Thursday, June 26, 2008

The Debts of the Spenders: Credit Crunch Forces Americans to Live in their Cars

Americans' affair with cars. Staying in one's car is considered one of the first steps toward utter destitution.

Wednesday, June 25, 2008

The Debts of the World: Finally Someone Defends the Speculators

Politicos have been riding roughshod over "evil speculators" for some time now. Finally an industry executive has the courage to come out and say the obvious - that government employees and political pandering live in a fantasy world all their own. For regulators to ban all except those who take physical possession is to dramatically reduce liquidity.

Tuesday, June 24, 2008

The Debts of the World: The Story So Far

This author gives an excellent summary of events from summer 2007 to date - nearly 1 year ago.

The simple facts

Since August 2007, the US Fed, by pursuing an aggressive re-inflationary policy in a bid to bailout large financial institutions and prevent debt deflation, has sent oil prices racing to $140 per barrel and the dollar falling from $1.27 per euro to $1.60 per euro. The injection of abundant liquidity in the banking system, together with the setting of real interest rates at negative levels, have led to a speculative boom in commodity markets. Low yields on bonds have pushed investors to seek higher yields in speculative commodities and currency markets. Fed policy is known to reward speculation and penalize the real sector of the economy.

Following the collapse of hedge funds and the stock market bubble, the Fed has followed an overly expansionary policy during 2001-2007, setting the federal funds rate at 1%, the lowest level in the post-World War ll period. Such an expansionary policy has created a speculative boom in housing markets and unchecked expansion of credit. The massive expansion of liquidity led to pushing of loans in subprime markets irrespective of the creditworthiness of the borrower, with underwriting standards reduced to nothing at all.

Typical housing loans are "NINJA" loans, rated high-grade assets by rating services yet extended to no income, no job and no asset borrowers. This policy turned out to be highly inflationary; housing prices increased up to fourfold and became misaligned with household incomes; and oil prices and other commodity prices rose at unprecedented rates during 2003-2007.

The Fed has been trapped in a vicious circle of cheap money inducing a speculative boom followed by financial collapse, which necessitates a new round of bailouts and cheap money. The more expansionary is monetary policy, the more widespread the ensuing financial crisis, the larger the scale of bailout operations, and higher and longer the inflationary episode.

Bailouts socialize private losses that have resulted from speculative booms. By acting as a lender of last resort and re-inflating the economy in order to support banks to stay afloat and prevent a debt deflation, the Fed is making the public pay for errors it did not make and sustain the high salaries of bankers and financiers. In other words, the homeless, by consuming much less food, are paying for the lavish salaries of bankers and financiers and for the gains reaped by speculators during a speculative boom.

Massive bailouts have always caused rapid inflation, yet those operations have been afforded the highest priority, regardless of their inflationary and exchange rate impact. At best, the Fed has been expressing its strong stand against inflation, words that are not backed by action to stem the huge cost in terms of loss of real incomes and protracted period of sluggish growth and rising unemployment.

The Debts of the Lenders: Hard Landing in Vietnam

Often referred to as "the other Communist country", Vietnam has enjoyed nearly a decade of wild growth. However, it looks like the party is about to end. The real estate and stock market bubbles are deflating in the face of soaring inflation and high oil prices. The government has taken steps to curb capital flight by "locking in" foreign investors assets and ...more ominously, imposing capital restraints on gold imports.

Possession of gold is a measure of inflationary risk and its elimination in the US by first FDR and then Nixon served as the precursor to today's floating exchange rate system. Under the gold standard, politicians were forced to abide by an external standard of wealth rather than their own arbitrary statements. The gold system imposed a measure of fiscal restraint on otherwise tax and money printing happy policymakers.

The Debts of the Spenders: The Great Game

Bernanke is running a dangerous gauntlet - trying to avoid the twin problems of inflation and a credit crisis. So far, the Fed under his tenure has acted as expected - in support of financials. This is no surprise as the Fed, the Treasury, and financials have traditionally had an incestuous relationship w/members from one group frequently transitioning to the other.

Inflation is threatening the balance. While the credit crisis is certainly part of the American economy, so is consumer spending on staples and food/energy. Already, several of the regional Feds have openly dissented with the party line.

Monday, June 23, 2008

The Debts of the Spenders: Crisis in Muni Land

It's starting. States are cutting their budgets in areas like
schooling and need based aid. These "sacrifices" are being made to
continue costly entitlement programs to the elderly. Under the cold
calculus of voting, politicians figured that children, young adults,
and poor people are less likely to vote (or buy votes) than the AARP
bloc. Throw in a piss poor muni bond climate and you've got the
beginnings of a perfect storm.

The Debts of the Spenders: Australian Gas Crisis Expected to Cut into Commodities Production

Expect schedules to be backlogged as a shortage of equipment and skilled personnel in the Australian natural gas industry mean generators will not be fully operational until December. Expect these logistical problems to contribute to already record commodity prices in industrial and precious metals.

The Debts of the Lenders: Asians Retreat from US Bonds

It's finally happening. Poor yields - especially after accounting for high inflation - are forcing Asian institutions to leave the US bond market. It is estimated that these investors own 28 percent of all US debt.

Sunday, June 22, 2008

The Debts of the World: Is Peak Oil a Myth?

Peak Oil is a term that is misused often. Conventional oil (sweet crude) has peaked.
Non-conventional oil is a different story.

EIA data shows global production peaking and plateauing at 85 mbls/day in 2003/2004. Increased demand has increased oil prices 6 times as a consequence.

Non-conventional oil can be found in places like the deepwater trenches off Brazil (Tupi fields), shale rock in the Rockies, and the North Pole.

But, ask yourself another question. Why go through 2 kms of ocean, 2 kms of unstable salt and another 2 km of hard rock to get oil if easier alternatives exist ?

If we ran out of deep sea oil, oil sands and oil shale as well, I am sure we can convert road asphalt, rubber tires and plastic waste into oil if the economics justified it.

The end result: high oil prices are here to stay for the foreseeable year. Remember - oil DISCOVERIES are not the same as oil EXTRACTIONS.

Tuesday, June 17, 2008

The Debts of a Nation: Speculators and Regulators

"The dollar," said Canadian Finance Minister Jim Flaherty at the Group of Eight (G-8)meeting of his colleagues last weekend in Osaka, "is a market currency." And "one does not interfere with a market currency".

The G-8 finance ministers basically admitted there was not much they could do about the recent worldwide increases in the price of oil, which has more than doubled from a year ago, or, for that matter, other commodities. All that they could bring themselves to do was to commission a study from the International Monetary Fund to determine what effect speculators may be having on oil supplies.

Sunday, June 8, 2008