holding these auctions in December as a way to ease the credit crunch, which began last year when mortgage defaults and foreclosures began to skyrocket. Since then, the crisis has extended far beyond the residential home loans, roiling the markets for everything from municipal bonds to student loans to auto financing.

 

After a particularly tough week in the credit markets, when even the value of formerly golden securities backed by Fannie Mae and Freddie Mac were called into question, the Fed announced Friday that it was upping the amount that would be available at the next two auctions to $50 billion, from $30 billion, and would continue to hold more rounds for at least six months.

 

In addition, the Fed said starting Monday it would hold a series of 28-day term repurchase transactions totaling $100 billion. Much as they have for the auctions, banks jumped on the opportunity, seeking $52.2 billion though only $15 billion is being made available in the first round.

 

These moves "indicate a deepening sense of anxiety on the part of the Fed," said Tom Schlesinger, executive director of the Financial Markets Center, which studies the central bank.

 

To be sure, the auctions are easing the credit crunch to some degree. Some financial institutions may use the Fed funds to replace money they could have raised by packaging bundles of mortgages and selling them as securities or by borrowing from other banks, said David Wyss, chief economist at Standard & Poor's.

 

Also, the Fed is allowing banks to use as collateral mortgage-backed securities from Fannie Mae and Freddie Mac, allowing them to trade securities of faltering value for cash.

 

But that doesn't mean the banks are, in turn, doling out the dough. Some are holding onto the funds to shore up their balance sheets, experts said. The firms can use the money to buy Treasuries, giving them a steadier stream of earnings than loans, Schlesinger said.

 

A main reason the Fed's measures aren't having a big impact on lending is because the problem with the markets isn't a liquidity crisis, but a psychological one, said Barry Ritholtz, chief executive of FusionIQ, an asset management firm.

 

Banks are shying away from offering credit because they fear the rising defaults, and they aren't buying securities backed by loans because they are unsure of the quality of the underlying assets. Even high-quality borrowers could run into trouble if the economy continues to tank.

 

"The Fed can't make banks lend," Ritholtz said.

 

Also, the Fed's moves aren't helping an ever greater problem facing many banks: A lack of sufficient capital. A measure of a bank's strength, capital levels indicate the institution's ability to absorb losses. As the value of assets backed by mortgages and other loans plummets, banks have had to raise capital by selling off operations or stakes in their companies.

 

Another way banks can improve their capital standing is to reduce the amount of loans they keep on their books. Citigroup, for instance, last week called for reducing its loan portfolio by 20% and cut the amount of new loans held on its balance sheet by half.

 

It's pressures such as these that prevent the Fed's efforts from having a great impact on the credit crunch. "The Fed's liquidity measures are inadequate to address a capital crisis," Todd said.

 

 

 

 

 

 

Is the dollar's decline about to accelerate?

Commentary: The foreign debt wolf is inside the door

By Peter Brimelow & Edwin S. Rubenstein

http://www.marketwatch.com/news/story/crying-wolf-again/story.aspx?guid=%7B2AA5CAA0%2DB0A6%2D4A88%2DA476%2DFDA8DD33D100%7D

Last update: 7:33 a.m. EDT March 12, 2008

 

INDIANAPOLIS (MarketWatch) -- Remember the boy who cried wolf -- and one day the wolf ate him? How about crying "foreign debt"?

We first asked this question nearly four years ago. See related column.

We pointed out that critics used to claim the Reagan-era boom in the early 1980s was just due to borrowings from foreigners.

It sounded plausible. But it just wasn't true. Foreign holdings of federal debt were low in the early 1980s, and falling. They bottomed at 13.4% at the end of the fiscal year in October 1984.

But when we last looked, the wolf was at the door. Foreign holdings of federal debt had reached 37.3% at the end of fiscal 2003.

Now the wolf is in the door. Foreign holdings of federal debt in 2007 reached a record: 45%.

We can see no precedent for this situation in the data.

Domestic holdings of federal debt actually fell in 2007 -- meaning foreigners bought more than 100% of that year's increase.

But, curiously, we don't hear much concern about foreign borrowing any more.

Maybe we should. In principle, it's very nice of foreigners to buy our federal debt.

We get to consume more. They have to assume the foreign exchange risk -- if the U.S. dollar falls, their debt holdings are worth less.

Maybe that's why Washington has so long tolerated China's pegging its yuan to the dollar. Of course, an undervalued yuan mean that Chinese exports to the U.S. are cheaper. That is nice for U.S consumers, although hard on U.S. manufacturers trying to compete.

But you have to wonder what would happen if foreigners stopped buying U.S. federal debt. Presumably interest rates would spike up, the dollar would fall, inflation would flare and the U.S would face wrenching structural change.

It would be nothing that markets can't handle. But it could be a shock.

Over two-thirds (69%) of the foreign debt holdings are owned by central banks, with China in the lead. That means purchase decisions are centralized and politicized.

Optimistic observers assume that neither China nor Japan would sell their holdings of U.S. Treasurys, because of the negative consequences of such a move on their own economies. Weakening the dollar would make their exports to the U.S. more expensive here. And where else would they put their money? (New thought: how about the euro?)

Foreign holdings of U.S. debt do fluctuate over time. Maybe the U.S. will quietly start to save its way out of this unusual situation.

But right now, it looks precarious.

And now the U.S. dollar seems to have started its long-predicted decline. Will that trigger a stampede?

We could be about to find out if the optimists are right.

Peter Brimelow is a MarketWatch columnist. Edwin S. Rubenstein is the president of ESR Research in Indianapolis.

 

 

 

 

 

Crude rallies to surpass $110 as dollar falls

Futures end at $109.92, shrug off surprise increase in U.S. inventories

By Moming Zhou & Polya Lesova, MarketWatch

Last update: 3:18 p.m. EDT March 12, 2008

http://www.marketwatch.com/news/story/crude-makes-fresh-gains-surpass/story.aspx?guid=%7B18D676B4%2D1A11%2D419D%2DBE39%2DB54C7FF36AB2%7D&siteid=yahoomy

 

SAN FRANCISCO (MarketWatch) -- Crude-oil futures ended Wednesday's trading at a new closing high of $109.92 a barrel after earlier topping $110 a barrel for the first time, as the dollar fell to a new low against the euro in a lift for dollar-denominated oil prices and as speculation increased in the futures market.

Crude gains came even after government data showed a surprising upturn in U.S. crude inventories in the latest week. Meanwhile, heating oil futures surpassed $3 a gallon for the first time.

Crude oil for April delivery hit a new intraday high of $110.20 a barrel on the New York Mercantile Exchange in late afternoon trading. It closed up $1.17 a barrel, or 1.1%. The benchmark contract was mostly in negative territory during morning trading after the inventories report.

U.S. crude inventories rose 6.2 million barrels to 311.6 million barrels in the week ended March 7, the Energy Information Administration reported. Analysts surveyed by Platts had expected an increase of 1.6 million barrels.

"Today's report is overwhelmingly bearish," said Chris Lafakis, an analyst at Moody's Economy.com. "There isn't a positive element in today's report for the oil bulls."

But some analysts believe the bearish news could instead push oil prices higher as investment funds resort to a buy-the-dip mentality, especially with the dollar under pressure. Crude has been making consecutive new highs and has rallied more than $20 in one month.

Market bears are hoping that in the short term this week's supplies numbers "could dent the recent rally, but we would not hold our breath," said Edward Meir, an analyst at MF Global, in a research note.

The dollar on Wednesday fell to the lowest level against the euro, which hit a new high of $1.5524. See Currencies.

Crude prices, denominated in dollars, tend to rise when the greenback falls, as a weaker U.S. currency makes crude less expensive to buyers holding other currencies. It also eats into oil producers' dollar revenue and forces them to raise prices. See story on dollar and crude.

Also on Nymex, April reformulated gasoline rose slightly to $2.7286 a gallon, and April heating oil surged to close at $3.0244 a gallon, up 2.87 cents.

April natural gas closed at $10.011 per million British thermal units, up 1.1 cent. EIA will report last week's U.S. natural gas inventories Thursday. Analysts at GlobalInsight expected stockpiles have fallen by 87 billion cubic feet.

Increasing speculation

The gap between WTI crude, the underlying product of Nymex crude futures, and Brent oil, a type of crude typically refined in Northwest Europe, widened to more than $4 a barrel on Wednesday, an unusual gap reflecting growing speculative buying of the U.S. contract, an analyst said on Wednesday.

"We believe that this is evidence of increased buying by hedge funds in the U.S.," said Peter Hitchens, analyst at Seymour Pierce.

According to Hitchens, the traditional premium between WTI and Brent is in the range of $1 to $1.50 a barrel, which he said "normally reflects the transportation price of moving a barrel of Brent to the U.S."

Government data showed speculators and managers of large investment funds, those who don't need physical oil, dominated bets on rising oil prices, while refiners and other oil users were betting oil prices would move lower.

The latest data from the Commodity Futures Trading Commission showed long positions from speculators, in which investors expect oil prices to move higher, outnumbered short positions, or bets on lower prices, by nearly 100,000 contracts last week.

Net long positions more than tripled in one month. This was the fourth consecutive week marking an increase in net long positions from financial traders, and some analysts are expecting another build-up in this week's net long positions.

Inventories in detail

Crude inventories at Cushing, Okla., the delivery point for crude traded on the Nymex, rose sharply, increasing by 2.7 million barrels to a total of 18.9 million barrels, EIA said in the report.

EIA also reported U.S. gasoline supplies rose by 1.7 million barrels in the latest week, while distillate stocks fell by 1.2 million barrels. Analysts surveyed by Platts, an energy information provider, had been expecting that gasoline supplies would fall by 900,000 barrels and that distillate stocks would drop by 2 million barrels.

U.S. refineries operated at 85% of their operable capacity last week, down from the previous week's 85.9%. U.S. crude oil imports averaged 10.5 million barrels a day last week, up 1.1 million barrels a day from the previous week.

Moming Zhou is a MarketWatch reporter, based in San Francisco.

Polya Lesova is a MarketWatch reporter based in New York.

 

 

 

 

UAE task force to review dollar peg

by Lynne Roberts on Tuesday, 11 March 2008

http://www.arabianbusiness.com/513409-uae-task-force-to-review-dollar-peg?ln=en

 

TASK FORCE: The UAE central bank is setting up a currency committee to study a possible depegging of the dirham from the dollar. (Getty Images)The UAE central bank has set up a currency task force to study a possible depegging or revaluation of the dirham from the dollar, the Wall Street Journal reported on Monday.

 

The committee will review the likely benefits of revaluing and will help coordinate any future depegging of the dirham, the WSJ said, quoting unnamed sources.

 

The UAE central bank’s head of treasury, Saif Al Shamsi will play a key role in setting up the committee, which is expected to report its findings by the end of the year, the report continued.

 

“The committee is still in its preliminary stages and an official list of members is still being drafted but all the members will be from the central bank” a source told the WSJ.

 

Central bankers in Saudi Arabia and the UAE recently reiterated their commitment to retaining the pegs, saying they helped Gulf states attract foreign investments.

 

However, investors have renewed bets on a revaluation of the dirham as dollar weakness and the prospect of further US Federal Reserve interest rate cuts places pressure on Gulf Arab dollar pegs as inflation rises to near-record peaks across the region.

 

UAE sets bank borrowing limit

Lenders can borrow up to $200mn per day against certificates of deposit, central bank says.

 

Bets grow on Gulf revaluations

Currency forwards strengthen as investors renew bets weak dollar will force change to dollar peg.

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Declining dollar equals higher food prices.

Why your food is costing more money By Tom Curry, National affairs writer

MSNBC http://www.msnbc.msn.com/id/23632933/

 

Food prices increased at a compound annual rate of 4.7 percent for the three months ending in February, according to data released Friday by the Bureau of Labor Statistics.

 

That increase was far less than the 7.6 percent jump in energy prices for the same period, but it occurred in a financial environment in which investors have been fleeing declining dollar-denominated assets such as U.S. stocks and bonds. Instead, they've been investing in commodities, such as wheat, corn, and soybeans — and it's driving up their prices.

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This article has some nice arguments for a Japan collapse at the end. If the American dollar stays weak against the Yen, Japanese exporters cant afford to export, and that accounts for 20% of their economy, which leads to general economic problems. I am sure there is a way for someone creative to work out a specific counterplan which can be used with this. Also included is a China specific scenario which also has potential for creativity.

 

The nice thing (well, technically not so nice) about the current analysis floating around the web is that analysts believe investors are losing confidence in the global markets, the ability of the fed to bail out the banks and keep inflation low, and the general resilience of the economy in general. We're not quite at the point where confidence has evaporated, but we are nearing it. If you can weasel in a significant economic shock (like terrorists striking oil refineries, or pissing off China/Japan so they stop buying dollars) then you can claim that to be the catalyst for global collapse. Using an internal impact as an internal link to a larger impact gives you options as well.

 

I also think the economy is at the point where you can assert precautionary principle. The burden should be on the aff to prove that a negative economic impact wont occur, not on the neg to prove the inverse. The economy IS teetering, that much is sure. Rocking the boat towards the negative is inherently destabilizing. One could say 'oh, whats 5 million in spending!' but the point that is missed is that every dollar counts at this point because we dont know how markets will react to willy nilly spending on AIDS in Africa, etc.

 

 

My comments in italics, as usual.

 

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Pharma Flashback: U.S. Drug Sales Slowest Since 1961

Posted by Jacob Goldstein

Wall Street Journal

March 12, 2008, 9:53 am

http://blogs.wsj.com/health/2008/03/12/pharma-flashback-us-drug-sales-growth-slowest-since-1961/?mod=sphere_ts&mod=sphere_wd

 

Drug sales grew 3.8% last year — the slowest growth since 1961, according to a report out this morning from the data crunchers over at IMS Health.

 

IMS gives plenty of familiar reasons for the slowdown: “loss of exclusivity of branded medicines, fewer new product approvals, the leveling of year-over-year growth from the Medicare Part D program, and the impact of safety issues.”

 

Don’t hold your breath for a big comeback. The report does predict about a half dozen potential blockbusters will launch this year. But in a statement, IMS’s Murray Aitken says, “The U.S. pharmaceutical market has entered a new era — one characterized by more modest growth….” IMS estimates compound annual U.S. growth through 2012 at 3% to 6%.

 

Total U.S. sales of prescription drugs were $286.5 billion last year. Antidepressants were the most frequently prescribed drug. Cholesterol drugs were the biggest category in terms of sales, at $18.4 billion — though sales were off 15%, as the category giant, Pfizer’s Lipitor, faced competition from the generic version of Merck’s Zocor.

 

Proton pump inhibitors, such as AstraZeneca’s Nexium, were the second biggest class in terms of sales. Antipsychotics were third, with sales of $13.1 billion, up 12% from the previous year.

 

The functional argument to make is that sales are flattening with mid-term prospects being not much better. The forced requirements of cheap drugs elsewhere will crush their growth and lead to negative sales. The important thing to remember is that the American market pays for the drugs of the rest of the world. A single pill which costs $10 in Africa costs $200 in America. Thus, is our sales are flat, and you increase price pressure on pharma, domestic prices go up, generic sales go up, brand name goes down, pharma tanks. This can be another internal link to a pharma disad using an intellectual property link.

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I came across this earlier today:

 

No recession now, but the economy is right on the brink

 

Alice M. Rivlin (QUALS: Visiting Professor, Public Policy Institute, Georgetown University; Chair, District of Columbia Financial Management Assistance Authority; Vice Chair, Board of Governors, Federal Reserve System; Director of Economic Studies, Brookings Institution), "Monetary Policy and the State of the Economy," Speech given at the House Committee on Financial Services, February 26, 2008

http://www.brookings.edu/testimony/2008/0226_us_economy_rivlin.aspx?emc=lm&m=213199&l=18&v=872427

 

If the consensus forecast is roughly right, we will have slow growth for a couple more quarters, but will avoid recession and see growth resuming by the end of the year. But the situation is precarious. In housing, a spreading wave of foreclosures could undermine consumer confidence and increase the probability of recession. Continued risk aversion of investors and unwillingness to lend on the part of financial institutions could raise the probability even more and turn a slowdown into a full-blown economic route that could spread beyond our borders.

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Here's a couple more articles...

 

A New Era in the Energy Sector

by Joseph Dancy, LSGI Advisors, Inc. | March 28, 2008

http://www.financialsense.com/fsu/editorials/dancy/2008/0328.html

Joseph Dancy Adjunct Professor, SMU School of Law | Oil & Gas Law, SMU School of Law

Advisor, LSGI Market Letter

 

Last month we delivered a lecture at Southern Methodist University to our Oil & Gas Law class on the 'New Era of Oil: The Age of Scarcity'. This is not a standard law school topic, but relevant when discussing the legal history and development of market demand prorationing, allowables, and conservation regulations.

 

Our thesis is that we are entering the fourth era of the oil age – one the world economy has never experienced before. This era will cause many disruptions, but will also create investment opportunities that arise only once every few decades.

 

From the discovery of crude oil in the Drake well in Pennsylvania in 1859 until the East Texas Field discovery and development in the early 1930’s we had a situation where supply was growing exponentially. Increases in demand did not keep pace so the price of crude oil plummeted. Governors shut in oil fields to prevent overproduction and waste. Arising from these problems the Texas Railroad Commission and other regulators obtained the statutory authority to restrict incremental oil production to match global demand.

 

The second era lasted 1930 to 1972 as state regulators like the Texas Railroad Commission restricted production to stabilize the price. When the production of crude oil peaked in the U.S. in 1972 the role of the Railroad Commission in restricting production passed to the Organization of Petroleum Exporting Countries – the third era of oil. In each of the first three oil eras we had excess productive capacity to meet the rising global demand and any short term shortages that occurred.

 

Going forward we find ourselves in the position where global demand for crude oil is now approaching the ability of the world’s producers to extract production – and soon demand will exceed productive capacity. For the first time ever we will have no excess global productive capacity to meet growing demand. In such an era – never seen before in the global economy.

 

We expect the following:

 

(1) wildly volatile crude oil prices - mostly to the upside,

(2) resource nationalization - the material is too valuable to export,

(3) irrational hoarding behavior by consumers,

(4) a spillover of price volatility into the markets for other energy sources (natural gas especially),

(5) a wild frenzy to acquire domestic oil and gas resources (property deals and deals on Wall Street),

(6) a melt-up of the energy and energy services sector,

(7) a focus on energy conservation,

(8) new opportunities in the solar and wind energy sectors,

(9) more attention on biofuels (emphasized by the 2007 Energy Act) - which incidentally will drive grain prices to record levels, and

(10) as a result of the extreme increases in food and fuel prices we expect to see food shortages, instability, riots, and the like in less developed countries.

 

One of the most significant developments we expect to see, besides much higher energy prices and volatility, will be the interconnection of the global energy and agricultural markets – tied together by biofuel initiatives. Adequate capital has not been allocated to the energy and agricultural sectors in the face of global physical and political challenges – and that historic misallocation creates great opportunities for business in these sectors. The energy and agriculture markets are quickly converging, which points to much higher prices for both commodities.

 

Because of these trends we remain heavily over-weighted in the energy and agricultural sectors. The evidence of a new era for both energy and agriculture – reflected in global production and demand data – is compelling.

 

 

This has utility primarily for next year. I think the aff can make the argument that the shift should be from ethanol to X, with the claim that ethanol is going to crush the commodities markets by sending the price of non-ethanol producing crops through the roof. This leads to famines, war etc.

 

 

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More stuff on the dollar as the world's reserve currency and the price of oil.

 

Arabs' Dollar Doldrums Fail to Shake Central Bankers (Update3)

By Matthew Brown

http://www.bloomberg.com/apps/news?pid=20601109&sid=auiN1nCBZano&refer=home

 

March 31 (Bloomberg) -- Central bankers in the Middle East are proving the U.S. dollar's decline to record lows is a small price to pay for the loyalty -- and oil money -- of their biggest Western ally.

 

The governor of the Saudi Arabian Monetary Authority, Hamad Saud al-Sayari, called the dollar a ``good buy'' when it fell to $1.55 a euro on March 12. The United Arab Emirates, conceding to U.S. pressure, will keep the dirham tied to the currency, a U.A.E. central bank official speaking on condition of anonymity said March 17.

 

While a booming economy has pushed the average rate of inflation to above 7 percent in Saudi Arabia and the five other Gulf Cooperation Council members, none say they will follow Kuwait and resolve the problem by ending their fixed exchange rates to the dollar. That's because doing so may spark a new dollar crisis, said Simon Williams, the chief Gulf economist at HSBC Holdings Plc in Dubai, a move that would slash the value of their $500 billion of assets denominated in the currency.

 

``The Gulf states may be decoupled from the U.S. economy, but they are still shackled to the dollar,'' Williams said. ``While they recognize the shortcomings of the status quo, policy makers seem minded to maintain it, at least for now.''

 

The survival of the pegs shows how hard it is for major economies to break from the dollar, regardless of its 13.4 percent decline on a trade-weighted basis in the past 12 months. Saudi Arabia keeps the riyal fixed at 3.75 to the dollar by purchasing or selling the greenback with the local currency.

 

Bank Meeting

 

Gulf central bank governors will hold the first of two meetings this year in Doha, Qatar, on April 6-7 to discuss monetary and currency policy.

 

Speculation about a revaluation peaked in November before a GCC meeting. U.A.E. central bank Governor Sultan Bin Nasser al- Suwaidi said he might link the dirham to a basket of currencies, and an unidentified official from the Saudi Arabian Monetary Authority said a revaluation was under consideration. The U.A.E. dirham and the Saudi riyal both jumped to 20-year highs.

 

GCC countries are unwilling to change because so much of their revenue comes from oil, which is priced in the U.S. currency. Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain control 40 percent of the world's proven crude reserves. Oman earned about 65 percent of its revenue from oil in the past year, government data show. Half of Saudi Arabia's gross domestic product is accounted for by the oil and gas industries.

 

Rejecting Iran

 

Saudi officials rejected a suggestion by Iran and Venezuela to stop pricing crude in dollars at a meeting of the Organization of Petroleum Exporting Countries in Riyadh on Nov. 19. Saudi Arabia doesn't want the U.S. currency to ``collapse,'' Foreign Minister Prince Saud Al-Faisal said.

 

``If OPEC made a definitive statement that it was going to be paid in other currencies, you could get a run on the dollar,'' said John Waterlow, an analyst at Edinburgh-based energy advisers Wood Mackenzie Ltd. ``But they are so heavily invested in dollar-denominated assets it would damage their financial position.''

 

GCC states' accumulation of dollar-denominated assets increased in 2007, even as the U.S. currency lost 10 percent against the euro. Dollars accounted for 67 percent of new GCC state assets managed by their central banks and sovereign wealth funds in 2007, up from 60 percent in 2006, according to RGE Monitor, a New York-based economic consulting firm led by former White House adviser Nouriel Roubini.

 

Faster Inflation

 

Linking their currencies to the dollar forces the GCC states to lower their interest rates in lockstep with the Federal Reserve. That reduces their ability to fight inflation, which accelerated to between 7 percent and 10 percent by the end of 2007, from an average annual pace of 1.4 percent in the decade through 2005, according to Commerzbank AG.

 

Rising prices, in turn, diminish the competitiveness of Gulf states as they seek to attract foreign employees. About 90 percent of the workforce in the U.A.E. and Qatar comes from overseas, according to the U.S. Department of State. Almost half of all companies in the GCC say revaluing their currencies would be positive for business, a survey by HSBC showed in January.

 

``Price stability is paramount when it comes to ensuring longer-term growth and making the region an attractive destination,'' said Marios Maratheftis, head of research for the Middle East and Pakistan at Standard Chartered Plc in Dubai.

 

The GCC states are diversifying their reserves. The U.A.E began buying euros in 2006 to increase the share of the European currency in its reserves to 10 percent from 2 percent.

 

U.S. Calling

 

The Qatar Investment Authority, the emirate's sovereign wealth fund, holds about 40 percent each in dollars and euros, according to RGE Monitor. The fund is looking at investment opportunities in countries including China, Japan, Korea and Vietnam to diversify currency risk, Kenneth Shen, head of strategic and private equity at the QIA, said in September.

 

Political pressure keeps Gulf states wedded to the dollar. Al-Suwaidi received calls from U.S. government officials after saying in November he might drop the peg, a person familiar with the matter said Jan. 3 on condition of anonymity. He received more calls this month after Dow Jones Newswires reported that the central bank had started a study into linking the dirham to a currency basket, a central bank official said.

 

``The U.S. has always been the guarantor of the Arabian Gulf's military security,'' said Anoushka Marashlian, senior Middle East analyst at Global Insight in London. ``Gulf policy makers wouldn't do anything to compromise that relationship, especially considering current tensions surrounding Iran.''

 

`Magnitude of Decision'

 

Before adopting the pegs, five of the GCC states used the Gulf rupee issued by the Reserve Bank of India and linked to the British pound. The U.A.E. began pegging the dirham to the dollar in 1978, while Saudi Arabia began tying the riyal to the U.S. currency in 1986. Kuwait pegged the dinar to a basket of currencies from 1975 to 2003 before using the dollar in preparation for a single Gulf currency. It abandoned that system in May.

 

``Analysts from outside the Gulf tend to look just at the economics,'' said HSBC's Williams. ``They see that depegging from the dollar makes sense and assume that change is imminent. What they sometimes miss is the politics of regional decision- making. They underestimate the magnitude of the decision.''

 

To contact the reporter on this story: Matthew Brown in Dubai at mbrown42@bloomberg.net

 

Last Updated: March 31, 2008 16:36 EDT

 

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This website has an interesting brink on the price of oil causing economic turmoil. The thought process is plainly clear. The current price of oil, when inflation adjusted is near or below the historial highs, therefore if the economy absorbed it back then it can do so now when the markets are more resilient and fluid.

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This article linked here is an interesting look at why the economy is going the way it does. Named culprits: dollar depreciation, rising inflation, widening rich-poor gap - all the classic variables for an economic collapse.

 

This is a very interesting article about economic bubbles. The author concludes that alternative energy will likely be the next bubble while doing very little for alternative energy. It trails off a bit towards the end and turns towards more rhetoric and less substance, but its educational none the less and an opportunity for negative teams to get creative. At the same time, he also states that the lack of a new bubble might be a bad thing. So it can go either way.

 

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The next bubble: Priming the markets for tomorrow's big crash

http://www.harpers.org/archive/2008/02/0081908

Eric Janszen - Eric Janszen is the founder and president of iTulip, Inc. He formerly served as managing director of the venture firm Osborn Capital, CEO of AutoCell, Inc. and Bluesocket, Inc., and entrepreneur-in-residence for Trident Capital.

February 2008

 

A financial bubble (1) (1: I will use the familiar term “bubble” as a shorthand, but note that it confuses cause with effect. A better, if ungainly, descriptor would be “asset-price hyperinflation”—the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away.) is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid “raising or pretending to raise a transferable stock.” For a century this law did much to prevent the formation of new speculative swellings.

 

Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.

 

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.

 

* * *

 

Such transformations do not take place overnight. After World War I, Wall Street wrote checks to finance new companies that were trying to turn wartime inventions, such as refrigeration and radio, into consumer products. The consumers of the rising middle class were ready to buy but lacked funds, so the banking system accommodated them with new forms of credit, notably the installment plan. Following a brief recession in 1921, federal policy accommodated progress by keeping interest rates below the rate of inflation. Pundits hailed a “new era” of prosperity until Black Tuesday, October 29, 1929.

 

The crash, the Great Depression, and World War II were a brutal education for government, academia, corporate America, Wall Street, and the press. For the next sixty years, that chastened generation managed to keep the fog of false hopes and bad credit at bay. Economist John Maynard Keynes emerged as the pied piper of a new school of economics that promised continuous economic growth without end. Keynes’s doctrine: When a business cycle peaks and starts its downward slide, one must increase federal spending, cut

 

taxes, and lower short-term interest rates to increase the money supply and expand credit. The demand stimulated by deficit spending and cheap money will thereby prevent a recession. In 1932 this set of economic gambits was dubbed “reflation.”

 

The first Keynesian reflation was botched. To be fair, it was perhaps impractical under the gold standard, for by the time the Federal Reserve made its attempt to ameliorate matters, debt was already out of control (2). (2: Historians argue whether the Federal Reserve and Congress did enough soon enough to slow the rate of debt liquidation at the time. Most agree that once the inflation rate turned negative, monetary stimulus via short-term interest-rate management was ineffective, since the Fed could not lower short-term rates below zero percent. The Bank of Japan found itself in a similar predicament sixty years later.) Banks failed, credit contracted, and GDP shrank. The economy was running in reverse and refused to respond to Keynesian inducements. In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began to expand. But it was World War II that brought real recovery, as a highly effective, demand-generating, deficit-and-debt-financed public-works project for the United States. The war did what a flawed application of Keynes’s theories could not.

 

A few weeks after D-Day, the allies met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to determine the future of the international monetary system. It wasn’t much of a negotiation. Western economies were in ruins, and the international monetary system had been in disarray since the start of the Great Depression. The United States, now the dominant economic and military power, successfully pushed to peg the currencies of member nations to the dollar and to make dollars redeemable in American gold.

 

Americans could now spend as wisely or foolishly as our government policy decreed and, regardless of the needs of other nations holding dollars as reserves, print as many dollars as desired. But by the second quarter of 1971, the U.S. balance of merchandise trade had run up a deficit of $3.8 billion (adjusted for inflation)—an admittedly tiny sum compared with the deficit of $204 billion in the second quarter of 2007, but until that time the United States had run only surpluses. Members of the Bretton Woods system, most famously French President General Charles de Gaulle, worried that the United States intended to repay the money borrowed to cover its trade gap with depreciated dollars. Opposed to the exercise of such “exorbitant privilege,” de Gaulle demanded payment in gold. With the balance of payments so greatly out of balance, newly elected President Richard Nixon faced a run on the U.S. gold supply, and his solution was novel: unilaterally end the U.S. legal obligation to redeem dollars with gold; in other words, default.

 

More than a decade of economic and financial-market chaos followed, as the dollar remained the international currency but traded without an absolute measure of value. Inflation rose not just in the United States but around the world, grinding down the worth of many securities and brokerage firms. The Federal Reserve pushed interest rates into double digits, setting off two global recessions, and new international standards and methods for measuring inflation and floating exchange rates were established to replace the gold standard. After 1975, the United States would never again post an annual merchandise trade surplus. Such high-value, finished-goods-producing industries as steel and automobiles were no longer dominant. The new economy belonged to finance, insurance, and real estate—FIRE.

 

* * *

 

FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals. With FIRE leading the way, the United States, free of the international gold standard’s limitations, now had great flexibility to finance its deficits with its own currency. This was “exorbitant privilege” on steroids. Massive external debts built up as trade partners to the United States, especially the oil-producing nations and Japan, balanced their trade surpluses with the purchase of U.S. financial assets (3). (3: The motivation was in part political: the Saudis, Japanese, and Taiwanese hold a great portion of U.S. debt; not coincidentally, these nations receive military protection from the United States.) The process of financing our deficit with private and public foreign funds became self-reinforcing, for if any of the largest holders of our debt reduced their holdings, the trade value of the dollar would fall—and with that, the value of their remaining holdings would be decreased. Worse, if not enough U.S. financial assets were purchased, the United States would be less able to finance its imports. It’s the old rule about bank debt, applied to international deficit finance: if you owe the banks $3 billion, the bank owns you. But if you owe the banks $10 trillion, you own the banks.

 

The FIRE sector’s power grew unchecked as the old manufacturing economy declined. The root of the 1920s bubble, it was believed, had been the conflicts of interest among banks and securities firms, but in the 1990s, under the leadership of Alan Greenspan at the Federal Reserve, banking and securities markets were deregulated. In 1999, the Glass-Steagall Act of 1933, which regulated banks and markets, was repealed, while a servile federal interest-rate policy helped move things along. As FIRE rose in power, so did a new generation of politicians, bankers, economists, and journalists willing to invent creative justifications for the system, as well as for the projects— ranging from the housing bubble to the Iraq war— that it financed. The high-water mark of such truckling might be the publication of the Cato Institute report “America’s Record Trade Deficit: A Symbol of Strength.” Freedom had become slavery; persistent deficits had become economic power.

 

* * *

 

The bubble machine often starts with a new invention or discovery. The Mosaic graphical Web browser, released in 1993, began to transform the Internet into a set of linked pages. Suddenly websites were easy to create and even easier to consume. Industry lobbyists stepped in, pushing for deregulation and special tax incentives. By 1995, the Internet had been thrown open to the profiteers; four years later a sales-tax moratorium was issued, opening the floodgates for e-commerce. Such legislation does not cause a bubble, but no bubble has ever occurred in its absence.

 

Total market value: NASDAQ. 11% annual growth derived from pre-bubble valuation (peak occurred March 10, 2000, when the NASDAQ traded as high as 5132.52 and closed the day at 5048.62)

 

I had a front-row seat to the Internet-stock mania of the late 1990s as managing director of Osborn Capital, a “seed stage” venture-capital firm founded by Jeffrey Osborn (4). (4: Venture-capital firms are defined by when, not where, they place their investments; a “seed stage” firm usually puts the first money into very young firms and takes an active role in that investment. Jeffrey Osborn was a senior executive at commercial Internet provider UUNet before and after the legislation passed. Prior to the legislation, bookings were less than $4 million a year; a few years later they were greater than $2 billion.) with positions on the boards of more than half a dozen technology companies. I observed otherwise rational men and women fall under the influence of a fast-flowing and, it was widely believed, risk-free flood of money. Logic and historical precedent were pushed aside. I remember a managing partner of one firm telling me with certainty that if the company in which we’d invested failed, at least it had “hard assets,” meaning the notoriously depreciation-prone computer equipment the company had received in exchange for stock. A year after the bubble collapsed, of course, the market was flooded with such hard assets.

 

Deregulation had built the church, and seed money was needed to grow the flock. The mechanics of financing vary with each bubble, but what matters is that the system be able to support astronomical flows of funds and generate trillions of dollars’ worth of new securities. For the Internet, the seed money came from venture capital. At first, Internet startups were merely one part of a spectrum of enterprise-software and other technology industries into which venture capitalists put their money. Then a few startups like Netscape went public, netting massive returns. Such liquidity events came faster and faster. A loop was formed: profits from IPO investments poured back into new venture funds, then into new start-ups, then back out again as IPOs, with the original investment multiplied many times over, then finally back into new venture-capital funds.

 

The media stood by cheering, carrying breathless profiles of wunderkinder in their early twenties who had just made their first hundred million dollars; business publications grew thick with advertisements. The media barely questioned the fine points of the new theology. Skeptics were occasionally interviewed by journalists, but in general the public was exposed to constant reiterations of the one true faith. Government stood back—after all, there was little incentive for lawmakers to intervene. Members of Congress, who influence the agencies that oversee market-regulation functions, have never been unfriendly to windfall tax revenues, and the FIRE sector has very deep pockets. According to the donation-tracking website opensecrets.org, FIRE gave $146 million in political donations for the 2008 election cycle alone, and since 1990 more than $1.9 billion—nearly double what lawyers and lobbyists have donated, and more than triple the donations from organized labor.

 

Part of my job was to watch for the end-time, to maximize gains and guard the firm against sudden losses when the bubble finally popped. In March 2000, the signal arrived. One of our companies was investigating the timing of an IPO; the management team was hoping for April 2000. The representatives of one of the investment banks we talked to gave us a surprisingly specific recommendation that ran counter to advice offered by banks during the IPO-driven cycle of the preceding five years: they warned the company not to go public in April. We took the advice in the context of other indicators as a clear sign of a top, and over the next few months we liquidated stocks in public companies that we held as a result of earlier IPOs. Shortly thereafter, millions of investors with unrealized gains in mutual funds sold stock to raise enough cash to pay taxes on their capital gains. The mass selling set off a panic, and the bubble popped.

 

In a bubble, fictitious value (5). (5: Fictitious value is the delta between historical-trend growth and growth brought on by asset hyperinflation. As an anonymous South Sea Bubble pamphleteer explained: “One added to one, by any rules of vulgar arithmetic, will never make three and a half; consequently, all the fictitious value must be a loss to some persons or other, first or last. The only way to prevent it to oneself must be to sell out betimes, and so let the Devil take the hindmost.”) goes away when market participants lose faith in the religion—when their false beliefs are destroyed as quickly as they had been formed. Since the early 1980s, the free-market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions.

 

The technology industry represents only a small fraction of the U.S. economy, but the effects of layoffs, cutbacks, and the collapsing stock market rippled through the economy and produced a brief national recession in the early part of 2001, despite a concerted effort by the Federal Reserve and Congress to avoid it. This left in its wake a crucial dilemma: how to counter the loss of that $7 trillion in fictitious value built up during the bubble.

 

* * *

The Internet boom had been a matter of abstract electrons and monetized eyeballs—castles in the sky translated into rising share prices. The new boom was in McMansions on the ground—wood and nails, granite countertops. The price-inflation process was traditional as well: there was way too much mortgage money chasing not enough housing. At the bubble’s peak, $12 trillion in fictitious value had been created, a sum greater even than the national debt.

 

Total market value: Real estate. Actual market value from “Federal Reserve Flow of Funds Accounts of the United States.” Historical trend from Robert J. Schiller, Irrational Exuberance.

 

We certainly should have known better. Historically, the price of American homes has risen at a rate similar to the annual rate of inflation. As the Yale economist Robert Shiller has pointed out, since 1890, discounting the housing boom after World War II, that rate has been about 3.3 percent. Why, then, did housing prices suddenly begin to hyperinflate? Changes in the reserve requirements of U.S. banks, and the creation in 1994 of special “sweep” accounts, which link commercial checking and investment accounts, allowed banks greater liquidity—which meant that they could offer more credit. This was the formative stage of the bubble. Then, from 2001 to 2002, in the wake of the dot-com crash, the Federal Reserve Funds Rate was reduced from 6 percent to 1.24 percent, leading to similar cuts in the London Interbank Offered Rate that banks use to set some adjustable-rate mortgage (ARM) rates. These drastically lowered ARM rates meant that in the United States the monthly cost of a mortgage on a $500,000 home fell to roughly the monthly cost of a mortgage on a $250,000 home purchased two years earlier. Demand skyrocketed, though home builders would need years to gear up their production.

 

With more credit available than there was housing stock, prices predictably, and rapidly, rose. All that was needed for hypergrowth was a supply of new capital. For the Internet boom this money had been provided by the IPO system and the venture capitalists; for the housing bubble, starting around 2003, it came from securitized debt.

 

To “securitize” is to make a new security out of a pool of existing bonds, bringing together similar financial instruments, like loans or mortgages, in order to create something more predictable, less risk-laden, than the sum of its parts. Many such “pass-thru” securities, backed by mortgages, were set up to allow banks to serve almost purely as middlemen, so that if a few homeowners defaulted but the rest continued to pay, the bank that sold the security would itself suffer little—or at least far less than if it held the mortgages directly. In theory, risks that used to concentrate on a bank’s balance sheet had been safely spread far and wide across the financial markets among well-financed and experienced institutional investors (6). (6: As happens with most bubbles, a perfectly good idea is taken to an extreme. In the case of the housing bubble, the new securitized debt product that drove the final stage—which has come to be known as the “subprime meltdown”—was the collateralized debt obligation (CDO). A CDO is a class of instrument called a credit derivative; specifically, a derivative of a pool of asset-backed securities. Parts of pools of asset-backed securities that were, for example, rated at a moderately high risk of default—junk grade, such as BB—were modeled, packaged into CDOs, and rated at lower risk-investment grades, such as AAA. These were used to finance the more creative mortgages—stated-income or “liar loans”—which we now hear are not quite living up to the issuers’ hopes.)

The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. Risks are embedded in price and lurk as defaults. Even after the faith that supported a bubble recedes, false beliefs continue to obscure cause and effect as the crisis unfolds.

 

Consider the chemical industry of forty years ago, back when such pollutants as PCBs were dumped into the air and water with little or no regulation. For years, the mantra of the industry was “the solution to pollution is dilution.” Mixing toxins with vast quantities of air and water was supposed to neutralize them. Many decades later, with our plagues of hermaphrodite frogs, poisoned ground water, and mysterious cancers, the mistake in that logic is plain. Modern bankers, however, have carried this mistake into the world of finance. As more and more loans with a high risk of default were made from the late 1990s to the summer of 2007, the shared level of credit risk increased throughout the global financial system.

 

Think of that enormous risk as ecomonic poison. In theory, those risk pollutants have been diluted in the oceanic vastness of the world’s debt markets; thanks to the magic of securitization, they are made nontoxic and so pose no systemic risk. In reality, credit pollutants pose the same kind of threat to our economy as chemical toxins do to our environment. Like their chemical counterparts, they tend to concentrate in the weakest and most vulnerable parts of the financial system, and that’s where the toxic effects show up first: the subprime mortgage market collapse is essentially the Love Canal of our ongoing risk-pollution disaster.

 

* * *

 

Read the front page of any business publication today and you can see the mess bubbling up. In the United States, Merrill Lynch took a $7.9 billion hit from its mortgage investments and experienced its first quarterly loss since 2001; Morgan Stanley, Bear Stearns, Citigroup, along with many other U.S. banks, have all suffered major losses. The Royal Bank of

 

Scotland Group was forced to write down $3 billion on credit-related securities and leveraged loans, and Japan’s Norinchukin Bank suffered $357 million in subprime-related losses in the six months prior to September 2007. Even more of this pollution will become manifest as home prices continue to fall.

 

The metaphor is not lost on those touched by debt pollution. In December 2007, Chip Mason of Legg Mason, one of the world’s largest money managers, said that the U.S. Treasury should put $20 billion into a “structured investment vehicles superfund” to boost investor confidence.

 

As more and more risk pollution rises to the surface, credit will continue to contract, and the FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s. Because all asset hyperinflations revert to the mean, we can expect housing prices to decline roughly 38 percent from their peak as they return to something closer to the historical rate of monetary inflation. If the rate of decline stabilizes at between 6 and 7 percent each year, the correction has about six years to go before things stabilize, leaving the FIRE economy in need of $12 trillion. Where will that money be found?

 

* * *

 

Bubbles are to the industries that host them what clear-cutting is to forest management. After several years of recession, the affected industry will eventually grow back, but slowly—the NASDAQ, for example, at 5,048 in March 2000, had recovered only half of its peak value going into 2007. When those trillions of dollars first die and go to money heaven, the whole economy grieves.

 

The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless. Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect. The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.

 

Our economy is in serious trouble. Both the production-consumption sector and the FIRE sector know that a debt-deflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression.

 

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.

 

There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.

 

There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded. Wired magazine, returning to its roots in boosterism, put ethanol on the cover of its October 2007 issue, advising its readers to forget oil; NBC had a “Green Week” in November 2007, with themed shows beating away at an ecological message and Al Gore making a guest appearance on the sitcom 30 Rock. Improbably, Gore threatens to become the poster boy for the new new new economy: he has joined the legendary venture-capital firm Kleiner Perkins Caufield & Byers, which assisted at the births of Amazon.com and Google, to oversee the “climate change solutions group,” thus providing a massive dose of Nobel Prize–winning credibility that will be most useful when its first alternative-energy investments are taken public before a credulous mob. Other ventures—Lazard Capital Markets, Generation Investment Management, Nth Power, EnerTech Capital, and Battery Ventures—are funding an array of startups working on improvements to solar cells, to biofuels production, to batteries, to “energy management” software, and so on.

 

Total market value: Alternative energy and infrastructure. Estimated fictitious value of next bubble compared with previous bubbles

The candidates for the 2008 presidential election, notably Obama, Clinton, Romney, and McCain, now invoke “energy security” in their stump speeches and on their websites. Previously, “energy independence” was more common, and perhaps this change in terminology is a hint that a portion of the Homeland Security budget will be allocated for alternative energy, a potential boon for startups and for FIRE.

 

More valuable than campaign rhetoric, however, is legislation. The Energy Policy Act of 2005, a massive bill known to morning commuters for extending daylight savings time, contained provisions guaranteeing loans for alternative-energy businesses, including nuclear-power technology. The bill authorizes $200 million annually for clean-coal initiatives, repeals the current 160-acre cap on coal leases, offers subsidies for wind energy and other alternative-energy producers, and promises $50 million annually, over the life of the bill, for a biomass grant program.

 

Loan guarantees for “innovative technologies” such as advanced nuclear-reactor designs are also at hand; a kindler, gentler nuclear industry appears to be imminent. The Price-Anderson Nuclear Industries Indemnity Act has been extended through 2025; the secretary of energy was ordered to implement the 2001 nuclear power “roadmap,” and $1.25 billion was set aside by the Department of Energy to develop a nuclear reactor that will generate both electricity and hydrogen. The future of transportation may be neither solar- nor ethanol-powered but instead rely on numerous small nuclear power plants generating electricity and, for local transportation, hydrogen. At the state and local levels, related bills have been passed or are under consideration.

 

Supporting this alternative-energy bubble will be a boom in infrastructure—transportation and communications systems, water, and power. In its 2005 report card, the American Society of Civil Engineers called for $1.6 trillion to be spent over five years to bring the United States back up to code, giving America a grade of “D.” Decades of neglect have put us trillions of dollars away from an “A.” After last August’s bridge collapse in Minnesota, it took only a week for libertarian Robert Poole, director of transportation studies for the Reason Foundation, to renew the call for “highway public-private partnerships funded by tolls,” and for Hillary Clinton to put forth a multibillion-dollar “Rebuild America” plan.

 

Of course, alternative energy and the improvement of our infrastructure are both necessary for our national well-being; and therein lies the danger: hyperinflations, in the long run, are always destructive. Since the 1970s, U.S. dependence on foreign energy supplies has become a major economic and security liability, and our superannuated roadways are the nation’s circulatory system. Without the efficient transit of gasoline-powered trucks laden with goods across our highways there would be no Wal-Mart, no other big-box stores, no morning FedEx deliveries. Without “energy security” and repairs to our “crumbling infrastructure,” our very competitiveness is at stake. Luckily, Al Gore will be making principled venture capital investments on our behalf.

 

The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations (7): (7: To create these valuations, I first examined the necessary market capitalization of existing companies; then, using the technology and housing bubbles as precedents, I estimated the number of companies needed to support the bubble. The model assumes the existence of nascent credit products that will eventually be deployed to fund the hyperinflation. While the range of error in this prediction is obviously huge, the antecedents—and more important, the necessity—for the bubble remain.) the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.

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More evidence. As always, my comments in italics.

 

==========================================================

An Inflation Indicator Leaves the Fed in a Tough Spot

New York Times Online

By MICHAEL M. GRYNBAUM

Published: April 16, 2008

 

Businesses continued to grapple with steep inflation last month as oil and food costs hit record highs, leaving Federal Reserve policy makers in a difficult spot ahead of their meeting later this month.

 

A gauge of prices paid by American producers jumped 1.1 percent in March, the Labor Department said on Tuesday, sharply accelerating from a 0.3 percent increase in February.

 

The increase, led by a surge in gasoline and home heating oil prices, was twice what economists had expected.

 

The higher prices put pressure on businesses to pass on costs to consumers, though some economists said the housing slump and weakening job market could discourage businesses from raising their prices.

 

“Given the weak nature of domestic demand now and going forward, it is unlikely that businesses will have as much success raising prices at the consumer level as they did in the not too distant past,” Joshua Shapiro, an economist at the research firm MFR, wrote in a note to clients.

 

The increases did not spread to popular products like automobiles and clothing. The closely watched core measure of the Producer Price Index, which excludes volatile costs of food and energy, rose 0.2 percent in March, falling back from an unexpected 0.5 percent rise in February.

 

The low core rate could take some pressure off the Fed as it tries to balance rising inflation with the overall slowdown in growth. Fed officials have acknowledged that inflation remains a serious concern, but they have signaled they will continue to focus on staving off a prolonged recession.

 

Central bankers meet for a two-day session starting on April 29, when they are expected to lower the Fed’s benchmark interest rate, a move that can stimulate growth but can also cause prices to rise.

 

Still, it will be difficult for the Fed to ignore the large cost increases in energy and food. Energy prices were up 2.9 percent in March, a steep increase from a 0.8 percent rise in February. Food costs rose 1.2 percent after declining 0.5 percent the month before.

 

“The headline numbers on any number of inflation measures continue to be outside the Fed’s comfort zone,” said Roger Bayston, a fixed-income strategist at Franklin Templeton, the investment firm.

 

Prices are rising further up the production pipeline, as well. The cost of unfinished products, known as intermediate goods, rose 2.3 percent in March, and crude goods surged 8 percent. These numbers tend to be highly volatile, but they signal that businesses will continue to face higher prices in the months ahead.

 

“It’s a balancing act,” Mr. Bayston said of the Fed’s task.

 

A separate report on Tuesday showed that manufacturing activity in New York State grew in April, an unexpected recovery from its worst month on record.

 

 

The general goodness of this article is for uniqueness. Currently the fed is tackling the recession as the primary problem and while they are keeping an eye on inflation, they are putting it on the backburner. So if you can extrapolate that the plan will accelerate inflation along with evidence that the Fed will be powerless to stop inflation, then you have an economic collapse scenario ready to roll.

 

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Oil hits new record as investors flee the falling dollar

By PABLO GORONDI,

Yahoo! News

Associated Press Writer

Wed Apr 16, 9:33 AM ET

 

Oil prices surged to record highs Wednesday as the weakening U.S. dollar drove up investments in commodities.

 

Light, sweet crude for May delivery rose as high as $114.53 a barrel in electronic trading on the New York Mercantile Exchange before retreating to $113.74 by the afternoon in Europe, down 5 cents.

 

The contract closed at a record $113.79 a barrel Tuesday and then jumped in after-hours trading to an all-time high of $114.08.

 

In London, June Brent crude contracts were down 6 cents to $111.52 a barrel on the ICE Futures exchange, after setting a new record of $112.35 earlier in the session.

 

Analysts said the oil increases were being caused by record lows for the dollar — $1.5966 per euro — as higher inflation in the euro zone practically eliminated the chances of an interest-rate cut by the European Central Bank.

 

Annual inflation in euro nations rose to a record 3.6 percent in March, boosted by higher prices in transport fuel, heating, dairy products and bread, said Eurostat, the EU's statistical agency. It is the highest inflation rate in 16 years.

 

Olivier Jakob of Petromatrix in Switzerland said there had been a "very strong correlation" between rising oil prices and the weakening dollar in the last few months, which appeared to have been broken at the start of this week.

 

"Monday and Tuesday crude oil managed to move ahead without the help of the dollar," Jakob said. "But once we broke above 1.59 euros per dollar and as we move toward 1.60, there's going to be more buying coming into oil."

 

Analysts said growing investor demand for commodities — which have performed better than other financial instruments — also propped up prices.

 

"This is really driven by investors purchasing oil because returns have simply outpaced those of stocks and bonds," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

 

Shum said he didn't think supply and demand fundamentals were that strong, but added that "oil's price rise seems unstoppable."

 

Oil's recent run above $100 a barrel has been largely attributed to speculators, as a steadily depreciating U.S. currency drives investments in hard commodities such as oil and gold.

 

Traders were awaiting the release of U.S. data Wednesday on the state of America's petroleum supplies. Last week's EIA report showed an unexpected drop in crude inventories, which started oil on its way to several records.

 

The U.S. Energy Information Administration was expected to report that crude inventories grew 1.5 million barrels last week, according to a survey of analysts by Platts, the energy research arm of McGraw-Hill Cos.

 

Gasoline inventories were expected to decline 2 million barrels, to post their fifth consecutive weekly drop amid increasing demand for the fuel, the survey showed.

 

"Implied gasoline demand typically starts to increase at this time of year, but high prices at the pump and a slowing U.S. economy appear to have dented the pace of demand growth," the Platts report said.

 

Analysts also projected a 1.7 million barrel drop in distillate stocks, which include heating oil and diesel, while refinery utilization rates were expected to jump 0.9 percentage points to 83.9 percent.

 

"The market may choose to focus on the expected product drawdowns and interpret the report as bullish," Shum said. "But product inventories in the U.S. are at healthy levels. The declines would simply be because refinery utilization operating rates have not been strong, and that's because refiners are responding to weak demand."

 

Crude prices were also supported by reports of a number of supply disruptions.

 

Attracting the most attention was the closure of Mexico's three main oil-exporting ports on the Gulf Coast because of bad weather that started Sunday. Only one of the ports remained closed Tuesday, according to Mexico's Communications and Transportation Department.

 

In other Nymex trading, heating oil futures added 3.11 cents to $3.3050 a gallon while gasoline prices rose 0.25 cent to $2.8835 a gallon. Natural gas futures were up 0.5 cent to $10.210 per 1,000 cubic feet.

 

Associated Press writer Gillian Wong in Singapore and Aoife White in Brussels, Belgium, contributed to this report.

 

 

The basics are that the weaker dollar is causing oil to go up in price because oil producers dont want to be earning 'less' with a weaker dollar compared to the new currency threat - the Euro. This means that the price of oil will spur global inflation because oil is at the heart of many industrial processes, intermediate raw materials (like plastics), agriculture and transportation. A future rate cut by the US Federal Reserve would cause dollar flight and the dollar would plummet more, resulting in even higher oil price and speedier, more significant inflation.

 

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Fuel Choices, Food Crises and Finger-Pointing

By ANDREW MARTIN

New York Times Online

Published: April 15, 2008

 

The idea of turning farms into fuel plants seemed, for a time, like one of the answers to high global oil prices and supply worries. That strategy seemed to reach a high point last year when Congress mandated a fivefold increase in the use of biofuels.

 

But now a reaction is building against policies in the United States and Europe to promote ethanol and similar fuels, with political leaders from poor countries contending that these fuels are driving up food prices and starving poor people. Biofuels are fast becoming a new flash point in global diplomacy, putting pressure on Western politicians to reconsider their policies, even as they argue that biofuels are only one factor in the seemingly inexorable rise in food prices.

 

In some countries, the higher prices are leading to riots, political instability and growing worries about feeding the poorest people. Food riots contributed to the dismissal of Haiti’s prime minister last week, and leaders in some other countries are nervously trying to calm anxious consumers.

 

At a weekend conference in Washington, finance ministers and central bankers of seven leading industrial nations called for urgent action to deal with the price spikes, and several of them demanded a reconsideration of biofuel policies adopted recently in the West.

 

Many specialists in food policy consider government mandates for biofuels to be ill advised, agreeing that the diversion of crops like corn into fuel production has contributed to the higher prices. But other factors have played big roles, including droughts that have limited output and rapid global economic growth that has created higher demand for food.

 

That growth, much faster over the last four years than the historical norm, is lifting millions of people out of destitution and giving them access to better diets. But farmers are having trouble keeping up with the surge in demand.

 

While there is agreement that the growth of biofuels has contributed to higher food prices, the amount is disputed.

 

Work by the International Food Policy Research Institute in Washington suggests that biofuel production accounts for a quarter to a third of the recent increase in global commodity prices. The Food and Agriculture Organization of the United Nations predicted late last year that biofuel production, assuming that current mandates continue, would increase food costs by 10 to 15 percent.

 

Ethanol supporters maintain that any increase caused by biofuels is relatively small and that energy costs and soaring demand for meat in developing countries have had a greater impact. “There’s no question that they are a factor, but they are really a smaller factor than other things that are driving up prices,” said Ron Litterer, an Iowa farmer who is president of the National Corn Growers Association.

 

He said biofuels were an “easy culprit to blame” because their popularity had grown so rapidly in the last two or three years.

 

Senator Charles E. Grassley, Republican of Iowa, called the recent criticism of ethanol by foreign officials “a big joke.” He questioned why they were not also blaming a drought in Australia that reduced the wheat crop and the growing demand for meat in China and India.

 

“You make ethanol out of corn,” he said. “I bet if I set a bushel of corn in front of any of those delegates, not one of them would eat it.”

 

The senator’s comments reflect a political reality in Washington that despite the criticism from abroad, support for ethanol remains solid.

 

Representative Jim McGovern, Democrat of Massachusetts, said he had come to realize that Congress made a mistake in backing biofuels, not anticipating the impact on food costs. He said Congress needed to reconsider its policy, though he acknowledged that would be difficult.

 

“If there was a secret vote, there is a pretty large number of people who would like to reassess what we are doing,” he said.

 

According to the World Bank, global food prices have increased by 83 percent in the last three years. Rice, a staple food for nearly half the world’s population, has been a particular focus of concern in recent weeks, with spiraling prices prompting several countries to impose drastic limits on exports as they try to protect domestic consumers.

 

While grocery prices in the United States increased about 5 percent over all in the last year, some essential items like eggs and milk have jumped far more. The federal government is expected to release new data on domestic food prices Wednesday, with notable increases expected.

 

On Monday, President Bush ordered that $200 million in emergency food aid be made available to “meet unanticipated food aid needs in Africa and elsewhere,” a White House statement said.

 

His spokeswoman, Dana M. Perino, said the president had urged officials to look for additional ways to help poor nations combat food insecurity and to come up with a long-term plan “that helps take care of the world’s poor and hungry.”

 

Food Prices Rise Skeptics have long questioned the value of diverting food crops for fuel, and the grocery and live- stock industries vehemently opposed an energy bill last fall, arguing it was driving up costs.

 

A fifth of the nation’s corn crop is now used to brew ethanol for motor fuel, and as farmers have planted more corn, they have cut acreage of other crops, particularly soybeans. That, in turn, has contributed to a global shortfall of cooking oil.

 

Spreading global dissatisfaction in recent months has intensified the food-versus-fuel debate. Last Friday, a European environment advisory panel urged the European Union to suspend its goal of having 10 percent of transportation fuel made from biofuels by 2020. Europe’s well-meaning rush to biofuels, the scientists concluded, had created a variety of harmful ripple effects, including deforestation in Southeast Asia and higher prices for grain.

 

Even if biofuels are not the primary reason for the increase in food costs, some experts say it is one area where a reversal of government policy could help take pressure off food prices.

 

C. Ford Runge, an economist at the University of Minnesota, said it is “extremely difficult to disentangle” the effect of biofuels on food costs. Nevertheless, he said there was little that could be done to mitigate the effect of droughts and the growing appetite for protein in developing countries.

 

“Ethanol is the one thing we can do something about,” he said. “It’s about the only lever we have to pull, but none of the politicians have the courage to pull the lever.”

 

But August Schumacher, a former under secretary of agriculture who is a consultant for the Kellogg Foundation, said the criticism of biofuels might be misdirected. Development agencies like the World Bank and many governments did little to support agricultural development in the last two decades, he said.

 

He noted that many of the upheavals over food prices abroad have concerned rice and wheat, neither of which is used as a biofuel. For both those crops, global demand has soared at the same time that droughts suppressed the output from farms.

 

Elisabeth Rosenthal and Steven R. Weisman contributed reporting

 

 

Though not a terribly strong article, it can provide some reasonable link on ethanol--> food price spike, deforestation to clear land for agriculture (which ultimately negates the CO2 benefits of ethanol), hunger, malnutrition, famines, etc.

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Ankur, I saw on MSNBC earlier that the Euro has been weakening, as well (I also saw this on the CNN ticker) due to 3.6% monthly inflation last month. That puts the Euro at an all-time weak point against the dollar, IIRC. Do you know anything about this?

 

Let me search for the article and edit my post with the article in it. If I can't find it in 15 minutes, though, it'll wait till after the debate.

 

EDIT: That didn't take long at all. Here's the NYT's take.

http://www.nytimes.com/2008/04/01/business/worldbusiness/01euro.html?_r=1&oref=slogin

Inflation Accelerates in Nations Using Euro

 

Article Tools Sponsored By

By DAVID JOLLY

Published: April 1, 2008

 

Euro-zone inflation accelerated in March to the fastest pace since 1992, official data showed Monday, giving the European Central Bank more reason to look with concern on the announcement of a big wage agreement in Germany.

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Related

Europe Takes a Closer Look at Employee Stock Ownership

 

Eurostat, the European statistics agency, said prices rose in March at a 3.5 percent annual rate in the 15 countries that share the euro, the highest rate since June 1992. The rate in February was 3.3 percent, which had itself been a record. Inflation is running far above the European Central Bank’s 2 percent guideline.

 

In recent months, high prices for energy and food in particular have pushed up inflation and are cited as reasons that household spending is being held back.

 

The concern about rising prices is not confined to the euro zone. In a speech on Monday, the governor of the Bank of England, Mervyn King, noted that “food prices on world markets are more than 50 percent higher, and oil prices two-thirds higher, than they were a year ago.”

 

The Ver.di service workers union in Germany, along with other unions representing civil servants, announced on Monday a deal with government negotiators that calls for a 3.1 percent pay increase for 2008, and a one-time payment of 50 euros, or $79.

 

Workers will receive a 2.8 percent raise next year, and some workers will get additional one-time payments.

 

Ver.di, which sought an 8 percent increase for 2008, had threatened major strikes in April if negotiations failed. The union, with 2.4 million members, is second in size among German unions behind IG Metall, which won a 5.2 percent pay increase for steel workers in February.

 

Matthew Sharratt, an economist at Bank of America in London, said policy makers at the central bank would probably view the wage deal in Germany, the largest euro-zone economy, with alarm.

 

“While inflation is being caused by external factors,” he said, “this will strengthen the resolve of the E.C.B. not to cut rates in the foreseeable future.”

 

Ken Wattret, chief euro-zone economist at BNP Paribas in London, said that labor negotiators often use inflation as a benchmark for their bargaining positions. The central bank’s concern is that inflation fears will become self-reinforcing.

 

“The news on prices gets worse and worse each month,” he said. “When headline inflation gets this high, it’s understandable that the central bank talks tough.” Mr. Wattret said he had expected the bank to cut its main rate as soon as this summer, but in light of continuing inflation surprises, “that looks increasingly unrealistic now.”

 

He said that workers in Germany were just beginning to catch up with years of wage growth that had trailed productivity growth.

 

But economists said it was harder to argue for strong wage growth in the service sector represented by Ver.di than in the industrial sector, where productivity has been rising rapidly.

 

The German labor negotiating season is not over. Postal workers are planning a warning strike Tuesday at Deutsche Post to press their own wage demands.

 

The president of the central bank, Jean-Claude Trichet, and his colleagues have resisted political pressure to ease monetary policy, even as the Federal Reserve has aggressively cut rates to deal with the global crisis in credit markets.

 

The European bank has kept its main interest rate at 4 percent while the Fed has cut rates six times, bringing its main policy rate, the federal funds rate, down to 2.25 percent, from 5.25 percent last summer.

 

But the European monetary authorities have moved to help credit markets, injecting funds into the money markets in unprecedented amounts.

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the euro as compared to itself is weakening because europe is also facing significant inflation despite their currency being strong relative to other currencies.

 

the euro compared to all other currencies is gaining strength, which technically amplifies the inflation we are experiencing.

 

the euro is most certainly NOT at an all time low vs the dollar. and the article does nothing to suggest that either. perhaps you linked the wrong article?

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Probably, and I was a bit distracted at the time I was watching the MSNBC story, so I likely misheard an anchor.

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So here's some more juicy news... for the third time in two weeks...

As always, my comments in italics...

 

==========================================================

TRADE IDEA-Rising inflation won't help US dollar any time soon

The Guardian

http://www.guardian.co.uk/feedarticle?id=7467334

Reuters, Wednesday April 16 2008

By Gertrude Chavez-Dreyfuss

 

NEW YORK, April 16 (Reuters) - Signs of mounting inflation pressures in the world's largest economy normally would support the U.S. dollar, but with recession worries gripping the market, investors are literally passing on the buck.

Soaring inflation once meant the Federal Reserve would have to lift interest rates to quell the rise in prices and that would increase the dollar's allure, especially to overseas investors.

In today's recession-wary climate, though, the Fed is left with little option but to cut interest rates aggressively to shore up U.S. growth.

Most analysts don't see a change in the Fed's rate-cutting campaign. That should further weigh on the low-yielding dollar as investors seek other currencies that can give them higher returns.

Some strategists are recommending shorting the dollar against the euro until the start of the fourth quarter, especially amid surging inflation in the euro zone.

"Inflation is not going to be the story this year because the bigger issue is fighting recession," said Avery Shenfeld, senior economist at CIBC World Markets in Toronto.

"For the next few quarters, the Fed may have to tolerate inflation above its comfort zone as it tries to get the economy out of recession. That means more interest-rate cuts and further dollar weakness," he added.

As U.S. economic weakness and financial-sector distress deepen, the Fed is widely expected at its April 29-30 meeting to lower the benchmark federal funds rate target from it current level of 2.25 percent. That would be in addition to 3 percentage points of cuts it has enacted since September.

CONNECTING THE DOTS

The dollar has steadily depreciated in value against the euro and other currencies since 2002, as U.S. budget and trade deficits ballooned. A slew of Fed rate cuts and a persistent credit crunch since last summer have pushed the greenback to stunning lows.

With the dollar's decline, inflation fears have mounted as well. On Tuesday, the overall U.S. Producer Price Index gained sharply on a surge in energy costs, while the overall Consumer Price Index rose 0.3 percent in March after a flat reading the previous month.

Higher inflation can be partly traced to a weak dollar, which has spurred a global boom in prices of commodities such as oil, gold, copper and platinum. A soft dollar has helped propel the price of oil to settle at a record near $115 per barrel on Wednesday.

FED PLAYING WITH FIRE?

"It's kind of playing with fire to the extent that if we do see ongoing inflation pressures becoming embedded in inflation expectations, ultimately it's going to undermine what we're trying to achieve on growth," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

"But the Fed is currently taking the view that if you do see dollar weakening, you've got upside inflation pressures, and that's kind of helpful for growth," he added.

Complacency about inflation is not the case, though, at the European Central Bank, which has kept its steadfast focus on stemming price pressures in the euro-zone economy.

Surging energy and food prices pushed euro-zone inflation to a new high of 3.6 percent last month, while core prices rose 2.7 percent year-on-year. The data pushed the euro to record highs against the dollar near $1.60 on Wednesday.

With inflation accelerating, the ECB has held interest rates steady at 4.0 percent. Analysts expect the central bank to hold the rate a few more months, at least before the start of the fourth quarter. That should underpin the euro even more.

Before the euro-zone inflation data, analysts had expected the ECB to start cutting rates by June this year as the credit crisis and a strong euro start having an impact in the region.

Over the last two weeks, the euro has stalled below $1.60 against the dollar. And most banks such as Calyon believe the single euro-zone currency could hit that level in no time.

"The euro's surge beyond $1.50 against the dollar has taken a breather, but the likelihood remains that it will breach the $1.60 threshold in the short term," said Daragh Maher, senior currency strategist at Calyon in London.

"We think it is too early to call a turn in the euro. The downbeat news on the U.S. economy is likely to persist, while the ECB continues to adopt a hawkish stance that precludes any lasting downward adjustment in the euro for now." (Editing by Jan Paschal)

 

 

The general idea here is to be able to extrapolate multiple internal links into an economic collapse story. For example, the article mentions a correlation between soaring budget deficits and the depreciating dollar. It also mentions that inflation will undermine the growth the Fed is trying to achieve to prevent recession. Ergo, an aff plan next year (which likely costs billions and billions), will simultaneously expand the deficit, and deficit spending also causes growth inflation, thus providing a double whammy to the dollar which can then spiral out of control under a 'loss of reserve status' impact scenario.

 

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The rise of the new energy world order

Asia Times

http://www.atimes.com/atimes/Global_Economy/JD17Dj04.html

April 17, 2008

By Michael T Klare - professor of peace and world security studies at Hampshire College and the author of Resource Wars and Blood and Oil. Consider this essay a preview of his newest book, Rising Powers, Shrinking Planet: The New Geopolitics of Energy, which has just been published by Metropolitan Books.

 

 

Oil at US$110 a barrel. Gasoline at $3.35 (or more) per gallon. Diesel fuel at $4 per gallon. Independent truckers forced off the road. Home heating oil rising to unconscionable price levels. Jet fuel so expensive that three low-cost airlines stopped flying in the past few weeks. This is just a taste of the latest energy news, signaling a profound change in how all of us, in this country and around the world, are going to live - trends that, so far as anyone can predict, will only become more pronounced as energy supplies dwindle and the global struggle over their allocation intensifies.

 

Energy of all sorts was once hugely abundant, making possible the worldwide economic expansion of the past six decades. This expansion benefited the United States above all - along with its "First World" allies in Europe and the Pacific. Recently, however, a select group of former "Third World" countries - China and India in particular - have sought to participate in this energy bonanza by industrializing their economies and selling a wide range of goods to international markets. This, in turn, has led to an unprecedented spurt in global energy consumption - a 47% rise in the past 20 years alone, according to the US Department of Energy (DoE).

 

An increase of this sort would not be a matter of deep anxiety if the world's primary energy suppliers were capable of producing the needed additional fuels. Instead, we face a frightening reality: a marked slowdown in the expansion of global energy supplies just as demand rises precipitously. These supplies are not exactly disappearing - though that will occur sooner or later - but they are not growing fast enough to satisfy soaring global demand.

 

The combination of rising demand, the emergence of powerful new energy consumers, and the contraction of the global energy supply is demolishing the energy-abundant world we are familiar with and creating in its place a new world order. Think of it as rising powers/shrinking planet.

 

This new world order will be characterized by fierce international competition for dwindling stocks of oil, natural gas, coal and uranium, as well as by a tidal shift in power and wealth from energy-deficit states like China, Japan and the United States to energy-surplus states like Russia, Saudi Arabia and Venezuela. In the process, the lives of everyone will be affected in one way or another - with poor and middle-class consumers in the energy-deficit states experiencing the harshest effects. That's most of us and our children, in case you hadn't quite taken it in.

 

Here, in a nutshell, are five key forces in this new world order which will change our planet:

 

Intense competition between older and newer economic powers for available supplies of energy. Until very recently, the mature industrial powers of Europe, Asia and North America consumed the lion's share of energy and left the dregs for the developing world. As recently as 1990, the members of the Organization of Economic Cooperation and Development (OECD), the club of the world's richest nations, consumed approximately 57% of world energy; the Soviet Union/Warsaw Pact bloc, 14%; and only 29% was left to the developing world. But that ratio is changing: with strong economic growth in the developing countries, a greater proportion of the world's energy is being consumed by them. By 2010, the developing world's share of energy use is expected to reach 40% and, if current trends persist, 47% by 2030.

 

China plays a critical role in all this. The Chinese alone are projected to consume 17% of world energy by 2015, and 20% by 2025 - by which time, if trend lines continue, it will have overtaken the United States as the world's leading energy consumer. India, which, in 2004, accounted for 3.4% of world energy use, is projected to reach 4.4% by 2025, while consumption in other rapidly industrializing nations like Brazil, Indonesia, Malaysia, Thailand and Turkey is expected to grow as well.

 

These rising economic dynamos will have to compete with the mature economic powers for access to remaining untapped reserves of exportable energy - in many cases, bought up long ago by the private energy firms of the mature powers like Exxon Mobil, Chevron, BP, Total of France and Royal Dutch Shell. Of necessity, the new contenders have developed a potent strategy for competing with the Western "majors": they've created state-owned companies of their own and fashioned strategic alliances with the national oil companies that now control oil and gas reserves in many of the major energy-producing nations.

 

China's Sinopec, for example, has established a strategic alliance with Saudi Aramco, the nationalized giant once owned by Chevron and Exxon Mobil, to explore for natural gas in Saudi Arabia and market Saudi crude oil in China. Likewise, the China National Petroleum Corporation (CNPC) will collaborate with Gazprom, the massive state-controlled Russian natural gas monopoly, to build pipelines and deliver Russian gas to China. Several of these state-owned firms, including CNPC and India's Oil and Natural Gas Corporation, are now set to collaborate with Petroleos de Venezuela SA in developing the extra-heavy crude of the Orinoco belt once controlled by Chevron. In this new stage of energy competition, the advantages long enjoyed by Western energy majors has been eroded by vigorous, state-backed upstarts from the developing world.

 

The insufficiency of primary energy supplies. The capacity of the global energy industry to satisfy demand is shrinking. By all accounts, the global supply of oil will expand for perhaps another half decade before reaching a peak and beginning to decline, while supplies of natural gas, coal and uranium will probably grow for another decade or two before peaking and commencing their own inevitable declines. In the meantime, global supplies of these existing fuels will prove incapable of reaching the elevated levels demanded.

 

Take oil. The US DoE claims that world oil demand, expected to reach 117.6 million barrels per day in 2030, will be matched by a supply that - miracle of miracles - will hit exactly 117.7 million barrels (including petroleum liquids derived from allied substances like natural gas and Canadian tar sands) at the same time. Most energy professionals, however, consider this estimate highly unrealistic. "One hundred million barrels is now in my view an optimistic case," the chief executive officer of Total, Christophe de Margerie, typically told a London oil conference in October 2007. "It is not my view; it is the industry view, or the view of those who like to speak clearly, honestly, and [are] not just trying to please people."

 

Similarly, the authors of the Medium-Term Oil Market Report, published in July 2007 by the International Energy Agency, an affiliate of the Organization for Economic Cooperation and Development, concluded that world oil output might hit 96 million barrels per day by 2012, but was unlikely to go much beyond that as a dearth of new discoveries made future growth impossible.

 

Daily business-page headlines point to a vortex of clashing trends: worldwide demand will continue to grow as hundred of millions of newly-affluent Chinese and Indian consumers line up to purchase their first automobile (some selling for as little as $2,500); key older "elephant" oil fields like Ghawar in Saudi Arabia and Canterell in Mexico are already in decline or expected to be so soon; and the rate of new oil-field discoveries plunges year after year. So expect global energy shortages and high prices to be a constant source of hardship.

 

The painfully slow development of energy alternatives. It has long been evident to policymakers that new sources of energy are desperately needed to compensate for the eventual disappearance of existing fuels as well as to slow the buildup of climate-changing "greenhouse gases" in the atmosphere. In fact, wind and solar power have gained significant footholds in some parts of the world. A number of other innovative energy solutions have already been developed and even tested out in university and corporate laboratories. But these alternatives, which now contribute only a tiny percentage of the world's net fuel supply, are simply not being developed fast enough to avert the multifaceted global energy catastrophe that lies ahead.

 

According to the DoE, renewable fuels, including wind, solar and hydropower (along with "traditional" fuels like firewood and dung), supplied but 7.4% of global energy in 2004; biofuels added another 0.3%. Meanwhile, fossil fuels - oil, coal and natural gas - supplied 86% of world energy, nuclear power another 6%. Based on current rates of development and investment, the DoE offers the following dismal projection: In 2030, fossil fuels will still account for exactly the same share of world energy as in 2004. The expected increase in renewables and biofuels is so slight - a mere 8.1% - as to be virtually meaningless.

 

In global warming terms, the implications are nothing short of catastrophic: Rising reliance on coal (especially in China, India and the United States) means that global emissions of carbon dioxide are projected to rise by 59% over the next quarter-century, from 26.9 billion metric tons to 42.9 billion tons. The meaning of this is simple. If these figures hold, there is no hope of averting the worst effects of climate change.

 

When it comes to global energy supplies, the implications are nearly as dire. To meet soaring energy demand, we would need a massive influx of alternative fuels, which would mean equally massive investment - in the trillions of dollars - to ensure that the newest possibilities move rapidly from laboratory to full-scale commercial production; but that, sad to say, is not in the cards.

 

Instead, the major energy firms (backed by lavish US government subsidies and tax breaks) are putting their mega-windfall profits from rising energy prices into vastly expensive (and environmentally questionable) schemes to extract oil and gas from Alaska and the Arctic, or to drill in the deep and difficult waters of the Gulf of Mexico and the Atlantic Ocean. The result? A few more barrels of oil or cubic feet of natural gas at exorbitant prices (with accompanying ecological damage), while non-petroleum alternatives limp along pitifully.

 

A steady migration of power and wealth from energy-deficit to energy-surplus nations: There are few countries - perhaps a dozen altogether - with enough oil, gas, coal and uranium (or some combination thereof) to meet their own energy needs and provide significant surpluses for export. Not surprisingly, such states will be able to extract increasingly beneficial terms from the much wider pool of energy-deficit nations dependent on them for vital supplies of energy. These terms, primarily of a financial nature, will result in growing mountains of petrodollars being accumulated by the leading oil producers, but will also include political and military concessions.

 

In the case of oil and natural gas, the major energy-surplus states can be counted on two hands. Ten oil-rich states possess 82.2% of the world's proven reserves. In order of importance, they are: Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates, Venezuela, Russia, Libya, Kazakhstan and Nigeria. The possession of natural gas is even more concentrated. Three countries - Russia, Iran and Qatar - harbor an astonishing 55.8% of the world supply. All of these countries are in an enviable position to cash in on the dramatic rise in global energy prices and to extract from potential customers whatever political concessions they deem important.

 

The transfer of wealth alone is already mind-boggling. The oil-exporting countries collected an estimated $970 billion from the importing countries in 2006, and the take for 2007, when finally calculated, is expected to be far higher. A substantial fraction of these dollars, yen and euros have been deposited in sovereign wealth funds (SWFs), giant investment accounts owned by the oil states and deployed for the acquisition of valuable assets around the world.

 

In recent months, the Persian Gulf SWFs have been taking advantage of the financial crisis in the United States to purchase large stakes in strategic sectors of its economy. In November 2007, for example, the Abu Dhabi Investment Authority (ADIA) acquired a $7.5 billion stake in Citigroup, America's largest bank holding company; in January, Citigroup sold an even larger share, worth $12.5 billion, to the Kuwait Investment Authority (KIA) and several other Middle Eastern investors, including Prince Walid bin Talal of Saudi Arabia. The managers of ADIA and KIA insist that they do not intend to use their newly-acquired stakes in Citigroup and other US banks and corporations to influence US economic or foreign policy, but it is hard to imagine that a financial shift of this magnitude, which can only gain momentum in the decades ahead, will not translate into some form of political leverage.

 

In the case of Russia, which has risen from the ashes of the Soviet Union as the world's first energy superpower, it already has. Russia is now the world's leading supplier of natural gas, the second largest supplier of oil and a major producer of coal and uranium. Though many of these assets were briefly privatized during the reign of Boris Yeltsin, President Vladimir Putin has brought most of them back under state control - in some cases by exceedingly questionable legal means.

 

He then used these assets in campaigns to bribe or coerce former Soviet republics on Russia's periphery reliant on it for the bulk of their oil and gas supplies. European Union countries have sometimes expressed dismay at Putin's tactics, but they, too, are dependent on Russian energy supplies, and so have learned to mute their protests to accommodate growing Russian power in Eurasia. Consider Russia a model for the new energy world order.

 

A growing risk of conflict. Throughout history, major shifts in power have normally been accompanied by violence - in some cases, protracted violent upheavals. Either states at the pinnacle of power have struggled to prevent the loss of their privileged status, or challengers have fought to topple those at the top of the heap. Will that happen now? Will energy-deficit states launch campaigns to wrest the oil and gas reserves of surplus states from their control - the George W Bush administration's war in Iraq might already be thought of as one such attempt or to eliminate competitors among their deficit-state rivals?

 

The high costs and risks of modern warfare are well known and there is a widespread perception that energy problems can best be solved through economic means, not military ones. Nevertheless, the major powers are employing military means in their efforts to gain advantage in the global struggle for energy, and no one should be deluded on the subject. These endeavors could easily enough lead to unintended escalation and conflict.

 

One conspicuous use of military means in the pursuit of energy is obviously the regular transfer of arms and military-support services by the major energy-importing states to their principal suppliers. Both the United States and China, for example, have stepped up their deliveries of arms and equipment to oil-producing states like Angola, Nigeria and Sudan in Africa and, in the Caspian Sea basin, Azerbaijan, Kazakhstan and Kyrgyzstan. The United States has placed particular emphasis on suppressing the armed insurgency in the vital Niger Delta region of Nigeria, where most of the country's oil is produced; Beijing has emphasized arms aid to Sudan, where Chinese-led oil operations are threatened by insurgencies in both the South and Darfur.

 

Russia is also using arms transfers as an instrument in its efforts to gain influence in the major oil- and gas-producing regions of the Caspian Sea basin and the Persian Gulf. Its urge is not to procure energy for its own use, but to dominate the flow of energy to others. In particular, Moscow seeks a monopoly on the transportation of Central Asian gas to Europe via Gazprom's vast pipeline network; it also wants to tap into Iran's mammoth gas fields, further cementing Russia's control over the trade in natural gas.

 

The danger, of course, is that such endeavors, multiplied over time, will provoke regional arms races, exacerbate regional tensions and increase the danger of great-power involvement in any local conflicts that erupt. History has all too many examples of such miscalculations leading to wars that spiral out of control. Think of the years leading up to World War I. In fact, Central Asia and the Caspian today, with their multiple ethnic disorders and great-power rivalries, bear more than a glancing resemblance to the Balkans in the years leading up to 1914.

 

What this adds up to is simple and sobering: the end of the world as you've known it. In the new, energy-centric world we have all now entered, the price of oil will dominate our lives and power will reside in the hands of those who control its global distribution.

 

In this new world order, energy will govern our lives in new ways and on a daily basis. It will determine when, and for what purposes, we use our cars; how high (or low) we turn our thermostats; when, where, or even if, we travel; increasingly, what foods we eat (given that the price of producing and distributing many meats and vegetables is profoundly affected by the cost of oil or the allure of growing corn for ethanol); for some of us, where to live; for others, what businesses we engage in; for all of us, when and under what circumstances we go to war or avoid foreign entanglements that could end in war.

 

This leads to a final observation: the most pressing decision facing the next president and Congress may be how best to accelerate the transition from a fossil-fuel-based energy system to a system based on climate-friendly energy alternatives.

 

 

This article is rather self explanatory and a viable resource for mining the impact of higher oil prices and energy resource scarcity. The key thing to remember for next year's resolution is not that energy resources are running out. They arent running out and wont run out for decades maybe centuries. The big thing is that the growth in supplies is not keeping up with demand. When a group of political forces walk into the same room hungry and starving and there is one slice of bread on the table, I really dont think that they are going to agree to an 'equal distribution.' Someone gets tossed aside and that will cause problems. Now, we arent to that point yet, but we are nearing that point. As the price of oil continues higher, western economies will begin to feel the strain. Western Europe, United States, Japan, China, India and several others will all be hurting. The question is whose economy will be able to weather the storm, secure their source of energy, and do so in a peaceful manner while knowing that the failed economies will wreak havoc on their home nations and citizens

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So I'm back again with real fun evidence...

Nothing's changed - my comments in italics, underlines on the important pieces... Remember, my comments are often interlaced in the articles themselves, so they arent evidence! Be sure to cut that part out if you plan on using the articles for evidence.

 

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This first article has a lot of charts and graphs you dont want to miss so I highly recommend your reading the actual source material as opposed to just the text below. But for your viewing pleasure I have underlined some sections of the article to drive home some economic options for solvency-linked counterplans/planplan.

 

OIL SHOCK AND ENERGY TRANSITION

by Andrew McKillop

Chief Strategist, Vertus Sustineo Asset Management, New York Former Expert-Policy and programming, Divn A-Policy, DGXVII-Energy, European Commission Presentation to POGEE Conferece, Karachi, May 2008

May 7, 2008

http://www.financialsense.com/editorials/mckillop/2008/0507.html

 

Introduction – Intense evidence of global oil crisis

Despite stagnant or slightly falling oil and gas intensities (See table) in some of the 'mature postindustrial' high energy consumer nations of the OECD group, the OECD countries still have an average oil intensity of more than 10 barrels/capita/year. China and India have oil intensities of about 2.5 barrels/capita/year (China), and 1.3 bbl/capita/yr (India). Any quick reduction in global oil demand can in fact only come from the OECD countries, now importing ‘embodied oil’ in the form of energy-intensive industrial and consumer goods from China, India, Pakistan, Turkey, Brazil and other Emerging Economies

 

As we know, global automobile production and world car fleets are growing at about 6.5%pa, and the fleet is about 98% fuelled by oil and LPG, with a small amount fuelled by CNG (compressed natural gas) and the biofuels. Global trade growth continues at around 10%pa (per annum), driving fast growth of 100% oil-fuelled ocean shipping. World airline fleets, and air passenger and freight movements are growing at about 7%pa, and airplanes are 100% oil dependent. In part due to soaring food prices, world agricultural machinery sales, such as tractors and combine harvesters, is growing at over 7%pa. Average engine horsepower sizes, and fuel consumption of the nearly 100% oil-dependent world agricultural machinery fleet is growing at close to 8%pa. World construction, urban development including ‘instant new cities’ in the GCC countries, and roads, bridges, tunnels and other construction or transport-linked, oil-dependent activity is increasing at record annual rates.

 

There is therefore no problem at all concerning global oil demand! The only, and real problem is world oil supply. Outside the older OECD countries of the North, the emerging industrial and economic superpowers of China and India, and other fast-growing Emerging Economies are experiencing totally ‘classic’ urban industrial economic growth. This generates strong and sustained growth of demand for all forms of commercial energy.

 

If not a slogan, the conventional OECD-bias concept of global oil, gas, coal and electricity demand is that these mostly-fossil based forms and types of commercial energy have predictable and slow-growth patterns. This idea was developed in the 1990s, when the OECD North had very slow economic growth, deperessing global economic growth but permitting extreme growth of the “paper asset bubble” on OECD or Old World stock markets. But since about 2003-2005 this Old World view of global energy, with stable production and supply patterns, and very low prices delivering Cheap Energy is less and less true. Many different reasons can be cited, over and above ‘BRIC growth’ or increasing oil, gas, coal and electricity demand of Brazil-Russia-India-China. Other reasons range from accelerated depletion of global oil reserves and climate change, population growth, and higher energy prices themselves.

 

For a variety of quite complex, but convergent reasons also applying to minerals and metals production – especially the precious metals gold, platinum, silver – rising prices do not lead to any automatic increase in production and supply. This can appear bizarre, but is a proven and real fact, and is very clear for world gold and platinum production, both of which are extremely energy-intensive and oil-dependent for their extraction, processing and supply. This can be used to link into hybrid technologies which are very intensive on their use of exotic metals which are currently skyrocketing in price.

 

This factor also applies to world oil, natural gas, and coal. Increasing prices are not producing an ‘instant kick’ upwards in supply. In fact, world production is tending to stagnate for natural gas and coal, as well as oil, exactly at the time prices soar to all-time records ! Energy trading, to be sure, also magnifies price rises in just the same way it intensifies price crashes, due to speculation and greed or the ‘poker table and casino-type’ basis of commodities and energy trading. Finally we can cite strong seasonality of demand for oil, as another factor that generates big price swings, but on the supply side, since Q3 or Q4 2007, seasonal variation of Isupply is now very low, due to depletion, resulting in possible price peaks over 150 USD/bbl for this Summer 2008, when the North hemisphere car and air travel season drives up demand for gasoline and kerosene, resulting in strong demand for crude oil.

 

There is one very simple ‘bottom line’: Energy Transition towards reduced energy intensity in OECD countries, development of alternate and renewable energy, and reduction of dependence on all fossil fuels is becoming imperative. In other words we have less and less choice. Organized and coherent transition however requires high and stable energy prices, led by oil, ensuring sufficient financial resources and demand signals for energy transition, also providing the public opinion and political impetus to act now for energy transition.

 

Petro Keynesian Belle Epoque Growth

It is easy to argue, and not difficult to prove that sharply rising oil, gas and energy prices increase economic growth rates. The simplest proof of this is to compare average energy prices in the low-growth, low energy price 1980s, with today. Comparing the two, for almost any nonOECD economy, and specially the Emerging Economies we find that with much higher energy prices, today, economic growth rates are also much higher.

 

Of course this can be treated as chicken-and-egg, and the increased economic growth can be claimed as driving, or pulling energy prices higher. In fact a comparison of the periods 1995-2000 and 2002-2007 lays this lie to rest: oil, energy and commodity price hikes preceded the general upturn in economic growth rates. Stronger global economic growth came after energy and commodity prices started to recover from about 15 years of record low prices. In the nonOECD emerging industrial and economic superpowers iof China and India this cause-and-effect sequence is very clear. Logically, low or suboptimal economic growth would tend to lower energy demand growth rates, which in turn would tend to push oil and gas prices lower. Logically also, when oil and energy prices reach certain 'thresholds' they feedback into the economy as 'belle epoque growth', which in turn bolsters their prices, and keeps feeding back as strong economic growth. Only 'pain ceiling' oil and energy prices can break the process.

 

In 'classic' economics this conception is sidetracked by the 'price elastic paradigm', by the fear of inflation, and by the rejection of either keynesianism or 'petro-keynesianism'. At all costs, for defenders of the New Economy, energy and resource costs must be kept low, and the relative value of services, employing nearly all persons in the high-energy 'postindustrial' societies of the OECD group, must be kept high in a slow-but-sure economic growth context and model. Certainly since 2002-2003, this is not the real growth process at work.

 

The above has many ‘perverse’ or apparently illogical implications.

These are notably: (1) low economic growth favours or causes low oil prices; and (2) the only process reducing oil demand growth, throug the long period 1945-2008, has been economic recession, or a sharp cut in global economic growth.

 

We can conclude that the 'supply side solution' to high oil prices – producing more oil or hydrocarbon liquids notably the biofuels – is getting difficult and will soon be impossible, until and unless world economic growth rates fall back in serious fashion. Unfortunately, whenever there is economic recession, financial resources available to both conventional, and renewable energy development falls away very fast, ensuring future shortage whenever demand picks up.

 

Only by cutting demand can slow growing global oil and energy supply meet still-growing, but reduced world demand and consumption. In turn, this means

 

  • Cutting energy intensity or average demand-per-capita in the most energy-intensive OECD countries, where considerable ‘fat to trim’ exists
  • Allowing and enabling continued growth of energy consumption in the Emerging Economies, within a Global Energy Transition framework
  • Setting a program for this, with economic, financial and legislative means and powers, that is a GLOBAL ENERGY TRANSITION PLAN which will obviously and necessarily be mutliateral and UN-linked, IMF-linked, and IBRD and regional bank-linked.

 

Makrket mechanisms, to be sure and certain, can only be counted on to produce laughable but costly financial and industrial disasters such as the 2006-2007 biofuels boom. Outside Brazil’s sugarcane ethanol program, which can compete against 120 USD/bbl oil, other ethanol production, and biodiesel from edible vegetable oils are only able to drive up food prices, while producing very high-priced, supposed ‘oil saving’ fuels. At current vegetable oil prices, eg. palm oil and rapeseed oil, the vegetable oil needed to produce a barrel of biodiesel costs about 150 – 160 USD/bbl, before any costs of factory operation! Investor interest in the biofuels is now very low, but only after many hundreds of millions of US dollars investment was made and wasted. This is why we need coordinated and long-term institutional, financial and technical supporting frameworks for a Global Energy Transition Plan.

 

Demand destruction, price elasticity and the real world real economy

So-called ‘price elastic’ responses by consumers and users - falling demand with rising prices - is swamped by the growth impact of rising energy and non-oil raw material prices on world economic and trade growth. A very simpl and clear example concerns gasoline and diesel fuel in Europe 2006-2007. Price rises were about 33% in the period but demand only fell by 3% . Natural gas demand in Europe is growing quite fast, as prices rise very fast. This “perverse zero elastic’’ impact of higher oil, natural gas, coal and electricity prices is due to what I call Petro Keynesian Growth, in other words higher oil, metals, minerals and food prices rapidly increase global economic growth rates. The basic driver is oil prices, and this process will continue to operate until extreme oil price levels are attained, which is unfortunately now possible.

 

World annual average per capita or ‘demographic’ oil demand is a key indicator, which also has oil price forecasting applications. Demographic demand has regularly but erratically increased through the long period 1965-2007, from about 3.5 bcy in 1965, through a peak during the ‘inter-shock period’ of 1975-1979, and slowly growing again, with rising oil and energy prices, since about 1998

 

World per capita average oil demand and oil price trends 1965-2007

 

Data sources

 

Population data/ UN Population Information Network (year average or « June » population estimate)

 

World daily average oil demand each year : BP Statistical Review of World Energy, various edns, Platts, Thomson Financial.

 

Peak annual oil price (2-month basis) for volume traded light crudes. World oil prices and deflators 1965-2007, are calculated by this author using multiple sources., including 'Oil economists handbook' Vols 1 & 2, G Jenkins, Elsevier Applied Science, various editions, Platts Oilgram, OPEC bulletin, Bloomberg, California Energy Commission ‘Delphi oil price forecasting series’, the ICE, etc.

 

 

 

BARREL PRICE IN 2005 DOLLARS PER BARREL (left side scale) AND AVERAGE OIL DEMAND PER CAPITA IN BARRELS/CAPITA/YEAR (right hand scale) Average year prices WTI grade in blue Oil intensity in red

 

Impact of Oil Shocks on demographic demand

 

The term ‘oil shock’ can have many meanings, but the essential element of the term is very large price changes in a short period of time. On this base, there have been at least 4 ‘oil shocks’ since 1973, that is 3 upward price shocks (1973-74, 1979-1981 and 1999-2009 (?)), and 1 downward price shock (1985-86). Everytime, changes were very big.

 

In nominam terms, not corrected for inflation and purchasing power of US dollar used to purchase oil, price rises were

 

1973-74 : about 295% 1979-81 : about 115% 1999-2008 (April) : about 915%

 

The oil price crash of 1985-86, basically due to Saudi Arabia unilaterally deciding to hike output to about 12.25 Mbd (a level it has never re-attained) drove down prices by about 70%.

 

None of these price shocks had an immediate and large impact on demographic demand, unless we accredit the thesis that the 1980-83 world economic crisis was either solely, or mainly caused by very high oil prices, and brought about the large cumulative falls in demographic oil demand through 1980-85, with the demand rate of 4.42 bcy in 1985 being the lowest in the entire 1979-2007 period.

 

The fast growth of world natural gas supplies needs to be underlined. Since the early 1980s, world gas supplies have increased at an annual average close to 4.5%, far higher than average oil supplies and demand. Gas prices are still low, but increasing quite fast, like coal prices, which was heavily (gas) or extremely (coal) underpriced relative to oil. In fact, we can note, gas and coal remain cheap relative to oil, and this explains why natural gas demand is growing at about 4.5% and coal demand at about 6.25%, while oil demand growth is only 1.5% to 1.75%pa

 

Declining growth rate of oil demand, to be sure, is linked to rising prices but also aided and accelerated by long term de-industrialization and accelerated electrification in many OECD countries (very fast growth of electricity demand), in the same period. In several OECD countries, with very low growth rates of the economy (1.25% to 2%) in 2007, their electricity demand continued to increase at 5%pa or more.

 

These factors are likely at least as important as high oil prices in causing the observed fall of global average per capita, or demographic oil demand. Troubling yet further any supposed ‘price elastic’ response or trigger for the fall in oil demand is the fact that demographic demand had begun to fall by 1977-78, a period in which oil prices did not grow rapidly, nor attain especially high peak price levels.

 

Three essential points have to be mentioned. In the 1973-79 period, after a 295% oil price rise in nominal terms through 1973-74, there was almost no reduction in world per capita oil intensity. This is very similar to the process since 1999, but in this case (1999-2007) demographic oil demand increases with increasing price.

 

After 1979-81, when oil prices briefly attained similar price level to Jan-Feb 2008 (that is about 110 USD/bbl in dollars of 2008), demographic oil demand started falling. But this was during the worst economic recession since 1929-31 ! Without global economic recession, and with the US Federal Reserve printing money and bailing out near-bankrupt US investment banks, oil prices can go a lot higher in 2008. As we can see from the table and Chart (above) increasing demographic oil demand is a powerful cause of rising oil prices.

 

Also, when oil prices fall, specially in 1985-86 when Saudi Arabia felt obliged to hike output, and was physically capable of raising output , which is probably not the case today, the decline in the demographic rate of oil demand began to accelerate. What is most notable, however, is that the demographic rate continued to fall after prices had fallen well below the highs of the 1979-81 period. As the Table above shows, the 1995 demographic rate was almost unchanged from that of 1985, but oil prices had been more than halved in real terms. Perhaps most important to note is the third point: since 1999, and the ‘price shock’ of 1999-2007 (a price rise of about 915% in nominal terms), the demographic demand rate has continued to rise.

 

We can conclude there are enormous or fantastic lead-and-lag processes and factors that play a role in the link between oil production, supply, demographic demand and oil prices.

 

The real impact of higher oil prices: Global economic growth

 

This can be called Petro Keynesian Growth because real impact of higher oil prices, certainly up to the range of even 90 – 100 USD/barrel, is to increase economic growth at the global, or worldwide level. This is the main reason why demographic oil demand in the 1975-79 period, with barrel prices constantly increasing, and rising (in real terms) to levels close to prices in late 2007 and early 2008, was significantly higher than it is today.

 

It should be clearly understood that if the demographic rate in 2008 was the same as 1979, that is over 5 barrels/capita/year, world oil demand in 2008 would be well over 96 Million barrels per day in 2008. There is considerable and realistic doubt on the world oil supply system to produce and sustain more than about 90 Mbd. The CEO of Total SA, for example, has said in 2007 that he thinks that 100 Mbd might be briefly achieved, but not sustained. This is probably an exageration: producing and sustaining more than about 90 or 92 Mbd is likely impossible.

 

The likely production rate for Peak Oil on an all liquids basis will probably be about 90 Mbd. Increasing gas-to-oil (GTL) conversion, biofuels and the syncrudes will probably not palliate this intrinsic supply crisis, which by 2010-2012 will be joined by supply crisis for global natural gas and LNG supplies. This will radically increase world coal demand causing huge demand for new production, local transport and shipping infrastructures, of course raising coal prices.

 

The “Petro Keynesian Growth” process is easy to describe: Higher oil prices operate to stimulate first the world economy, outside the OECD countries, and then lead to increased growth inside the OECD. This is through the income or revenue effect on oil exporter countries, and then on metals, minerals and agrocommodity exporter countries, most of them Low or Mid Income (GNP per capita below $1000/year). Almost all such ‘real resource exporter’ countries have very high marginal propensity to consume. World trade growth accelerates, and world liquidity is raised, tending to reduce real interest rates.

 

In other words, any increase in revenues in commodity exporter countries, due to prices of their exports increasing in line with, or being ‘indexed’ to the oil price, is very rapidly spent on purchasing manufactured goods and services of all kinds, including capital good, industrial equipment, urban development, etc. In the 1973-81 period, in which oil price rises before inflation were of 405%, the New Industrial Countries (NICs) of that period - notably Taiwan, South Korea and Singapore - experienced very large and rapid increases in solvent demand for their export goods, leading to large and sustained increases of oil demand by the Asian Tigers in that period. Today, exactly the same process leads to China and India rapidly increasing their oil, gas and coal demand as prices for fossil fuels increase very fast.

 

Global economic recession and higher oil and gas prices

 

The global economy, today in 2008, faces very serious problems due to many factors. These include falling economic growth or recesssion in USA, Europe, Japan. Rising inflation is one immediate impact of falling economic growth, and can generate a “vicious spiral” unless economic growth is restored or inflation falls. Food price inflation, partly due to high priced oil to operate agriculture machinery, process foood and transport food to cities is now very strong.

 

We must not forget that inflation is also due to currency and monetary problems. In particular and today, the moneys of Emerging Economies, including Pakistan, Turkey, China, India are all under-valued against US dollar. Conversely, the Euro is highly over-valued against US dollar. This is a very unstable, fragile context and may lead to major FX readjustment and realignment before end-2008, and perhaps cause a major monetary crisis. This context will also tend to increase global inflation and bolster oil price rises.

 

As we have however found in 2006-2007, no immediate economic recession can occur with oil at even $75 per barrel. Much higher oil prices would be needed to cause a global economic recession, and as noted above monetary crisis and global inflation due to many factors including fast economic growth outside OECD countries, climate change, soil erosion, biodiversity loss, population growth, urbanisation, and other factors, are also the cause of global inflation. Oil and natural gas prices are not at all the unique cause of global inflation.

 

Without strong economic growth and sustained higher prices for oil and gas it is unrealistic to expect that any ‘energy transition’ can occur, for example the type of energy transition that is implied (but not exactly stated) by international effort to mitigate climate change. The mechanism is application of the Kyoto Treaty and its linked Joint Implementation Clean Development Mechanisms (JI CDM) in some countries outside Europe, Japan, Australia, NZ and Canada. Application of Kyoto Treaty in Europe and Japan has only shifted electric power production to natural gas-fired, and triggered rapid development of wind electric farms, now at saturation level in several EU27 countries. Oil demand has not been seriously reduced, and natural gas demand has increased quite fast, despite very slow or stagnant economy in Europe and Japan.

 

Oil demand is itself driven by higher prices - Demand shock

 

The Table below (Demographic rate, oil and natural gas) shows what we can call almost unlimited upward growth potential for world oil and natural gas demand. This itself tends to suggest we will have very high prices for traded oil and natural gas, until and unless there is very strong and sharp, global economic recession.

 

Current world oil demand trends extend down from 25.6 bcy for the USA to well below 0.2 bcy in rural areas of low income developing countries (LDCs). While it is totally impossible that this could happen, the world’s current 6.35 Bn population consuming oil at US per capita rates would generate a demand of around 445 Million barrels/day (Mbd). At the other extreme, at 0.2 bcy world total oil demand would be telescoped to under 3.5 Mbd. The current 4.5 bcy world average is around one-third the average in European Union countries, but more than 4 times per capita average consumption in India, and over 3 times that of China - which will soon become the world’s biggest industrial economy.

 

Annual increase of the world’s population, which is continuing to fall as a percentage rate, and in absolute numbers of annual increment to global population, is now running at about 70 Million. We can note that China, by about 2015, will have a very rapidly ageing population, similar to many EU27 countries and Japan today.

 

At a demographic demand rate of 4.75 bcy the ‘latent’ or potential annual growth in world oil demand is itself about 1.25 Mbd, assuming no change in the energy economy, no fuel substitution, and also no economic growth.

 

Table : Global Demographic rate - oil and gas demand, 2006-2007

 

 

 

Surprising growth of world energy demand

 

The BP Amoco Statistical Review has for some years prefaced its annual editions by noting what it call ‘surprising growth’ of world energy demand since 2000 - approaching 2.75%-3.5% annual and about 6.5%pa for coal and nearly 7%pa for electricity. For oil, BP claims the so-called “10-year trend rate” is about 0.9% to 1.4%pa, and in 2008 the Chief Economist of BP claimed that BP ‘now believes in Peak Oil’ but only because global demand growth for oil is so low that oil production will fall, due to weak demand !

 

Any imagined ‘price elastic’ response as a potential cause of world oil demand growth shrinking back to BP’s claimed “10-year trend rate” can be forgotten when we note the real impact of higher oil prices on world oil demand.

 

Through the 1975-79 period, when oil prices increased quite fast and briefly attained, in 1980, prices comparable to 2007 (but not 2008) prices in real terms, world oil demand growth easily achieved 4% annual. Just one year of 4% growth in global oil demand, today, would produce a catastrophic supply shortage and very rapid fall to near-zero of world crude oil and product stocks and inventories. Prices would instantly explode.

 

During the first 6 months of 1979, before higher interest rates triggered an intense worldwide economic recession, oil demand was increasing at an annual rate of close to 4.5%, with prices in 2008 dollars close to 90 or 100 USD-per-barrel. It is therefore easy to suggest the “10-year trend rate” that BP claims, and is also taken seriously by OPEC’s economists, that is maximum growth of global demand less than about 1.3%pa was a simple aberration due to extreme high interest rates causing global economic recession, followed by very slow recovery of the global economy in the 1990s.

 

Restored or strengthened economic growth through oil shock and Petro Keynesian Growth also changes the type of growth towards more energy-intense industrial and manufactured products, and away from more services based, lower energy activities. This ‘perverse’ factor itself increases oil intensity of world economic output and raises the ‘oil coefficient’ or percentage increase in oil demand for a percentage point growth in the economy for any country or bloc. BP and OPEC economists do not seem to understand this, and use extreme low coefficients in their forecasting method for global oil demand, going forward. We can be rather sure ‘surprisingly firm’ demand will tend to remain, for much more costly oil, coal, gas and electricity.

 

The near-term future

 

Understanding the mechanisms in play is vital for making accurate and realistic forecasts of future world oil demand and oil prices. Rational estimates of global oil demand growth, despite 100+ dollars per barrel, are in the range of 1.6 to 1.75 Mbd in 2008, not the absurdly low estimates produced by US EIA, OECD IEA, BP, OPEC, Exxon Mobil, ENI, Shell and others, including the investment banks such as Goldman Sachs, Lehman Bros, Merrill Lynch, etc.

 

More realistic and credible demand forecasts can be made, as shown below:

 

Table : 2010 world oil demand forecasts (Million barrels/day, Mbd)

 

 

 

Population growth forecast for ‘Low’ projection assumes UN forecasts of slowed annual rates of growth for the 2020-2030 period are attained by 2004-2010. ‘High’ population projection utilises current world demographic growth trend (about 70 M. per yr).

 

Geopolitical and other price-shaping factors

 

Real market supply and price sentiment will ever more depend on policies decided by, and events affecting Russia and Saudi Arabia, as well as Iraq, and to a lesser degree Nigeria and Venezuela. Outside the major producers, political events in small African oil exporter countries, due to the very tight supply situation, can also have major impact on prices.

 

Institutional unpreparedness regarding world oil supply/demand is high, or even extreme – almost all EU27 leaders now say that ‘very high oil prices cannot be controlled by national policies’, in other words consumers and industrial users of oil will have to put up with high, and likely rising prices. Apart from a recent visit to see his ‘friend and ally’ King Abdullah, the George Bush Administration of USA does little or nothing to seek lower oil prices.

 

However, current and actual growth trends for world oil demand, and emerging shortfalls for world oil supply were clearly in place by end-2003, or before, suggesting that official energy and oil institutions are not yet prepared for Peak Oil and probable 150-dollar oil. The economic consequences of oil prices simply exploding out of sight still does seem to be taken seriously.

 

The implications of continually underestimating demand growth, combined with overoptimistic, and in fact entirely unrealistic forecasts for net oil exports from Saudi Arabia, Iraq, and the other 3 major Gulf region producers, together with very optimistic notions of Russia’s capacity or willingness to continue increasing its export capacity, is a certain and sure recipe for Oil Shock. In this uneasy context, we cannot expect oil prices to fall very significantly or for long periods.

 

Conclusions

 

Cheap Oil is seen by the decision making elite in the richer nations as the ‘passport to economic growth’. This is pure fantasy. Only ‘extreme’ oil prices (probably above $150/barrel) will cancel, abort or overturn the global economy expansionary impacts of higher oil prices

 

Since about 1995 ‘demand shock’ has begun to operate in the world economy for a number of economic, social or ‘secular’ and technical reasons, leading to considerably higher underlying growth rates of world oil demand. Current ‘trend growth rates’ for world energy and world oil demand are closer to 1.75% or 2%pa than the unreal under-estimates of many ‘official’ sources, including most big energy corporations.

 

Cheap oil and energy remains the essential base of conventional economic development and conventional social progress anyplace in the world. This in turn is a powerful motor for continued and strong demand growth for fossil energy, worldwide. Upward potential for personal consumption of fossil fuels is essentially unlimited in this context.

 

Only Global Energy Transition, with a coherent and firm Plan, and adequate financial and legislative frameworks can resolve the very big problem of global energy supply

 

 

 

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Consumer borrowing unexpectedly surges in March

By MARTIN CRUTSINGER, AP Economics Writer

Wed May 7, 3:18 PM ET

Yahoo! News

http://news.yahoo.com/s/ap/20080507/ap_on_bi_go_ec_fi/consumer_credit_10

 

 

WASHINGTON - Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month.

 

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The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7.2 percent, compared with a 3.1 percent rate of increase in February.

 

The gain was much larger than economists had been expecting and reflected strong borrowing on credit cards and also in the category that includes auto loans.

 

The increase in consumer debt totaled $15.3 billion at an annual rate in March, much bigger than the $6 billion increase that economists had been expecting. The bigger gain was seen as a sign that the weaker economy was forcing consumers to increase their borrowing to support spending.

 

Borrowing on credit cards was up at an annual rate of 7.9 percent, compared to a 5 percent gain in February, while borrowing in the category that includes auto loans jumped by 6.8 percent, compared to a 2 percent increase in February.

 

The overall growth in debt of 7.2 percent at an annual rate was the biggest gain since an increase of 8.25 percent last November.

 

Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.

 

The Fed's measure of consumer borrowing, which does not include any debt secured by real estate such as mortgages or home equity loans, stood at a record $2.558 trillion in March.

 

 

The general idea I want to float out there is the fact that borrowing is spreading heavily to credit cards which are unsecured debt. This is different from a mortgage because mortgages have an asset backing the debt - the home itself. So if one was to default on the mortgage, the bank repossesses the house and still maintains ownership over the property which is an asset which can be sold to recoup the money you arent paying the bank. Credit cards, on the other hand, are unsecured debt. So when you spend money on your credit cards to buy groceries, its not like the credit card companies/banks can repossess your eaten groceries or that they want to repossess your used kayak, new laptop computer etc. They would be forced to sit on a mountain of goods if that were the case. Some people, to avoid losing their home, are paying the mortgage with higher interet credit cards! Its a legal version of back alley loan sharking! So this is the start of the credit card bubble. When THAT pops, then we are looking at massive problems. Just as the mortgage rates havent gone down despite the fed lowering the interest rates, credit card rates would not fall also in the event of a credit card collapse. In fact, I believe they would go up. So even if you are someone who only carries a small balance from month to month and not the astronomical $12000 of credit card debt most people have, your interest rate on the balance would skyrocket from say 17% to maybe 25% or 30%. You'll be paying the credit card companies because someone else helped to wipe out their profits because they defaulted $12000 of debt. I highly recommend ridding yourself of credit card debt if you have any, and carefully watching credit card balance rates over the coming months.

 

 

 

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This article is interesting because the argument can be made that if livestock is a driving factor behind world agriculture prices (animals need to eat, afterall) then the high energy prices and the inability to get higher prices for livestock will crush the livestock industries. Some scientists also suggest that animal farts (cows fart a heck of a lot) which are primarily methane, is one of the leading causes of global warming - not CO2. there is room for interesting arguments with this one...

 

Fertilizer prices more than double

Increases push farmers to plant different crops

By WENDY LEE • Staff Writer • May 7, 2008

http://www.tennessean.com/apps/pbcs.dll/article?AID=/20080507/BUSINESS01/805070403/1003/BUSINESS

 

Farmers like 80-year-old Joe Dement say it's becoming too financially risky to plant corn this year.

 

Despite high food prices for corn, the prices of essentials such as fertilizer have more than doubled in the past few months, cutting into the wallets of the state's farmers and further raising the risks associated with a life spent in agriculture.

 

 

In response, farmers like Dement are choosing to plant soybeans instead of corn because it uses less fertilizer.

 

The prices of fertilizer, essential for maximizing a crop's potential, have gone up because of more worldwide demand, high freight rates and stubbornly high natural gas prices, according to the Tennessee Farmers Cooperative, owned by 70,000 farmers in the state.

 

"The cost of putting out the crops is more daunting this year," said Delton C. Gerloff, agricultural economics professor at the University of Tennessee-Knoxville.

 

For example, DAP, a fertilizer used for beans, corn, pastures and cotton, sold last year for $398 a ton. This year, it sells for $1,000 a ton, according to Arkansas-based Oakley Fertilizer Inc.

 

Local farmers of a broad range of crops say they're hurt by the price increases.

 

But analysts said farmers who raise cattle may be hurt the most, because of the need to fertilize pastures and the fact that high grain prices used to feed cattle have outstripped the sales prices for beef cattle.

 

"This is one of those years where you're just going to have to hang in there," said Ronnie Barron, the University of Tennessee's extension agent for agriculture programs in Cheatham County.

 

"When you take into account extremely high fertilizer prices, it pretty much wipes out that profit margin."

 

Tennessee crops and pastures rely on fertilizers made from nitrogen, phosphorous and potassium, and these ingredients can boost yields 20 percent to 25 percent on average, said associate professor Hugh Savoy at the University of Tennessee-Knoxville.

 

Big fertilizer producers such as Calgary, Alberta-based Agrium Inc. have seen a financial boon with the rising prices. Agrium Inc.said its first-quarter net earnings jumped to $195 million, up from a net loss of $11 million a year ago.

 

"There is certainly tightness in the market, and at times we need to manage how much you commit to," said Ashley Harris, an Agrium spokesman. Agrium is evaluating plans to expand its potash operations and will complete a nitrogen plant in Egypt in 2010.

 

"We still see a healthy margin for the farmers and that is proven by the healthy demand for the products," Harris said.

 

Already, some analysts are saying some agricultural stocks such as Potash Corp. of Saskatchewan Inc. do have the potential to continue to grow because of higher food demand from countries such as China.

 

"I think the sector in general has plenty of growth left ahead of it," said Morningstar agricultural stock analyst Ben Johnson in Chicago.

 

Gerloff said this is a crucial year for farmers in part because many are trying to recover from reduced crop yields last year due to drought, and now they're dealing with higher fuel and fertilizer costs.

 

Dement, who had a normal yield on only about one-third of his soybean crop last year because of the drought, said he hopes to have better results on his 150 acres of this year.

 

"That's the beauty of farming: We're the biggest gamblers on earth," the Lascassas farmer said. "We pay our good money for seeds and fertilizers and pray for rain. Generally the odds are against us."

 

Wendy Lee can be reached at 259-8092 or wlee@tennessean.com.

 

 

 

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World Food Riots Portend Trouble for the US Dollar

By Christopher G. Galakoutis, http://www.murkymarkets.com, May 8, 2008

http://news.goldseek.com/GoldSeek/1210258860.php

 

On a trip to Canada recently I couldn’t help but notice the extensive media coverage paid to the worldwide food price inflation, as well as the riots breaking out in many countries over food shortages.

 

And of course the list of reasons given by the so-called ‘economists’ interviewed are completely devoid of the one all important reason fueling what may arguably become an epic food price inflation: the declining value of the US dollar.

 

Many countries around the world peg their currency to the dollar, either through what are called soft or hard pegs.

 

As I have written on numerous occasions, these countries are paying the price for their ‘loyalty’ by importing the inflation the US is creating. In order to support the US currency and keep theirs from appreciating, countries must create more of their own and sell it in the open market to buy dollars. This increased supply of their own currency fuels the inflationary conditions in their own countries.

 

Akin to a destructive typhoon that has hit shore in some and about to in others, the inflation monster wasn’t an issue so long as it was gestating and churning over open water after developing and departing US shores.

 

But as it starts to hit the many nations foolish enough to have invited the storm, the question that arises is how will the affected countries respond?

 

In my opinion, as this food crisis grows and civil unrest intensifies worldwide, all nations impacted by it will finally be forced to stand up and walk off this particular field of dreams.

 

For if it is one thing and one thing alone that all politicians understand it is power, and remaining in power. And in most places that means votes.

 

The question for the longest time has been ‘when,’ as in when will countries begin to un-peg from the dollar. That’s already happened in some places, but I believe it is about to pick up pace as prices of not only food but also all basic necessities spiral out of control. The un-pegging will cause those foreign currencies to strengthen, bringing down domestic prices virtually overnight.

 

Authorities here in the US have, up until now, been able to ‘fool’ the people into believing there was no inflation, by working to bring down the cost of their big screen TV’s and other imported consumer electronics. By doing so, the rising costs of life’s necessities have been camouflaged, as it were, since the average consumer was left par for the course after all was said and done.

 

But in a slowing economy and home equity cash-out’s a thing of the past, the now frugal consumer is hurting, having to carry and service large debt while also feeling the full force of the price increases for everything from food, energy, health care and all other necessities that can not be outsourced on the cheap.

 

As this inflation spreads it can therefore mean only one thing: countries will let go of their currency pegs sooner rather than later.

 

This will come as a complete and total shock to those currently calling for a massive dollar rally and corresponding collapse of gold and commodities prices.

 

It is why we have been picking up more of our favorite gold, silver and energy stocks this past week. Some of these stocks are trading it ridiculously low prices, a few approaching their cash on hand. It is these stocks that will have the most explosive moves to the upside in the months ahead.

 

The MurkyMarkets.com website by Christopher G Galakoutis is a running macroeconomic commentary on the state of the financial markets with emphasis on gold, silver, the currency markets and energy. Visitors to our new site are always welcome.

 

The fun arguments to make here are veiled. The author concludes that countries are going to be increasingly willing to drop the fixed exchange rates they have with the dollar. This will lead to a loss of the dollar's status as the reserve currency of the world and the dollar will collapse overnight. Countries will be willing to do this to stop their own countries from collapsing under the weight of chaos and disorder caused by spiraling inflation. So this is a neat internal to the idea that both the status quo and the plan are bad and only a counterplan which strengthens the dollar will save the world and the US.

 

 

 

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