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Tuesday, January 31, 2012
Games
Saturday, January 14, 2012
Key US oil supplier may cut off spigot Sunday
NEW YORK (AP) — One of the biggest suppliers of oil to the United States may shut off the spigot this weekend, pushing crude and gasoline prices higher for Americans.
Nigeria, which supplies 8 percent of U.S. oil imports, could see production halted if striking workers walk off the job Sunday. Workers are demanding the return of a vital government fuel subsidy that has kept gasoline prices low in that impoverished and restive nation of 160 million people.
It's unclear how much of Nigeria's production would be affected. At worst, the country's 20,000 unionized oil workers could take as much as 2.4 million barrels of daily crude production off the market, striking at the heart of Nigeria's oil-dependent economy.
Even if strikers are only partially successful, fears of tightened global supplies could raise oil prices by $5-$10 per barrel on futures markets next week. Gasoline prices would follow, rising by as much as 10 cents per gallon and forcing U.S. drivers to spend an additional $36 million a day at the pump.
Gasoline now costs $3.39 per gallon (89 cents a liter) after rising 11 cents since the start of the year. Experts predict the national average could rise as high as $4.25 per gallon ($1.12 a liter) in 2012.
The Nigerian government already has offered a smaller, temporary fuel subsidy and will meet with union leaders on Saturday. The strike could be called off but protesters have promised to halt production if they don't get the full, $8 billion subsidy restored.
Disruptions would have a long-term impact on Nigeria's economy. Union president Babatunde Ogun said it could take six months to a year to restart oil fields once they're shut down.
"If everything comes to a standstill, the government will budge," Ogun told reporters this week in Lagos.
The threat to shut off oil production is the latest move by protesters after a week of violent, anti-government clashes throughout the country. The strike began Monday to challenge President Goodluck Jonathan's decision to abandon the fuel subsidy.
"It's going to be a showdown this weekend," in Nigeria, Oppenheimer & Co. analyst Fadel Gheit said. "You can only hope that cooler heads will prevail."It's hard to predict how effective a national oil worker strike would be.
Oil production facilities are usually automated, allowing them to pump oil out of the ground without anyone at the platform. But if something breaks, if the pressure in the well fluctuates, or if other problems occur that cause an automatic system shutdown, there wouldn't be anyone there to get production running again.
It's likely oil companies operating in the region —Royal Dutch Shell, Exxon Mobil Corp., Chevron Corp., Total SA and Eni S.P.A. — would simply shutter their platforms and wait for political tensions to subside, Gheit said. Oil companies could still export oil from storage terminals on the coast; that is, if union workers at the terminals stay on the job.The price of oil already has swung up and down this year because of supply concerns in another oil-rich part of the world, the Persian Gulf. Iran, the world's third-largest crude exporter, is sparring with the U.S. and Europe over its nuclear program.
While Iranian imports are banned in the U.S. because of long-standing tensions, the country supplies 2.2 million barrels per day to the rest of the world, including Europe. Meanwhile, Libya is quickly restarting oil fields that were shut down during the anti-government uprising last year. It has about 1 million barrels per day back online, and it expects to increase production to pre-rebellion levels of 1.6 million barrels per day by mid-year.
Oil prices fell by $2.86 this week to end at $98.70 per barrel in New York. Prices dropped as Europe delayed a decision to ban Iranian imports. But they could snap back up given the variety of geopolitical problems affecting world supplies, including the threat of a Nigerian oil worker strike.
The U.S. government expects the price of oil to average $100.25 per barrel this year.Michael Lynch, president of Strategic Energy & Economic Research, said oil could jump by $5-$10 per barrel if the strike begins Sunday. Nigeria ranks behind Canada, Saudi Arabia, Mexico and Venezuela in oil exports to the U.S. It produces a valuable crude variety that is easier and cheaper to turn into gasoline than others.
Investors, who have been numbed from years of political unrest in Nigeria that included sabotage, thievery, environmental protests and other operating problems, may wait to see how the government works with the union. Nigerian oil always seems to be under a perpetual threat of some kind, Lynch said.
"Though this time seems more serious," he said.Nigerians have been upset for years as international oil production damaged the environment with little apparent domestic benefits. One of the only visible perks was the fuel subsidy. Removing it forced gasoline prices to jump overnight from $1.70 per gallon to at least $3.50 per gallon — a crippling increase for a nation where most people live on less than $2 a day.
The government still seems determined to have its way, Barclays analyst Helima Croft said, but an oil field strike would be a game changer. If workers can shut down oil production, it's only a matter of time before declining oil revenues will force the government to cave, she said.
"Any disruptions in either oil production or exports would severely constrain government activities and its ability to meet its obligations," Croft said.
Eighty percent of the country's revenue comes from oil.
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Follow Chris Kahn on Twitter at http://twitter.com/ChrisKahnAP
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Associated Press writer Jon Gambrell in Lagos, Nigeria, contributed to this report.
Thursday, January 12, 2012
3 Places Where a Looming Energy War Could Mean Global Economic Disaster in 2012
The Strait of Hormuz
A narrow stretch of water separating Iran from Oman and the United Arab Emirates (UAE), the strait is the sole maritime link between the oil-rich Persian Gulf region and the rest of the world. A striking percentage of the oil produced by Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the UAE is carried by tanker through this passageway on a daily basis, making it (in the words of the Department of Energy) “the world’s most important oil chokepoint.” Some analysts believe that any sustained blockage in the strait could trigger a 50 percent increase in the price of oil and trigger a full-scale global recession or depression.American leaders have long viewed the Strait as a strategic fixture in their global plans that must be defended at any cost. It was an outlook first voiced by President Jimmy Carter in January 1980, on the heels of the Soviet invasion and occupation of Afghanistan which had, he told Congress, “brought Soviet military forces to within 300 miles of the Indian Ocean and close to the Strait of Hormuz, a waterway through which most of the world’s oil must flow.” The American response, he insisted, must be unequivocal: any attempt by a hostile power to block the waterway would henceforth be viewed as “an assault on the vital interests of the United States of America,” and “repelled by any means necessary, including military force.”
Much has changed in the Gulf region since Carter issued his famous decree, known since as the Carter Doctrine, and established the U.S. Central Command (CENTCOM) to guard the Strait — but not Washington’s determination to ensure the unhindered flow of oil there. Indeed, President Obama has made it clear that, even if CENTCOM ground forces were to leave Afghanistan, as they have Iraq, there would be no reduction in the command’s air and naval presence in the greater Gulf area.
It is conceivable that the Iranians will put Washington’s capabilities to the test. On December 27th, Iran’s first vice president Mohammad-Reza Rahimi said, “If [the Americans] impose sanctions on Iran’s oil exports, then even one drop of oil cannot flow from the Strait of Hormuz.” Similar statements have since been made by other senior officials (and contradicted as well by yet others). In addition, the Iranians recently conducted elaborate naval exercises in the Arabian Sea near the eastern mouth of the strait, and more such maneuvers are said to be forthcoming. At the same time, the commanding general of Iran’s army suggested that the USS John C. Stennis, an American aircraft carrier just leaving the Gulf, should not return. “The Islamic Republic of Iran,” he added ominously, “will not repeat its warning.”
Might the Iranians actually block the strait? Many analysts believe that the statements by Rahimi and his colleagues are bluster and bluff meant to rattle Western leaders, send oil prices higher and win future concessions if negotiations ever recommence over their country’s nuclear program. Economic conditions in Iran are, however, becoming more desperate, and it is always possible that the country’s hard-pressed hardline leaders may feel the urge to take some dramatic action, even if it invites a powerful U.S. counterstrike. Whatever the case, the Strait of Hormuz will remain a focus of international attention in 2012, with global oil prices closely following the rise and fall of tensions there.
The South China Sea
The South China Sea is a semi-enclosed portion of the western Pacific bounded by China to the north, Vietnam to the west, the Philippines to the east and the island of Borneo (shared by Brunei, Indonesia and Malaysia) to the south. The sea also incorporates two largely uninhabited island chains, the Paracels and the Spratlys. Long an important fishing ground, it has also been a major avenue for commercial shipping between East Asia and Europe, the Middle East and Africa. More recently, it acquired significance as a potential source of oil and natural gas, large reserves of which are now believed to lie in subsea areas surrounding the Paracels and Spratlys.
With the discovery of oil and gas deposits, the South China Sea has been transformed into a cockpit of international friction. At least some islands in this energy-rich area are claimed by every one of the surrounding countries, including China — which claims them all, and has demonstrated a willingness to use military force to assert dominance in the region. Not surprisingly, this has put it in conflict with the other claimants, including several with close military ties to the United States. As a result, what started out as a regional matter, involving China and various members of the Association of Southeast Asian Nations (ASEAN), has become a prospective tussle between the world’s two leading powers.
To press their claims, Brunei, Malaysia, Vietnam and the Philippines have all sought to work collectively through ASEAN, believing a multilateral approach will give them greater negotiating clout than one-on-one dealings with China. For their part, the Chinese have insisted that all disputes must be resolved bilaterally, a situation in which they can more easily bring their economic and military power to bear. Previously preoccupied with Iraq and Afghanistan, the United States has now entered the fray, offering full-throated support to the ASEAN countries in their efforts to negotiate en masse with Beijing.
Chinese Foreign Minister Yang Jiechi promptly warned the United States not to interfere. Any such move “will only make matters worse and the resolution more difficult,” he declared. The result was an instant war of words between Beijing and Washington. During a visit to the Chinese capital in July 2011, Chairman of the Joint Chiefs of Staff Admiral Mike Mullen delivered a barely concealed threat when it came to possible future military action. “The worry, among others that I have,” he commented, “is that the ongoing incidents could spark a miscalculation, and an outbreak that no one anticipated.” To drive the point home, the United States has conducted a series of conspicuous military exercises in the South China Sea, including some joint maneuvers with ships from Vietnam and the Philippines. Not to be outdone, China responded with naval maneuvers of its own. It’s a perfect formula for future “incidents” at sea.
The South China Sea has long been on the radar screens of those who follow Asian affairs, but it only attracted global attention when, in November, President Obama traveled to Australia and announced, with remarkable bluntness, a new U.S. strategy aimed at confronting Chinese power in Asia and the Pacific. “As we plan and budget for the future,” he told members of the Australian Parliament in Canberra, “we will allocate the resources necessary to maintain our strong military presence in this region.” A key feature of this effort would be to ensure “maritime security” in the South China Sea.
While in Australia, President Obama also announced the establishment of a new U.S. base at Darwin on that country’s northern coast, as well as expanded military ties with Indonesia and the Philippines. In January, the president similarly placed special emphasis on projecting U.S. power in the region when he went to the Pentagon to discuss changes in the American military posture in the world.
Beijing will undoubtedly take its own set of steps, no less belligerent, to protect its growing interests in the South China Sea. Where this will lead remains, of course, unknown. After the Strait of Hormuz, however, the South China Sea may be the global energy chokepoint where small mistakes or provocations could lead to bigger confrontations in 2012 and beyond.
The Caspian Sea Basin
The Caspian Sea is an inland body of water bordered by Russia, Iran and three former republics of the USSR: Azerbaijan, Kazakhstan and Turkmenistan. In the immediate area as well are the former Soviet lands of Armenia, Georgia, Kyrgyzstan and Tajikistan. All of these old SSRs are, to one degree or another, attempting to assert their autonomy from Moscow and establish independent ties with the United States, the European Union, Iran, Turkey and, increasingly, China. All are wracked by internal schisms and/or involved in border disputes with their neighbors. The region would be a hotbed of potential conflict even if the Caspian basin did not harbor some of the world’s largest undeveloped reserves of oil and natural gas, which could easily bring it to a boil.
This is not the first time that the Caspian has been viewed as a major source of oil, and so potential conflict. In the late nineteenth century, the region around the city of Baku — then part of the Russian empire, now in Azerbaijan — was a prolific source of petroleum and so a major strategic prize. Future Soviet dictator Joseph Stalin first gained notoriety there as a leader of militant oil workers, and Hitler sought to capture it during his ill-fated 1941 invasion of the USSR. After World War II, however, the region lost its importance as an oil producer when Baku’s onshore fields dried up. Now, fresh discoveries are being made in offshore areas of the Caspian itself and in previously undeveloped areas of Kazakhstan and Turkmenistan.
According to energy giant BP, the Caspian area harbors as much as 48 billion barrels of oil (mostly buried in Azerbaijan and Kazakhstan) and 449 trillion cubic feet of natural gas (with the largest supply in Turkmenistan). This puts the region ahead of North and South America in total gas reserves and Asia in oil reserves. But producing all this energy and delivering it to foreign markets will be a monumental task. The region’s energy infrastructure is woefully inadequate and the Caspian itself provides no maritime outlet to other seas, so all that oil and gas must travel by pipeline or rail.
Russia, long the dominant power in the region, is pursuing control over the transportation routes by which Caspian oil and gas will reach markets. It is upgrading Soviet-era pipelines that link the former SSRs to Russia or building new ones and, to achieve a near monopoly over the marketing of all this energy, bringing traditional diplomacy, strong-arm tactics and outright bribery to bear on regional leaders (many of whom once served in the Soviet bureaucracy) to ship their energy via Russia. As recounted in my book ”Rising Powers, Shrinking Planet,” Washington sought to thwart these efforts by sponsoring the construction of alternative pipelines that avoid Russian territory, crossing Azerbaijan, Georgia and Turkey to the Mediterranean (notably the BTC, or Baku-Tbilisi-Ceyhan pipeline), while Beijing is building its own pipelines linking the Caspian area to western China.
All of these pipelines cross through areas of ethnic unrest and pass near various contested regions like rebellious Chechnya and breakaway South Ossetia. As a result, both China and the U.S. have wedded their pipeline operations to military assistance for countries along the routes. Fearful of an American presence, military or otherwise, in the former territories of the Soviet Union, Russia has responded with military moves of its own, including its brief August 2008 war with Georgia, which took place along the BTC route.
Given the magnitude of the Caspian’s oil and gas reserves, many energy firms are planning new production operations in the region, along with the pipelines needed to bring the oil and gas to market. The European Union, for example, hopes to build a new natural gas pipeline called Nabucco from Azerbaijan through Turkey to Austria. Russia has proposed a competing conduit called South Stream. All of these efforts involve the geopolitical interests of major powers, ensuring that the Caspian region will remain a potential source of international crisis and conflict.Study: Americans Are Waking up to Class War
Occupy Wall Street may have gone indoors for the winter, but class war is increasingly prevalent in the American consciousness. A recent Pew Research Center survey found that the number of Americans who see strong conflicts between the rich poor is rising among all demographics, and has become the majority opinion. Americans are not just waking up to the class conflict; they are also increasingly considering it to be more intense.
From Pew:
A new Pew Research Center survey of 2,048 adults found that about two-thirds of the public (66%) believes there are “very strong” or “strong” conflicts between the rich and the poor—an increase of 19 percentage points since 2009.
What's more:
three-in-ten Americans (30%) say there are “very strong conflicts” between poor people and rich people. That is double the proportion that offered a similar view in July 2009 and the largest share expressing this opinion since the question was first asked in 1987.
According to the study, increasing perception of class war stretches across demographics, with some groups seeing stronger disagreements between rich and poor than others:
Virtually all major demographic groups now perceive significantly more class conflict than two years ago. However, the survey found that younger adults, women, Democrats and African Americans are somewhat more likely than older people, men, Republicans, whites or Hispanics to say there are strong disagreements between rich and poor.While blacks are still more likely than whites see serious class conflicts, the share of whites who hold this view has increased by 22 percentage points, to 65%, since 2009. At the same time, the proportion of blacks (74%) and Hispanics (61%) sharing this judgment has grown by single digits (8 and 6 points, respectively).
The demographic that showed the largest change was political liberals and Independents:
The biggest increases in perceptions of class conflicts occurred among political liberals and Americans who say they are not affiliated with either major party. In each group the proportion who say there are major disagreements between rich and poor Americans increased by more than 20 percentage points since 2009.
What hasn't really changed, however, is perception of wealth as an entity that is earned:
A 46% plurality believes that most rich people “are wealthy mainly because they know the right people or were born into wealthy families.” But nearly as many have a more favorable view of the rich: 43% say wealthy people became rich “mainly because of their own hard work, ambition or education,” largely unchanged from a Pew survey in 2008.
Read more about the study here.
Sunday, January 8, 2012
Get Ready to be Financially Conscripted
By Arnold Bock06/20/2011
A new financial policy initiative known by the label “Financial Repression” may soon become our worst nightmare. ‘Repression’ rhymes with ‘depression’ which could be what we have to look forward to as rampant price inflation and permanently lower living standards take hold. Get ready to be conscripted into a citizen army assembled for the greater cause of saving the nation from being swamped by a tsunami of debt. Let me explain.
What is Financial Repression?
Financial Repression is a policy cocktail comprised of large doses of monetary inflation, commonly known as money creation far in excess of the growth in the economy, coupled with interest rates that are below the real rate of inflation. While that may not sound particularly scary, the policy is designed to cause asset and price inflation which is reflective of, and caused by, a devaluing dollar. A much lower standard of living is the inevitable outcome.
What’s the Purpose of Financial Repression?
The purpose of Financial Repression is to allow the US federal government to cope with its overwhelming accumulated debt and unfunded promises for future Social Security, Medicare, Medicaid and employee pensions. It also prevents a proud nation from having to ‘restructure’ its debt as run-of-the-mill dead beat nations periodically are forced to do. Insolvency is just plain un-American for the world’s largest economy, the only remaining super power and the owner of the world’s reserve currency. To declare the equivalent of a private sector bankruptcy is just not in the cards.
In order to make Financial Repression work, the FED needs to keep a cap on nominal interest rates preferably at four percentage points below the real rate of price inflation. Aside from the highly negative impact of decimating the nest eggs of citizen-savers, it has the beneficial effect of inflating away debilitating, pesky and otherwise unmanageable financial obligations of the federal government.
Will Financial Repression Work?
A four percent interest rate below the real rate of inflation, compounded over ten years, reduces in half the ‘real’ value of payments to the government’s debt holders and entitlement recipients. Imagine what it does to the purchasing power of social security payments. Everyone gets the number of dollars promised, but they just don’t buy as much. Magical, isn’t it, especially if citizens think they are getting richer because their pay checks rise and their houses start to increase in price, thanks to inflation.
In the absence of large foreign buyers of US government debt, we the citizens will be conscripted to fill the gap, all for the greater good of the nation’s future. A captive audience of citizen-savers and investors are expected to be a compliant army of civic minded patriots herded into the role of federal bond buyers in order to save the nation for future generations of Americans. Of course we will be assisted by the FED with a rejuvenated and renamed QE3 program...designed to drive dollar devaluation and inflation.
How Will Financial Repression Work?
So how will this new and improved effort at national financial rejuvenation and restoration scheme work? A fixed percentage of all pools of capital - including savings, investments, pension and retirement funds of individuals and institutions - will be mandated to own Treasury bonds as a part of their savings and investment portfolios.
Will Financial Repression Be Voluntary?
As with all conscriptions involving a national crisis, this one will be anything but voluntary. Your personal 401k and IRA are likely to be conscripted to become part of this greater good. Bank assets, insurance company investments, university and other public institution endowments, pension funds and virtually all pools of money will be forced to join the cause of the greater good for America’s future.
How Can Financial Repression Be Avoided?
You could decide now to place some of your money in more friendly investments than US federal government bonds. Bill Gross, head of the nation’s largest bond fund, took exactly this decision a few months ago by unloading all of Pimco’s US government bonds. However, it is entirely probable that Pimco will find itself owning US Treasury paper once again.
If you decide to transfer some of your cash outside the country you should do it soon simply because ‘Capital Controls’ restricting the movement of money outside the US are likely to become increasingly problematic. Rules are already in place to restrict money laundering derived from illicit drugs or the movement of money which facilitates terrorism. Expect more restrictions under the guise of fighting drugs and terror when, in fact, it is designed to ensure there is a large and captive market for increasingly unmarketable Treasury debt.
When Will Financial Repression Begin?
When does this process get underway? As soon as possible, but given the inclination of politicians to present purely positive pictures prior to elections, one could reasonably conclude that it will not be implemented, or talked about publicly, until after the November 2012 election. Political leadership on this issue will remain invisible until electoral risk subsides or until there is absolutely no alternative to a rapidly burgeoning debt crisis.
What Will Cause Financial Repression to Commence?
Financial Repression will be imposed upon us when normal market demand for the massively growing quantities of US Treasury debt dries up. China, the biggest foreign customer for US government bonds, is developing a bad case of cold feet when it considers US Treasury bond ‘investments’. Instead they are mopping up the world’s natural resources from their pot of surplus dollars derived from burgeoning manufactured exports. The Japanese now need to cash in their Treasury debt to pay for tsunami damage, essentially dropping them to bit player status in the bond market. The Saudis and other mid-east oil Sheikdoms need their US petrodollars to buy protection and to insulate themselves from the unsettling consequences of the ‘Arab Spring.’
Why Financial Repression is Coming – to YOU
If foreign buyers with the deepest pockets are deserting the regular Treasury auction of bonds, notes and bills, who is available to pick up the slack? The existing official debt is $14.3 Trillion and the current year fiscal deficit is projected to add another $1.7 Trillion. Since much of the ‘old’ debt continues to mature, it too must find new purchasers.
These troubling realities leave US domestic buyers to do the heavy lifting of buying US government debt. Who might these US domestic buyers be? Think FED and its $100 Billion of magical digital dollars per month, or $600 Billion in total, over the past six months under the guise of Quantitative Easing, commonly known as QE2. While difficult to confirm, it would appear that the FED has bought approximately 70 percent of the debt during this period. What about the period immediately ahead now that the FED says it will stop the QE2 program?
Why Financial Repression is Unavoidable
US sovereign debt is VERY serious. It currently stands at $14 Trillion - the allowable ceiling. Moreover, the federal government is presently running an annual deficit of $1.7 Trillion with deficits of similar dimensions projected into future years. As such, Congress is now playing political games for voter consumption which will lead inevitably to raising this debt head room by a further $2 Trillion, thereby allowing current politicians to get re-elected in November 2012. Given the fact that 42 cents of every dollar spent by the federal government is borrowed money, not tax dollars, the debt ceiling is going to have to be lifted, year after year, by Billions of additional dollars.
That is not the worst of it, however. Projected future deficits are even more overwhelming in that promises to citizens for Social Security, Medicare, Medicaid and other obligations for other services are mind numbing in scale. The worst part is that these promises are dramatically underfunded. Depending on whose numbers are used, what assumptions are made about future economic growth, inflation, rates of interest and similar considerations, unfunded future liabilities range from $60 Trillion to over $100 Trillion. Obviously, growth of the economy and massive tax increases are totally incapable of meeting the debt challenge.
What Can We Expect to Unfold in Years to Come?
Citizen taxpayers and benefit recipients should expect more and higher deficits forcing an ever growing mountain of debt. Current fifty year low interest rates are guaranteed to rise which will make servicing the humongous debt an insurmountable challenge. So what is going to happen?
The U.S. could declare “Banana Republic” style insolvency and embark upon debt restructuring, but that would be the ‘easy’ route out of the debt morass. The US is the world’s largest economy, the only remaining super power and owns the world’s reserve currency. Alpha nations like the US don’t declare the public sector equivalent of a private bankruptcy.
Instead, the US and other first world economies that are reaching similar zombie debt status, will adopt brutally tough austerity measures starting with painful reductions in social security and health care benefits. Tax increases should be expected too, as well as ever more digital dollar printing.
The end result of Financial Repression will be rampant price inflation and permanently lower living standards. Get ready to be conscripted into a citizen army assembled for the greater cause of saving the nation from being swamped by a tsunami of debt.
A Financial Crisis in 2012 Is Inevitable! Here’s Why
2012 is shaping up to be the blockbuster main event of the ongoing financial crisis. Massive amounts of new debt, vast quantities of additional digital dollars and the spark of higher interest rates will set off version 2.0 of the credit-driven financial implosion. Why Was Financial Crisis 1.0 Only a First World Crisis?
The original 1.0 version had its origins in the collapse of the US subprime mortgage derivative deck of cards in 2007 before morphing into a broad-based financial crisis in the fall of 2008. It gradually spread to most other first-world advanced economies, but did not wreck havoc on emerging markets and second and third world nations. Most such economies were insulated from the folly of first-world finance - credit, borrowing, overwhelming debt and onerous interest payments – simply because they did not qualify for the intoxicating elixir of credit.
Can the US Government Prevent Another Financial Crisis?
A plethora of fact and opinion has been offered to explain what went wrong - Wall Street greed, crony capitalism, deficient and inadequately administered regulations, a credit and debt engorged consumer-driven economy, imprudent lending standards, negative real interest rates and nonexistent savings. Invariably, all reasons rest on the overwhelming availability and excessive abundance of cheap and easy credit and cash. The meagre measures that have been designed and implemented since the onset of the Great Recession to mitigate financial risk, such as the Dodd Frank Financial Reform legislation, have merely institutionalized the shortcomings of the regulatory framework. Moreover, the ‘too big to fail’ private financial institutions which qualify for unlimited taxpayer bailouts are even fewer and larger today. Indeed, the supposed solutions to the problem exemplify what the problem really is – government! Deficits are exploding rapidly leading inexorably to massive debt at all levels of government from federal, to state and into local governments. US sovereign/federal debt is now over $14 Trillion and is expanding in the current fiscal year at over $1.65 Trillion – over three times greater than just three years ago. Currently 37 percent of all federal spending comes from borrowing, which means much more debt...and a veritable fairyland of more magic money created by the FED to service the ballooning beast. To this cauldron of crud one must add all the unfunded and underfunded obligations of the social safety net represented by Social Security, Medicare and Medicaid, all conveniently excluded from the federal government’s annual operating budget. Depending on what assumptions are made for such factors as future inflation, eligibility criteria, program utilization and related issues, further unfunded liabilities of between $60 Trillion and $110 Trillion must be added to the US federal government’s debt tab. State and local governments contribute a further $3.87 Trillion in unfunded liabilities attributable to their employee pensions and health insurance benefits. Recent state and municipal employee demonstrations militating for retention of the unsustainable status quo have profiled what clearly are bloated pension and health benefits. Respected economists Carmen Reinhart and Kenneth Rogoff, in their recent book entitled “This Time is Different” outlined how a debt to GDP ratio of 90 percent is a nation’s tipping point. Their conclusions are based on an analysis several hundred years of economic history. The USA, United Kingdom, Japan and others are lined up to join Greece, Ireland, Portugal among others staring at the looming financial abyss. Fundamentals are therefore in place for another financial collapse. This time governments will join private financial institutions heading toward the financial debt wall. Government won’t be able to perform its previous role of bailing out ailing financial giants since government itself is now in need of rescuing. Indeed, the most challenging questions today are how and who will bail out our failing governments? European nations in the EU and those who share the Euro currency can’t help since many of them occupy an equally perilous perch on the financial precipice. It seems all advanced nations not supported by a strong natural resources sector (Canada, Australia) or high productivity manufacturing (Germany) are facing financial catastrophe. What Will Trigger Financial Crisis 2.0? Rising interest rates are all that is necessary to trigger the round two collapse of the ongoing financial crisis. It doesn’t take Mensa level intelligence to notice that current interest rates are lower than they have been since the early 1950’s. Real interest rates are also perilously close to being negative, if not already. With rapidly growing price inflation, interest rates will be forced northward. Until this year foreign purchasers have been the largest buyers of US Treasury debt, with China and Japan in the lead. Japan now has other priorities following its recent highly destructive tsunami. China has already substantially reduced its purchases citing lack of confidence in the declining value of the United States dollar. They have also found that spending their inventory of surplus US dollars by ensuring future supplies of minerals and energy to be much more beneficial to the Chinese economy. Moreover, bond purchasers find sixty year low interest rates on US Treasury bonds, less than the rate of inflation, a very risky and unattractive investment. In the absence of enough foreign or private sector purchasers, the US central bank, the Federal Reserve Board, has been ‘monetizing’ federal government debt through its purchases of Treasury bonds. The process dubbed Quantitative Easing, by which the FED creates money out of thin air, allows the FED to become the purchaser of last resort of government debt. At the present rate it is expected that the FED will purchase a full 50 percent of all new and maturing Treasury bonds in the current fiscal year. This is necessary simply because there are not enough foreign or domestic, private sector or government buyers to be found at current rates of interest and levels of risk. The most telling and perhaps scary portent occurred recently when PIMCO, the largest private bond fund, sold its entire US Treasury bond holdings, thereby demonstrating its concern about federal government debt. Reasons cited for the sale by PIMCO head Bill Gross are risks associated with near negative interest rates and the declining value of the US dollar stemming from excessive money creation. Knowing that institutional money managers representing pension funds and insurance company investment pools frequently follow industry leaders, we can confidently predict that many more Billions and Trillions of Treasury bonds will soon be dumped into the sickly bond market. When this process plays out, FED money creation and debt monetization will go into overdrive, since price inflation will take off as the dollar devalues. Why America’s Political Process Virtually Guarantees Financial Crisis 2.0? How can we be so certain that another and more serious financial crisis is on the horizon? Salient factors include:the magnitude and momentum of expanding government deficits, debt and unfunded liabilities,the monetization of Treasury debt by the Federal Reserve Board using manufactured money acquired through the somewhat mystical process labelled ‘Quantitative Easing’, the strong prospect of higher interest rates necessitated by an inflating and devaluing currency followed inevitably by increasing price inflation. The political process virtually guarantees that no tough, but essential, measures of consequence will be undertaken by political decision makers to stabilize the financial system. Witness the recent embarrassing public tussle between the two parties in Congress over a mere $33 Billion of pocket change in budget reductions when the total shortfall is $1.65 Trillion. To suggest that strong leadership at this time of looming financial crisis is needed is to state the obvious. However, politicians are like most other people in that they are ambitious careerists who worked hard to secure the jobs they so treasure. Ditto for government bureaucrats who want to preserve their careers and the associated benefits, including the cushiness of defined benefit and inflation protected pensions as well as gilded health insurance. Preservation of the status quo is understandably their top priority. Voters expect their elected representatives to be active and to ‘do something’ when a crisis strikes them between their eyes. However, there is absolutely no incentive to scan the horizon and to implement tough measures designed to head off a mounting crisis. Politicians of across the partisan spectrum and range of ideologies have learned, indeed they have thoroughly inculcated, the reality that the voting public does not want to hear about emerging or imminent problems. They want reassurance, not anxiety, but when a crisis blindsides them, they want immediate action from their government. Until the crisis arrives, politicians who assume leadership roles as educators and disseminators of serious policy options are frequently branded as bad news bears and messengers of mayhem for calling for belt tightening and sacrifice. Instead, voters reflexively point to government waste and to the ‘rich people’ for austerity and additional revenue. Politicians of vision are invariably chastised by losing their jobs at the next election. Candidates who ignore the storm clouds and who promise good times ahead are most frequently rewarded with the endorsement of a vote. Political will wilts in this kind of hostile electoral environment. Is it any wonder the voting public hears what it wants and gets what it deserves? Presidential election years are traditionally awash with positive investment environments. Politicians in power know that the public can be bribed with their own money...actually borrowed money. Voters enjoy their apparent prosperity and the general feeling of financial wellbeing. Incumbent Presidents, legislators all, do well in such circumstances. We will see this scenario play out again in 2012...but only if the persons in power can engineer it yet again. But can they? Will record low interest rates continue? Will the large institutional Treasury bond purchasers such as pension funds and insurance companies follow PIMCO’S Bill Gross out of the Treasuries market? Will the dollar plummet with the excess of FED money printing? Will emerging price inflation in food and energy make for a grouchy voter? Can the government keep the lid on or will the financial pressure cooker explode? Conclusion: 2012 Will Be the Year of the Perfect Financial Storm... Buying time by creating ever more magic money, which inevitably results in price inflation, overheated stock and commodities markets and which devalues the currency - will work until it doesn’t. This analyst sees the perfect storm of converging criteria almost perfectly timed and aligned with the 2012 election cycle. When the moment arrives, the financial earthquake will rapidly demolish the existing highly precarious financial system. Government will stand by helpless, unable to shield itself, much less its vulnerable citizens or private financial institutions from the tsunami of debt and currency destruction. If starting tomorrow morning our politicians were to act like adults, willing to lead in a pragmatic and focused fashion, free from the concerns of partisan advantage, rancour and rigid ideology, financial collapse could be delayed...perhaps avoided. Unfortunately the challenge seems insurmountable and the political will too feeble. Get ready for Financial Crisis 2.0 in 2012 – It’s inevitable!
The original 1.0 version had its origins in the collapse of the US subprime mortgage derivative deck of cards in 2007 before morphing into a broad-based financial crisis in the fall of 2008. It gradually spread to most other first-world advanced economies, but did not wreck havoc on emerging markets and second and third world nations. Most such economies were insulated from the folly of first-world finance - credit, borrowing, overwhelming debt and onerous interest payments – simply because they did not qualify for the intoxicating elixir of credit.
Can the US Government Prevent Another Financial Crisis?
A plethora of fact and opinion has been offered to explain what went wrong - Wall Street greed, crony capitalism, deficient and inadequately administered regulations, a credit and debt engorged consumer-driven economy, imprudent lending standards, negative real interest rates and nonexistent savings. Invariably, all reasons rest on the overwhelming availability and excessive abundance of cheap and easy credit and cash. The meagre measures that have been designed and implemented since the onset of the Great Recession to mitigate financial risk, such as the Dodd Frank Financial Reform legislation, have merely institutionalized the shortcomings of the regulatory framework. Moreover, the ‘too big to fail’ private financial institutions which qualify for unlimited taxpayer bailouts are even fewer and larger today. Indeed, the supposed solutions to the problem exemplify what the problem really is – government! Deficits are exploding rapidly leading inexorably to massive debt at all levels of government from federal, to state and into local governments. US sovereign/federal debt is now over $14 Trillion and is expanding in the current fiscal year at over $1.65 Trillion – over three times greater than just three years ago. Currently 37 percent of all federal spending comes from borrowing, which means much more debt...and a veritable fairyland of more magic money created by the FED to service the ballooning beast. To this cauldron of crud one must add all the unfunded and underfunded obligations of the social safety net represented by Social Security, Medicare and Medicaid, all conveniently excluded from the federal government’s annual operating budget. Depending on what assumptions are made for such factors as future inflation, eligibility criteria, program utilization and related issues, further unfunded liabilities of between $60 Trillion and $110 Trillion must be added to the US federal government’s debt tab. State and local governments contribute a further $3.87 Trillion in unfunded liabilities attributable to their employee pensions and health insurance benefits. Recent state and municipal employee demonstrations militating for retention of the unsustainable status quo have profiled what clearly are bloated pension and health benefits. Respected economists Carmen Reinhart and Kenneth Rogoff, in their recent book entitled “This Time is Different” outlined how a debt to GDP ratio of 90 percent is a nation’s tipping point. Their conclusions are based on an analysis several hundred years of economic history. The USA, United Kingdom, Japan and others are lined up to join Greece, Ireland, Portugal among others staring at the looming financial abyss. Fundamentals are therefore in place for another financial collapse. This time governments will join private financial institutions heading toward the financial debt wall. Government won’t be able to perform its previous role of bailing out ailing financial giants since government itself is now in need of rescuing. Indeed, the most challenging questions today are how and who will bail out our failing governments? European nations in the EU and those who share the Euro currency can’t help since many of them occupy an equally perilous perch on the financial precipice. It seems all advanced nations not supported by a strong natural resources sector (Canada, Australia) or high productivity manufacturing (Germany) are facing financial catastrophe. What Will Trigger Financial Crisis 2.0? Rising interest rates are all that is necessary to trigger the round two collapse of the ongoing financial crisis. It doesn’t take Mensa level intelligence to notice that current interest rates are lower than they have been since the early 1950’s. Real interest rates are also perilously close to being negative, if not already. With rapidly growing price inflation, interest rates will be forced northward. Until this year foreign purchasers have been the largest buyers of US Treasury debt, with China and Japan in the lead. Japan now has other priorities following its recent highly destructive tsunami. China has already substantially reduced its purchases citing lack of confidence in the declining value of the United States dollar. They have also found that spending their inventory of surplus US dollars by ensuring future supplies of minerals and energy to be much more beneficial to the Chinese economy. Moreover, bond purchasers find sixty year low interest rates on US Treasury bonds, less than the rate of inflation, a very risky and unattractive investment. In the absence of enough foreign or private sector purchasers, the US central bank, the Federal Reserve Board, has been ‘monetizing’ federal government debt through its purchases of Treasury bonds. The process dubbed Quantitative Easing, by which the FED creates money out of thin air, allows the FED to become the purchaser of last resort of government debt. At the present rate it is expected that the FED will purchase a full 50 percent of all new and maturing Treasury bonds in the current fiscal year. This is necessary simply because there are not enough foreign or domestic, private sector or government buyers to be found at current rates of interest and levels of risk. The most telling and perhaps scary portent occurred recently when PIMCO, the largest private bond fund, sold its entire US Treasury bond holdings, thereby demonstrating its concern about federal government debt. Reasons cited for the sale by PIMCO head Bill Gross are risks associated with near negative interest rates and the declining value of the US dollar stemming from excessive money creation. Knowing that institutional money managers representing pension funds and insurance company investment pools frequently follow industry leaders, we can confidently predict that many more Billions and Trillions of Treasury bonds will soon be dumped into the sickly bond market. When this process plays out, FED money creation and debt monetization will go into overdrive, since price inflation will take off as the dollar devalues. Why America’s Political Process Virtually Guarantees Financial Crisis 2.0? How can we be so certain that another and more serious financial crisis is on the horizon? Salient factors include:the magnitude and momentum of expanding government deficits, debt and unfunded liabilities,the monetization of Treasury debt by the Federal Reserve Board using manufactured money acquired through the somewhat mystical process labelled ‘Quantitative Easing’, the strong prospect of higher interest rates necessitated by an inflating and devaluing currency followed inevitably by increasing price inflation. The political process virtually guarantees that no tough, but essential, measures of consequence will be undertaken by political decision makers to stabilize the financial system. Witness the recent embarrassing public tussle between the two parties in Congress over a mere $33 Billion of pocket change in budget reductions when the total shortfall is $1.65 Trillion. To suggest that strong leadership at this time of looming financial crisis is needed is to state the obvious. However, politicians are like most other people in that they are ambitious careerists who worked hard to secure the jobs they so treasure. Ditto for government bureaucrats who want to preserve their careers and the associated benefits, including the cushiness of defined benefit and inflation protected pensions as well as gilded health insurance. Preservation of the status quo is understandably their top priority. Voters expect their elected representatives to be active and to ‘do something’ when a crisis strikes them between their eyes. However, there is absolutely no incentive to scan the horizon and to implement tough measures designed to head off a mounting crisis. Politicians of across the partisan spectrum and range of ideologies have learned, indeed they have thoroughly inculcated, the reality that the voting public does not want to hear about emerging or imminent problems. They want reassurance, not anxiety, but when a crisis blindsides them, they want immediate action from their government. Until the crisis arrives, politicians who assume leadership roles as educators and disseminators of serious policy options are frequently branded as bad news bears and messengers of mayhem for calling for belt tightening and sacrifice. Instead, voters reflexively point to government waste and to the ‘rich people’ for austerity and additional revenue. Politicians of vision are invariably chastised by losing their jobs at the next election. Candidates who ignore the storm clouds and who promise good times ahead are most frequently rewarded with the endorsement of a vote. Political will wilts in this kind of hostile electoral environment. Is it any wonder the voting public hears what it wants and gets what it deserves? Presidential election years are traditionally awash with positive investment environments. Politicians in power know that the public can be bribed with their own money...actually borrowed money. Voters enjoy their apparent prosperity and the general feeling of financial wellbeing. Incumbent Presidents, legislators all, do well in such circumstances. We will see this scenario play out again in 2012...but only if the persons in power can engineer it yet again. But can they? Will record low interest rates continue? Will the large institutional Treasury bond purchasers such as pension funds and insurance companies follow PIMCO’S Bill Gross out of the Treasuries market? Will the dollar plummet with the excess of FED money printing? Will emerging price inflation in food and energy make for a grouchy voter? Can the government keep the lid on or will the financial pressure cooker explode? Conclusion: 2012 Will Be the Year of the Perfect Financial Storm... Buying time by creating ever more magic money, which inevitably results in price inflation, overheated stock and commodities markets and which devalues the currency - will work until it doesn’t. This analyst sees the perfect storm of converging criteria almost perfectly timed and aligned with the 2012 election cycle. When the moment arrives, the financial earthquake will rapidly demolish the existing highly precarious financial system. Government will stand by helpless, unable to shield itself, much less its vulnerable citizens or private financial institutions from the tsunami of debt and currency destruction. If starting tomorrow morning our politicians were to act like adults, willing to lead in a pragmatic and focused fashion, free from the concerns of partisan advantage, rancour and rigid ideology, financial collapse could be delayed...perhaps avoided. Unfortunately the challenge seems insurmountable and the political will too feeble. Get ready for Financial Crisis 2.0 in 2012 – It’s inevitable!
Monday, January 2, 2012
Vampire Squid Watch: 4 Scary Economic Trends for 2012
Delmar catches a medium-sized Humboldt Squid, also known as the Red Devil or Diablo Rojo.
Photo Credit: EMMANUEL RUIZ
Having been seen to twitch – ever so slightly – in the 2011 tidal wave of global protests, the vampire squid
is stirring in its evil lair. Reports of sucking noises and new
tentacles sprouting in every direction tell us that the global financial
monster is poised to steal yet more wealth and resources from the
public in the coming year. Top economic thinkers have shared their
forecasts with AlterNet, and the focus is clear: 2012 will be a year of
continued – and escalating – predation by financiers. Their influence
over political, financial, and economic activity is likely to grow –
along with potential for harm.
1. Back-door Bailout of the Eurozone
Would
you like more of your hard-earned money to flow to fatcats? Wish
granted! Attorney Walker Todd, who spent two decades in the legal
departments of the Federal Reserve Banks of New York and Cleveland,
names the back-door bailout of the eurozone banking system by our very
own Federal Reserve as the top economic story of the upcoming year – or,
at least one of the most outrageous. In a nutshell, the Fed is helping
European banks by opening up the short-term ‘emergency’ lending
pipeline, which means that U.S. taxpayers are indirectly bailing out
private European capitalists. This is being done through a bit of
financial hocus pocus called “swaps” – essentially the trading of
dollars for euros. Such a maneuver allows the Fed to prop up European
banks while claiming that it is not 'technically' directly lending. In
other words, swaps are an attempt to hide the truth from the public.
As Gerald O’Driscoll put it in the Wall Street Journal:
“This Byzantine financial arrangement could hardly be better designed
to confuse observers, and it has largely succeeded on this side of the
Atlantic, where press coverage has been light.” O'Driscoll observes that
the Fed has no authority to bail out European banks and warns of what
economists call “moral hazard” – the nasty habit of banks to engage in
even riskier behavior when they get bailed out.
Why
is this happening? Well, because the squid is strangling morality,
democracy, and the rule of law. We pay, they play. “This is an attempt
by our own governing elites to maintain a false vision of how the world
works, or how ‘we’ think it should work,” Todd told AlterNet. “This
comes at the expense of many people who never will go to Europe, who
know no European bankers, and who have no European bank accounts.”
You
may not know a European banker, but you can be sure that one is just
now raising a glass of bubbly in your honor. After all, you paid for it.
2. Record-breaking Political Finance
What does corporate dough buy? Newspapers and elections and presidents, oh my!
Thomas
Ferguson of the University of Massachusetts, Boston and the Institute
for New Economic Thinking suggested that next year’s very biggest
stories could well be about corporate money influencing politics. He
told AlterNet he saw a real possibility that a serious third party
candidate for president might emerge; if one does, it will be bankrolled
from the right while promoted in public as representing the political
“center.” And it will also be designed to give corporate America many of
the policies it has long sought, such a trimming Social Security and
eviscerating the social safety net. "People are going to be astonished
at how lethal the combination of secret money and corporate mass media
will be to the public’s interest," said Ferguson.
Ferguson
was confident that the 2012 elections would break all records for
political finance, but he did add a sobering qualification. He thought
there was an outside chance that the world economic slowdown would
provoke really serious unrest in China or Europe on a scale that would
put American developments in the shade.
3. Executive Pay Explosion
Since
the Great Recession of 2008-2009, the prime beneficiaries of the
sluggish recovery have been…you guessed it!....top corporate executives.
And it looks like the good times will keep rolling – for them. William
Lazonick, professor of economics at the University of Massachusetts,
Lowell, predicts an escalation of the harmful practice of corporate
stock buybacks, which produces the explosion in executive pay.
As
Lazonick explained to AlterNet, corporate honchos have enjoyed a
windfall as they have cashed in their stock options in a generally
rising stock market. This kind of thing does absolutely zilch for the
economy. But here’s what it does do: spending on buybacks makes
executives rich and results in manipulative boosts to stock prices in
the short-term at the cost of investments in innovation and job
creation. “Look for buybacks to continue to increase in 2012, perhaps
surpassing the record $600 billion done by S&P 500 companies in
2007,” predicted Lazonick.
What
to do? Maybe it’s time for Congress to confront the reality of that
predatory monster, the financialized business corporation. Lazonick
suggests that a ban on buybacks (which is already in the purview of the
Securities Exchange Act) would be a good start. Unfortunately this idea
is at odds with prediction #2.
4. Pathological Corporate Leadership
Jamie
Dimon never seems to seize an opportunity to keep his mouth shut. JP
Morgan's CEO, who happens to be the highest-paid chief executive officer
among the six biggest U.S. banks, has consequently regaled us with his
worldview, in which bank regulations are “anti-American”
and ordinary folks have no right to be mad at rich people. He has
become the poster-boy for Wall Street greed and has earned the especial ire of the Occupy movement, which recently marched to his digs on Park Avenue to offer to help him pack his bags and go wreak havoc somewhere else. In his universe,
defrauding investors, spreading lies to manipulate markets, and
foreclosing on military families are all part of a good day’s work.
Dimon
is a particularly nasty customer, but he is part of a new breed of
sociopathic financiers. And his kind of distorted ‘vision’ has harmed
the country’s prospects and created a gap in America between the richest and the poorest that puts us in close range of Rwanda and Serbia.
When
those at the top of the corporate pyramid are this tone-deaf and
lacking in any sense of public responsibility, we are in treacherous
waters.
“The biggest danger to
America is that the people in the financial sector and corporate
leadership convey no awareness of what is needed to create a coherent
and prosperous society,” economist Rob Johnson, head of the Institute
for New Economic Thinking, told AlterNet. “Leadership is not simply
about how much money one makes.”
Many
dollars. Very little sense. Ultimately, hoarding everything at the top
is not sustainable, and bankers like Dimon will end up destroying the
very society that makes their enormous wealth possible. If we let them.
Sunday, January 1, 2012
Save the Darfur Coalition
When
Save Darfur and the Genocide Intervention Network merged to form United
to End Genocide, we created the nation's largest activist organization
dedicated to ending violence in Darfur and all of Sudan, and boldly
expanded our mission to protect innocent civilians anywhere they are
threatened by potential genocide or mass atrocities. I hope you will click here to make a special year-end gift — which will be DOUBLED today thanks to the generosity of friends and donors.
Thank you, Tom Andrews President, United to End Genocide |
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Dear Mig,
We're so close. Last week, a generous group of friends offered to match all donations, up to $165,000, made through December 31. We are very close to meeting our goal — but our deadline is rapidly approaching and we still need your help. Please make your year-end gift today and help us meet our matching gift challenge. Your support this year has been so crucial as we've put forth a bold new mission to stand up and protect people around the world who are enduring systematic violence. From the bombing of villages in South Kordofan to the slaughter of peaceful protesters in Syria, we will not rest until those responsible for these crimes are brought to justice. Your tax-deductible donation today will go twice as far in helping us carry this important work into the new year. In 2012, we will push our agenda even further — with our eyes firmly on Sudan, Syria, Burma, and any other conflict area where innocent people are living under the threat of genocide and other crimes against humanity. Creating change on this scale is no small task — and your support is truly invaluable. Thank you for your ongoing commitment — please click here to have your donation doubled before the December 31 deadline. Sincerely,  Tom Andrews President United to End Genocide
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