Thursday, June 26, 2008
Wednesday, June 25, 2008
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 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.
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.
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
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.
Sunday, June 22, 2008
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 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
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