This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….
Some thoughts on China…
Marc Faber – If the Chinese were to develop a taste for coffee, to the extent that, on average, every adult were to drink one cup of coffee per day, China would consume the entire world’s coffee crop….
The Chinese government has announced that it has plans to build cities at a rate that will house a population the size of Australia’s every year for the next 15 years…. Hmm, doesn’t that have some implications for ongoing demand for raw materials?
Last year, for the first time ever, Chinese bought more vehicles than Americans… More generally, last year the developing world bought more vehicles than the developed world… Doesn’t that imply a continuing increased thirst for oil?? Perhaps also, it’s part of the reason that, in an economic environment of the greatest downturn (in the Western world at least) since the 1930s, the oil price is once again approaching $80 per barrel… See also the article on peak oil below.
Chinese citizens, in total, now own more cellphones than US citizens…
James Dines – Rare earths are obscure elements that just happen to be essential materials for modern technology. Large scale modern windmills, for example, require considerable amounts. China controls over 96% of the world’s production of rare earths… Oh dear, Mr Obama – don’t you think that instead of waging expensive foreign wars and killing over 2 million Afghans since the war began, it might be better to spend the dollars you don’t have but insist on spending anyway on securing supplies of these essential materials? Oh, I forgot, I suppose you do have the option at any time of declaring war on China…
Last but not least, Chinese citizens are being encouraged by their government to buy gold and silver. And, of course, if you are a Chinese citizen, Government “encouragement” has to be taken seriously…
Here are our subjects this week.
· Government debt, private sector non-lending – from “The Automatic Earth” blog
· Defaults, by Marc Faber
· Peak Oil reaches mainstream media
· America—A Country of Serfs Ruled By Oligarchs
Government debt, private sector non-lending – from “The Automatic Earth” blog
February 19 2010: A thousand miles behind
Ilargi: When on any given morning you see consecutive headlines that read
- “US bank lending falls at the fastest rate in history”,
- “Lending to British businesses falls at record pace”,
- “UK mortgage lending falls to 10-year low “,
- ”Shock as British deficit equals that of Greece” and
- “Britain posts first deficit for January since records began”
is your first thought that the economic recovery is nicely on pace? If so, perhaps a Tiger Woods press-op is more your thing.
How about we add this one:
“Fed raises interest rate on emergency loans to banks”
Think perhaps that would switch on the light?
See, what those headlines tell us is that the spigots on the private sector are not just closed, they’re still tightening ever more. While at the same time, government debt keeps rising. There can be only one conclusion. The only thing that lets our economies continue to exude a semblance of normality is the dwindling rests of our own remaining wealth, and we are not only not adding any, we are spending what is left, and fast. Our governments, eager to stay in power and remain wealthy, keep us thinking we’re doing just fine, borrow enormous amounts of money in world markets that is not used for any sort of recovery, but instead to pay for the debts of a small group of people who gained access to our full faith and credit by buying the representatives we elect. And once the Federal Reserve starts raising interest rates, while simultaneously drawing down its purchases of Treasuries and mortgage-backed securities, we will come to understand that we have been living in a soapbubble of our own making, built at the expense of many trillions of dollars and that this bubble is about to pop. That is true in the US as it is in the UK, and all the attention presently squandered on Greece and Ireland is but a trick to make us look the other way for a little bit longer, until everything of value has been stripped from around us and we can wake up one day to find all support and stimulus measures vanished into thin air, a bad moon rising, and a cold wind blowing through the cracks of our unheated MacMansions, with no gas stations able to supply us with the fuel to get out and get away. That’s what these headlines say. With all the money thrown at the issues, everything keeps reaching record lows. And all our governments can think of is to spend more. Until they don’t. One year ago, stock markets had almost reached their then low. The amount of public funds spend since to lift those markets are truly mind-boggling, and their effect now, predictably, turns out to be short-lived. The rich have gotten richer, and the poor have gotten an awful lot poorer in that year. They just don’t know it yet, or at least not the full and true extent, but once the numbers are crunched on government and central bank purchases of lenders’ defunct mortgage loans and their own sovereign debt (how’s that for a Ponzi scheme?), you will know just how destitute you’ve become. And it’ll be too late to do anything about it. You’ll have let yourself be fooled for too long. And, to use an ancient metaphor, find yourself one too many mornings and a thousand miles behind. Or is that a thousand debt payments?
Defaults, by Marc Faber
I Think In The Next 10 Years, We Will Have A Lot Of Defaults
What you find in the world is an unusual situation. International reserves have grown from 1 trillion dollars in 1996 to over 8 trillion dollars at the present time. Most of these reserves are held by emerging economies like China, India, Russia, Brazil and so forth. Over 70% of international reserves are in Asia including Japan.
So, what you have is basically in emerging economies, they have relatively low debt to GDP ratios and in most emerging economies their mortgage market has hardly developed. People buy homes for cash. There is no mortgage market. Whereas in the developed world, what we have is an overleveraged consumer and governments that have liabilities that they cannot meet in the long run. So something will break. And I think in the next 10 years, we will have a lot of defaults. Now before the United States, the UK or Eurozone members default on their debt obligations, they will print money. And then we will get very high inflation rates. Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world. Dr. Doom also trades currencies and commodity futures like Gold and Oil.
Peak Oil reaches mainstream media
On our site, we have references to the coming commodity crunch, in particular, we look at the work of Chris Martenson. To find out in depth about the peak oil crisis, we highly recommend the web site www.theoildrum.com What is interesting at the present time is that this idea, which has been almost entirely pooh-poohed by the mainstream media, is gradually gaining traction in that same forum. For example, from Ambrose Evans-Pritchard, of the Telegraph, comes this piece.
Barclays and Bank of America see looming oil crunch
For oil markets, it as if the Great Recession never happened. Surging demand in China, India and the Middle East is making up for decline in the debt-crippled West, ensuring another global crunch within three or four years.
By Ambrose Evans-Pritchard, International Business Editor Bank of America and Barclays Capital, two leading oil traders, have told clients to brace for crude above $100 (£64) a barrel by next year, before it pushes relentlessly higher over the decade. This is a stark contrast from recessions in the 1980s and 1990s, when it took years to work off excess drilling capacity built in the boom.
“Oil has the potential to flirt with $100 this year. We forecast an average price of $137 by 2015,” said Amrita Sen, an oil expert at BarCap. The price has doubled to $78 in the last year.
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“The groundwork for the next sustained step up in oil prices is now almost complete. Global spare capacity is likely to be reduced to low levels within a relatively short time. The global economic crisis has postponed, but not cancelled, a crunch which would otherwise be starting to bite now,” said Barclays.
Francisco Blanch, from Bank of America Merrill Lynch, said crude may touch $105 next year, with $150 in sight by 2014. “Approximately 1.7bn consumers in emerging markets with a per capita income of $5,000 to $20,000 are eagerly waiting to buy cars, air-conditioning units, or white goods,” he said.
China has overtaken the US as the world’s top car market. Mr Blanch expects oil demand to rise by a further 2.8m barrels per day (bpd) in China and 2.5m bpd in India by 2015, when two giants will be absorbing the lion’s share of Gulf output. Consumption in the West has already peaked and will fall each year as populations shrink and we waste less, but the West no longer sets the price. Global use will increase by 8.8m bpd to 95m bpd.
Supply is scarce. Sir Richard Branson warned this month that the world faces ‘peak oil’ within five years. “Don’t let the oil crunch catch us out in the way that the credit crunch did,” he said.
Mr Blanch said output from non-OPEC states is falling by 4.9pc each year, despite Russia’s reserves. Saudi Arabia and the Emirates can plug a quarter of the gap, but global spare capacity must soon drop to wafer-thin levels – leaving us vulnerable to the sort of “super-spike” seen in 2008. The wildcard is whether Iraq can quadruple output to Saudi levels this decade, a target dismissed by most analysts as pie-in-the-sky.
Painfully high prices are needed to unlock fresh supplies as reserves are depleted in the North Sea and the Gulf of Mexico. Deep-water rigs off Brazil are costly and require drilling far below the seabed. Canadian oil sands and US biofuels have break-even costs near $70. While the US, UK, and the Far East are turning to nuclear power, it takes a decade to build reactors. “peak uranium” lurks in any case.
The oil spike brought the global economy to a shuddering halt in 2008. This time the crunch may hit before the West has fully recovered. Whatever happens, the US, Europe and Japan will soon transfer a chunk of their wealth to the petro-powers. It is a new world order.
America—A Country of Serfs Ruled By Oligarchs
By Dr Paul Craig Roberts – bio at end.
(We have featured articles by Dr Roberts in these pages before – Ed.)
The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent (“the recession is over”), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean?
The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.
More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest.
Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains cannot drive the consumer economy.
Housing is still under pressure, and commercial real estate is about to become a big problem.
The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.
The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.
Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes.
Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.
As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one recently arrived:
“Thank you for your continued truthful commentary on the ‘New Economy.‘ My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband’s job stagnated. After several years of no pay raises, he finally lost his job a year and a half ago. But he didn’t just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted. We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can’t find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn’t have made it. So, I could tell you just how that ‘New Economy’ has worked for us, but I’d really rather not use that kind of language.”
Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers.
Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.
It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.
To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden.
Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.
Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit.
The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.
If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit.
America is on its way to becoming a country of serfs ruled by oligarchs.
Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider’s Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton ofThe Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. His latest book, How The Economy Was Lost, has just been published by CounterPunch/AK Press.