Topic: The Global Economy

[Nemo888]

Gold may already be in bubble territory IMO. Even the prices on gold mining and production companies have already spiked. Though you could easily see 2000$ an ounce if things crashed I don't think it is the best thing to invest in right now. If that reaches 3000$/oz I have another back up plan. My dad still has a claim on some gold producing land in BC. But with only about 2 grams of flake for a days work it's not worth working. Gold only sells for 50$ a gram right now. At 100$ a gram that could be a nice semi retirement.

[Kirkhill]

On the subject of gold: My education continues.

I have come out in favour of a return to the Gold Standard.  I have changed my mind.  And not for the first time.   

Watching what is going on in Europe has been my education.

What Germany is doing to the Eurozone is effectively holding the Eurozone to a Fixed Standard of Exchange, roughly equivalent in effect to a Gold Standard.

This morning France is moaning that their economy is in better shape than the UK's and that the UK's credit rating should be cut before France's is cut.   Arguably they have a point.  (But they are wrong.....They are French.  ) 

The difference is that Britain can continue to write IOUs to the world denominated in their own tender.  In some sense each Pound Sterling could be looked at as a stock option in UK PLC.  People will continue to put their money into Pounds just so long as they believe their money is safe there.

On the other hand the Euro is a stock option issued by the Eurozone.....whoever and whatever that entity is, whatever their rules might be and if it continues.  Right now 300 years of the Bank of England looks better than 10 years of the ECB as a bet.   (And the Swiss Franc continues on unperturbed).

If Germany has its way then the Euro will become as good as  gold.  But that will only happen if Hungarians decide they are Italians, Lombards decide they are Danes and Hessians decide they are Lyonnais and accept one federal government as we do here in Canada.  (The Scots seem in danger of shooting themselves in the foot if they continue to play Silly Bugger and follow the PQ line.... but that's another story.  The Bank of England predated the Union and I have no doubt it will survive the Union).

In the absence of a European Federal Government, or in the event of a Bundesbank Federal Government, the Europeans might as well revert to the Gold Standard, or the Rimbi, or the Beloved Yankee Dollar.   They will have comparable control over their economies.

The difference, as I see it, between being on a Fiat Currency or being tied to the Gold Standard (or the Euro) is the difference between being able to write cheques and sign mortgages versus being held to Cash on the Barrelhead payments.

The Canadian Dollar may have swung from 105 Yankee Pesos to 65 and back again during my time in Canada, and some years life looked better than others, but all things considered I'd prefer to relive the last 40 years with the same decisions Canadian Governments have made (good and bad) than face the future most Europeans are looking at.

When it comes done to it - decentralization and trust win the day. 

That is true whether you are betting on your neighbour to repay the mortgage that you personally hold, whether you are looking at outfits like Walmart or Electrical Appliance manufacturers because people always need "stuff" regardless of the denomination of the currency (a 1000 dollar stove is a 100,000 penny stove and a penny used to buy you 4 farthings back when a farthing bought you 4 lbs of brown bread - ca 1256 London), or whether you are looking at investing in a country.

Canada, as a country, has good neighbours internally, has lots of stuff to sell, has an ability to convert that stuff into other stuff that sells better, has great institutions like the Government and the Bank of Canada - and still has the ability to write its own IOUs and have them accepted internationally.

Ultimately, for all those reasons, I am standing pat.

As Bruce Bairnsfather's "Old Bill" said: "If you know a better 'ole, go to it!"

I don't know a better hole right now.

 

[Kirkhill]

I'm not an economist but I'm enjoying learning how to play one just now.... 
The Daily Telegraph posted this comparison between France and the UK

Graphic Comparison   Scroll Down to 15.15


Re-Edit:  Third time's the charm.


Problem      
      
   France    UK
Income = GDP BUSD   2676   2480
Assets   7500   11485
Assets at Risk   24.3%   14.4%
Risk   1823   1654
      
Debt   2285   2083
GDP at Risk   80%   79%
      
GDP Growth   1.60%   0.90%
2011 Income   2719   2502
GDP if Default   2718   2502
Impact on GDP   67%   66%
      
Impact on Economy Roughly Equal      
      
      
      
      
Solution 1 - Sell More      
      
Exports Current   509   665
Export Growth   -0.30%   1.50%
Exports Future   507   675
      
Years of Export Income  to Offset Risk   3.6   2.5
      
UK can offset the Impact with Export Revenues in only 66% of the time (decreasing)       
France will take 50% more time than Britain (increasing)      
      
      
      
      
Solution 2 - Work Harder      
      

      
Labour   28.21   31.45
Hours per Year   8,760   8,760
Labour Hours Per Year   247,120   275,502
      
Unemployment   9.70%   8.30%
Workers   25.5   28.8
Hours per Worker   1533   1674
Hours Worked   39,051   48,278
      
Average Taxes   49.80%   33.80%
State Hours   19,447   16,318
Personal Hours   19,604   31,960
Leisure Hours   208,069   227,224
      
Controlled Work Hours   46,405   Unlimited
Opportunity Hours   7,354   227,224
      
      
The French Government already demands 689 hours of labour from every employable citizen compared to 519 demanded by the British Government (or 33% more)      
      
The French Government limits the number of hours a citizen works to 1645 per year meaning the  citizen is limited to only 956 productive hours for personal consumption   
   
Of the 956 hours of personal consumption 695 are already being worked.
      
That leaves only 261 hours per citizen of additional capacity or 7,354,000,000 Labour Hours.
      
      
By contrast the British economy has 227,224,000,000 untapped hours of labour as there is nothing to prevent every British citizen working all their leisure hours if they so choose.      
That means Britain has 31 times more untapped capacity than France.       
      
Of course France could change its laws - but the Unions won't have it.  And to be fair, you'll never get all those Brits working that hard -  But Britain has a much higher level of available capacity.

Hiring Hurdle (Min Wage)   1365   1139
Workers Hired                 100   120      
      
In addition, with the Minimum Wage provisions, France's being higher, business men in Britain can afford to engage 120 workers for every 100 workers that French business men can engage... If they can find people willing to accept the minimum wage.      
      
Summary      
      
Britain has equivalent exposure to risk but greater opportunity to sell or work its way out of the crisis.      

[Thucydides]

The UK MOD starts making plans for the Eurozone meltdown:

http://www.telegraph.co.uk/news/uknews/defence/8957513/Eurozone-crisis-poses-military-risk-warns-defence-chief-General-Sir-David-Richards.html

Eurozone crisis poses military risk, warns defence chief General Sir David Richards
Defence chiefs are drawing up plans to cope with the potential military fallout from the eurozone crisis, according to General Sir David Richards.

General Sir David Richards, the Chief of the Defence Staff
By James Kirkup, Deputy Political Editor10:37PM GMT 14 Dec 2011 711 Comments

It is understood that Armed Forces planners are looking at the possibility that a new global financial crash could undermine the defence forces of key British allies.

The head of the Armed Forces warned that economic issues pose a “strategic risk” to Britain.

Senior British commanders and officials are concerned that US plans to cut defence spending will be followed by other allies in Europe and elsewhere.
Reductions in allied military capabilities could put a greater burden on Britain’s stretched forces in Afghanistan and elsewhere, it is feared.
The military planning work has come to light after The Daily Telegraph disclosed last month that British embassies in the eurozone have been told to prepare emergency plans for the demise of the euro and the possible civil disorder that could follow.

Senior ministers are increasingly convinced that the break-up of the single currency is a real possibility. Economists suggest that the failure of the euro could cause EU economies, including Britain’s, to shrink by up to eight per cent.

Gen Richards, the Chief of the Defence Staff, said economic issues present the biggest threat to Britain and its interests in the world.
“I am clear that the single biggest strategic risk facing the UK today is economic rather than military,” he told the Royal United Services Institute

“Over time, a thriving economy must be the central ingredient in any UK Grand Strategy. This is why the eurozone crisis is of such huge importance not just to the City of London but rightly to the whole country and to military planners like me.”

The Armed Forces are facing painful cuts and the loss of tens of thousands of personnel, but Gen Richards said that such austerity was necessary.
“The country’s main effort must be the economy. No country can defend itself if bankrupt,” he said.

He used his speech to raise questions about the ability of European economies to sustain their armed forces. He asked: “What impact will fiscal restraint and slow recovery have on European defence capabilities?’’

Gen Richards also noted that America, which is facing deep defence cuts, has said it will switch the focus of its main military effort from the Atlantic to the Pacific and south-east Asia.

That means “less emphasis on Europe and her problems,” he said. Gen Richards also accepted that Britain’s defence cuts carry risks, but insisted those risks were acceptable.

“It will mean taking risk. But managing risk is ultimately what we do and none of us in the Armed Forces are discomforted by the challenge,” he said.
The Armed Forces will need to “combine realism with imagination”, he said.

[Thucydides]

Rebuild the Anglosphere? Aye!

http://blogs.telegraph.co.uk/news/danielhannan/100124393/a-generational-chance-to-recast-britains-foreign-policy/

Daniel Hannan is a writer and journalist, and has been Conservative MEP for South East England since 1999. He speaks French and Spanish and loves Europe, but believes that the European Union is making its constituent nations poorer, less democratic and less free.

A generational chance to recast Britain's foreign policy
By Daniel Hannan Politics Last updated: December 16th, 2011

The Anglosphere is a better prospect than the EU

Britain has stumbled accidentally upon an epochal opportunity. David Cameron is plainly sincere when he says he went into the Brussels summit hoping for a deal. Most British commentators (including me) were in despair over the extent to which he had watered down his demands. He wasn't asking for powers back; he wasn't asking for an exemption or protocol (as the French have on cultural issues, the Danes on second home ownership, etc). All he wanted was an assurance that the single market wouldn't be distorted in ways that were detrimental to the City of London. Far from being a concession, this would have represented a confirmation of the status quo.

Yet, unbelievably, even this tiny fig-leaf was too much for Nicolas Sarkozy and his federalist allies. Faced with a choice between propping up the euro through the EU Treaties and lashing out at London, they lashed out.

The prime minister thus finds himself, without having intended it, with a generational chance to recast our foreign policy. Philip Blond argues that Britain should become the leader of the non-euro states, and there is certainly some mileage in providing a counterweight to the FU. This was, broadly speaking, our policy during the 1960s, when we built up EFTA – which, to this day, remains immensely wealthier than the EU. (Interpolation; This isn't something I have seen before. If the EFTA is so much wealthier, then it seems a clear choice to go with the winner...)

That, though, is only the beginning. Having negotiated a looser form of association with the FU, Britain should raise its eyes to more distant horizons. Our place is not with the declining and irritable nations of the Old World, at least not entirely; we should also be exploiting our relationship with the developing markets, in particular those in the Anglosphere.

Now here's the good news. To the extent that he can pursue any kind of meaningful foreign policy within the EU, that is precisely what the PM has so far been doing. A couple of months ago, on the occasion of his address to the Canadian parliament, I noted that David Cameron's instincts on foreign policy were, in a rather undogmatic way, reassuringly conservative:

This government is perhaps the first since Anthony Eden's to take seriously our relationship with those distant lands to which we are soldered by history and habit, by sentiment and outlook, by blood and speech. David Cameron's foreign policy focus has so far been impeccable. His chief diplomatic energies have been directed at Australia, New Zealand, Canada, Pakistan and, in particular, India. In Europe, his priority has been the Nordic and Baltic states whose outlook most resembles our own; and, at the other end of the continent, Turkey. He is, in short, doing the best he can within the unhappy constraint of EU membership.

Now, in a benign and unlooked-for development, that constraint might be lifted. We might just be about to reassume the global vocation which our fathers took for granted.

[E.R. Campbell]

Rebuild the Anglosphere? Aye!

http://blogs.telegraph.co.uk/news/danielhannan/100124393/a-generational-chance-to-recast-britains-foreign-policy/

Daniel Hannan forgets, as people often do, two important Asian Anglosphere candidates: Singapore and Malaysia; the latter is a much better candidate than Pakistan, at this time anyway.

Hannan does mention the Nordic nations, as he should; Denmark, Iceland and Norway are NATO allies and non-Euro (€) countries. Ireland and Finland are both € members, now - one weak and the other economically strong; Sweden is non-€ and reasonably solid.

[Thucydides]

The Angosphere does not have to be 100% "anglo" so long as the members share most of the basic values of Classical Liberalism as invented in England back in the 1700's (Life, Liberty, free speech and association, unfettered use of property and the Rule of Law would be the biggest ones), along with a willingness to take action.

The 2004 Tsunami made me think that Japan should be one of the "honourary" members of the Anglosphere, and the Netherlands also has a claim. I agree with the Nordic states as "honouaries", and maybe the Asian Tigers (but there will be much more cultural "friction" there).

Many Commonwealth nations are really no longer proper members of the Anglosphere; having shed a lot of the cultural inheritance of the Empire/Commonwealth, so I would not go out of my way to include them.

[Kirkhill]

If Germany, France, Belgium and Luxembourg are the heirs of Charlemagne.  The Baltic States, Britain and Ireland, and all of Britain's spawn could fairly be described as the heirs of Canute...

Britain has been a Danish country since Clovis left the German Confederation and cosied up to the Romans.

[E.R. Campbell]

More on the Anglosphere in this column which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/the-anglosphere-yet-reigns-supreme/article2274566/

The anglosphere yet reigns supreme

NEIL REYNOLDS

From Monday's Globe and Mail
Published Monday, Dec. 19, 2011

If Rome could survive Caligula and Nero, says American geographer Joel Kotkin, the United States can probably survive George W. Bush and Barack Obama. Indeed, he says, the U.S. and its “anglosphere” allies – Britain, Canada, Australia and New Zealand – will continue to be the primary economic, scientific and cultural force in global commerce well into the 21st century. The economic and political crises of the moment will pass. For the English-speaking world, the best is yet to be.

Author of the 2010 best-selling The Next Hundred Million: America in 2050, Mr. Kotkin is singularly optimistic in his latest assessment of a world in which the anglosphere appears to be in truculent decline. The U.S. and Britain, after all, are experiencing serious crises of confidence. Now, in The New World Order, a study published in November by the London-based Legatum Institute, Mr. Kotkin and nine academic associates conclude that the anglosphere will remain the ascendant player on the world stage for a long time to come.

Mr. Kotkin bases his prognostication on a strategic global review that rates kinship – ethnic and cultural connections – as a better indicator than geography of long-term economic success. Thus, he defines the “sinosphere” as a tribal grouping of China, Taiwan, Hong Kong and Macau; on the other hand, he defines the “indosphere” as simply India, all its important tribal groupings self-contained.

Along with the anglosphere, Mr. Kotkin says, the sinosphere and the indosphere will emerge as the three most important spheres of influence in the 21st century. In itself, this is conventional enough – although more explicitly dismissive of continental Europe (and Russia, too) than most such forecasts. But Mr. Kotkin puts the anglosphere in a class of its own.

The anglosphere accounts for 26.1 per cent of global GDP ($19-trillion U.S.) – the same share the British Empire held at its height. The sinosphere accounts for 15.1 per cent ($11-trillion); the indosphere 5.4 per cent ($4-trillion). On a per-capita basis, the anglosphere leads by lopsided margins: the anglosphere, $45,000 per person; the sinosphere, $7,500 per person; the indosphere, $4,000 per person.

“Today, the anglosphere is predominantly a union of language, culture and shared values,” Mr. Kotkin says, with a population of 400 million. Beyond the anglosphere itself, two billion other people live in countries with a strong English-language bias: the countries of the Commonwealth, for example, and Singapore – which, its Chinese population notwithstanding, is a country where English is dominant.

“Since the Second World War, English has replaced French, Russian and German as the primary language of business and science,” Mr. Kotkin notes. English is now spoken by 40 per cent of Europeans, French by just 20 per cent.

Further, the ascendancy of English in Asia, Mr. Kotkin says, “all but cements its status as the world’s ‘world language.’ ” The number of Chinese who speak English will soon outnumber the English-speaking population of the anglosphere itself.

In cultural industries – movies, television, books, news media – the anglosphere has no real rival. It exports $20-billion in cultural goods a year; the rest of the world, $16-billion. And global demand keeps soaring. In Latin America, sales of anglosphere cultural goods increased last year by 25 per cent; in China alone, by 40 per cent.

The anglosphere has a comparable lead in science. U.S. scientists publish three times as many technical papers as Japanese scientists – who rank No. 2 in the world. (Canada rates 7th, equal to Italy.) Of the top 500 software companies in the world, 450 are based in the anglosphere.

Equally important, Mr. Kotkin says, is the unique capacity of the anglosphere to attract immigrants – and its ability to “incorporate” cultures. In the past 10 years alone, 14 million people have emigrated to the anglosphere, among them 27 per cent of the 20,000 Chinese entrepreneurs whose incomes exceed $15-million a year.

Winston Churchill was always a great champion of an English-speaking union. Indeed, he regarded it as “a common duty of English-speaking people to the human race.” This sounded for a while like a requiem for a dying empire. But Britain still stands apart from Europe, its alternative destiny, and the notion no longer seems quite so quaint. Note the U.S. decision a few weeks ago to build a forward military base in Australia. Churchill’s voice rings louder these days.

The problem for the Anglosphere, for the past generation or so, has been failing American leadership - the Anglosphere began to fall into disrepair when John F Kennedy came to power; he was very much a Europhile and, consequentially, a bit of an Anglophobe - more important he was an instinctive unilateralist, as were most of his successors, including Reagan and  Clinton. America has come far, far away from the constructive, enthusiastic internationalism of the Truman/Acheson and Eisenhower/Dulles era; given the state of the world we, the world, need more Truman/Eisenhower and less, far less, Bush/Obama/(Gingrich? Romney? Perry? Bachman?).

[Thucydides]

Given the relative size and power of the "Indiasphere", and the fact that it should actually be considered part of the Anglosphere, I think we may see real Anglospheric leadeship emerge from that part of the world.  Since India is in an "intersting" position, needing global maritime trade and being situated next door to two competing "civilizations" (the Sinosphere and the Islamic civilization), there are enough challenges to make Indian leaders look for wide ranging solutions and to link up with other maritime powers (who are mostly part of the Anglosphere) there are lots of reasons to believe they will have to rise to the challenge. They have the human resources to do so as well, India, after all, has an amazing educational system and now counts 300 milion people in the middle class; similar in number to the entire population of the United States.

[E.R. Campbell]

Going all Mackinderish, both China and India lack the great, resource and agriculture rich "heartlands," which America and Russia have and which Britain had (in the form of Australia, Canada and South Africa). China has some, limited, "heartland" and it is willing to pay Russia for all the resources East of the Yenisei River - a region China regards as Asian and therefore, 'open' for exploitation by Asians. India is less well positioned ... except that it is close to resource rich Africa, which also has considerable agricultural lands. Of course, China is already in Africa but there is always room for one more when it comes exploiting those who are unable (or unwilling) to fend for themselves.


Sir Halford Mackinder, (15 February 1861 – 6 March 1947)

[Thucydides]

I agree with some of the premise that we are into the conditions of a global restructuring, especially with the need for massive deleveraging, the migration of global manufacturing and the abolition of traditional "gatekeepers" due to the communications revolution. The length of time may not be as prolonged as projected, since one of the other ongoing revolutions is the rescaling of things away from large centralized units (be it factories or power plants) to smaller decentralized units that are far more responsive to local markets. Even education will undergo a revolution as people will be able to access lessons and knowledge directly over the internet (such as the Khan academy www.khanacademy.org/).

This still has implications for Canada, since a large portion of our economic power does derive from the large scale export of resources such as minerals, timber and agriculture; economic activities which do benefit from the economies of scale. Will we be able to restructure, or will we see fast moving "Tiger" economies overtake us? (Tiger economies may even be regional in nature, as the example of Texas demonstrates).

http://www.nationalreview.com/articles/286877/long-long-depression-matthew-lynn

The Long, Long Depression
Better days are ahead — in the 2030s.

By Matthew Lynn

The markets were on a roll. New companies were being listed every few days. Germany had a new currency, and its mighty exporters were doing business around the world. Greece had merged its currency with that of France and Italy in a bold experiment in monetary union. A massive new continental economy was flooding the world with cheap goods, disrupting old industries. And new technologies were creating global markets, where money and information zipped from bourse to bank virtually instantaneously. Until the crash came, it seemed as if everyone would keep on getting richer and richer forever.

You could be forgiven for thinking that was a description of New York in 2008. Or London in 2000. Or Shanghai right now. But actually it is Vienna in 1873.

In that year, the Austrian capital was the epicenter of one of the great bubbles of the Victorian era. Money was flooding out of the new, unified German economy, and much of it landed in the lightly regulated Vienna bourse. Over the course of three years, more than a thousand companies joined the market. Preparations for the 1873 World Exhibition in Vienna led to a massive building boom. The Austrian rail network doubled in just five years. Over six months, the Vienna market tripled in value. Then, in May 1873, it all crashed spectacularly. The market plummeted and had to be temporarily closed. The panic quickly spread to Germany, leading to what became known as the Gründerkrach, or “Founders’ Crash,” because it came so soon after the Gründerzeit, or “Founders’ Boom,” that had followed unification.

By November, it had spread to Wall Street, sparking a collapse that started when Jay Cooke & Company, a bank that had been one of the main financiers of the American Civil War and was among the most prominent finance houses on Wall Street, suspended payments on its bonds. “The brokers stood perfectly thunderstruck for a moment, and then there was a general run to notify the different houses of Wall Street of the failure,” reported the New York Times the next day. “The brokers surged out of the Exchange, stumbling pell-mell over one another in general confusion.”

The crash marked the start of what economic historians refer to as the long depression. During Edwardian times, it was actually known as the Great Depression, but rather like the Great War of 1914–18, it had to be renamed once a worse catastrophe came along. Either name would do, however; the slump was both long and great. It lasted from 1873 to 1896, and over that period output crashed, unemployment increased, prices fell, and migration soared. Most of today’s German population in the U.S. is descended from Germans who migrated here during the years after the crash, trying their luck in Cleveland and Milwaukee after they were laid off in the Ruhr.

The long depression was, for many years, of interest only to a small band of economic historians. Right now, however, it seems full of lessons for our own times. The parallels are almost spooky. In the 1870s, Germany had recently reunified, just as it has now. A currency union had been formed in Europe but was struggling to stay together. There was a new form of instant communication, the telegraph, that was more revolutionary than e-mail in the time saved over the technology it replaced. There was a new continental economy, and the U.S. was flooding the world with cheap grain just as China now floods the world with cheap computer chips. There was even a wave of financial innovation. In the years leading up to 1873 crash, new industrial banks such as Deutsche Bank had been formed, and the global bond market was fueling the railway boom. And, of course, there was an epic financial bubble that suddenly blew up. The question is whether we are going to witness another two-decade slump like the one that followed the 1873 crash.

Unfortunately, it is starting to look as if we might. The U.K. is already experiencing its longest depression since records began: The current downturn has lasted longer than the slump of the 1930s. Europe is heading for a deep depression next year as the austerity regime that will be needed for the euro to survive starts to bite. The U.S. will struggle to grow significantly. We are used to short, sharp recessions, because those were what we experienced for most of the 20th century. But it is now more than three years since the crash of 2008, and things are getting worse, not better.

When the markets blew up in 2008, policymakers rushed to make comparisons with the 1930s. True, that was a terrible depression, but one that was over quite quickly. The Great Depression was caused by a sudden collapse of demand and shrinking money supply. Now, as then, policymakers assumed that if the government expanded its deficits and central banks printed lots of money, that would fix the problem. It hasn’t, and it should be clear by now that it isn’t going to. (Interpolation; one of the underlying causes of the Great Depression was the need to deleverage the huge debts of WWI)

Why not? Because what we are really dealing with is a structural depression. In reality, the global economy is facing not one crisis, but three.

There is a debt crisis. The developed world has been building up debts on a spectacular scale for three decades. According to McKinsey data, global debt now stands at $158 trillion; that is up from $77 trillion in 2000. Put another way, global debt amounts to 266 percent of global GDP now, compared with 216 percent a decade ago. While economists used to think that debt was largely neutral — on the grounds that once person’s borrowing is another person’s loan — we are now discovering that borrowing on that scale is unsustainable.

Then there is a currency crisis. For most of the post-WWII period, the dollar was the anchor of the global economic system. That worked when the U.S. was the overwhelmingly dominant economy. It doesn’t work anymore. The dollar is now down to 60 percent of reserves, as central banks diversify away from a currency falling in value. At some point we will come up with a new core currency — perhaps the Chinese renminbi, perhaps gold. But until we do, there will be more chaos ahead.

And finally, there is the euro, perhaps the most dysfunctional monetary system ever created. Welding together the currencies of 17 very different economies, without any kind of fiscal union to compensate for the differences between them, was always a high-risk experiment. By now we can surely agree that it has failed. The euro was meant to promote faster growth and greater stability. It has become instead a cause of depression and volatility. Until it is dismembered, there is little chance of the global economy’s returning to stability.

This is a structural depression — just as the long depression of the 19th century was. And it won’t be over until we have fixed the way the economy works.

The trouble is, none of those tasks can be accomplished easily. The euro will take several years to restructure, and if it falls apart chaotically, it will plunge the world into a deep depression. Any replacement for the dollar will take a decade to establish itself. We don’t even have much idea what it might be yet: Historically, the reserve currency has always been either gold or the currency of the world’s dominant economy, but China is not ready to assume that role yet, and the shiny yellow metal has a long way to go to reclaim its place as the ultimate store of value, even if it is taking a far larger share of anxious investors’ portfolios. Only once those things are achieved will we be able to start reducing our debt to manageable levels.

The great 19th-century depression lasted for more than two decades. On the same reckoning, this slump will last until 2031. That may be too long a time scale: The old joke that economists make forecasts  only to give the weather guys someone to laugh at should stop anyone from making predictions for decades ahead. But the lesson of the long depression is that a downturn can last a very, very long time — and it’s already clear that this one isn’t going to be over soon.

— Matthew Lynn’s e-book The Long Depression: The Slump of 2008–2031 is available now from Endeavour Press.

[Thucydides]

Since food has recently become a topic, here is an interesting look at the market volatility of food. Since food is "officially" not part of the CPI for the purposes of calculating inflation (as is fuel), we all see part of the disconnect when going to the grocery store. Investing in a garden looks more and more promising:

http://www.zerohedge.com/news/guest-post-punch-mouth-food-price-volatility-hits-world

Guest Post: A Punch to the Mouth - Food Price Volatility Hits the World

Submitted by ChrisMartenson.com contributing editor Gregor Macdonald

2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications.

And critically, it has a particular impact on food.

Many factors seen over the past decade have produced higher food prices: population growth, urbanization, the decline of arable land per person, and the upgrading of diets for example. But more damaging than food inflation has been the pushing of global food prices out of their long, quiet envelope of stability. From the recently released UN Report on the World Food Situation:

The FAO Index (Food and Agriculture Organization of the U.N) shows that, while prices are once again down from a peak, a troublesome volatility started to affect food prices this decade. These are the very prices that caused social instability in countries like Mexico in 2007-2008 (pressure on corn prices, owing in part to US corn ethanol mandates) and more recently in northern Africa (Arab Spring).

Commodity observers will note the rough correspondence with oil prices, and of course that’s no mistake. Inputs to food production are heavily composed of fossil fuels. In the same way that both high (and highly volatile) oil prices play havoc with economies, food prices and marginal speculation in food have done the same.

2011 also saw the highest average oil prices since 2008, at $94.81 per barrel. That is not far below the average high of 2008, at $99.67. In between was a crash in oil prices -- and most commodities -- which unfolded at a rate almost as rapid as the original run-ups from 2006-2008. What happens next?

The USDA has just released its Food CPI readings for 2011, along with their forecast for 2012.

    With 11 months of data recorded, the outlook for the 2011 Consumer Price Index (CPI) and food price inflation has become clear. The CPI for all food is projected to increase 3.25 to 3.75 percent. Food-at-home (grocery store) prices are forecast to rise 4.25 to 4.75 percent, while food-away-from-home (restaurant) prices are forecast to increase 2 to 2.5 percent. Although food price inflation was relatively weak for most of 2009 and 2010, cost pressures on wholesale and retail food prices due to higher food commodity and energy prices, along with strengthening global food demand, have pushed inflation projections upward for 2011.

    For 2012, food price inflation is expected to abate from 2011 levels but is projected to be slightly above the historical average for the past two decades. The all-food CPI is projected to increase 2.5 to 3.5 percent over 2011 levels, with food-at-home prices increasing 3 to 4 percent...

With non-existent wage growth and a dearth of investment opportunities, these price advances in food costs have much more impact than it appears. What asset classes are keeping pace with the year-over-year increases in food? Certainly not stocks, as the S&P 500 has gone nowhere in a decade. Moreover, a 3.5% increase in Food CPI this year, with more to come next year, falls on top of a deeply under-utilized US economy in which tens of millions derive income from government transfer payments, most of which are not sufficiently ratcheting higher from “inflation-adjustments." Food Stamp recipients, for example, are not seeing food inflation adjustments in their benefit checks that would compensate for the price increases. Not even close.

As you may have heard, milk was the top commodity performer in 2011, up 40% on the year in the futures market. A question: do you think milk is a central staple in American family diets? There's more. On a year-over-year basis through November, according to USDA, beef prices are up 9.8%, egg prices are up 10.25%, and potato prices are up 12%. (This partly explains why junk-type grocery foods make up an ever-larger portion of food-stamp purchasers' shopping carts. Sadly, people are buying caloric content, not nutrition).

Now, compare these price increases to the average individual Food Stamp benefit, which is basically flat year-over-year, moving from $133.79 in 2010 to $133.84 in 2011. And to the extent that households use Food Stamp benefits to plug overall cash flow problems, the very central and related pressure from higher gasoline prices also deflates the impact of the Food Stamp benefit.

Food Stamp Nation

The march higher in Food Stamp participation following the 2008 crisis has been relentless. The trend has paid no attention whatsoever to assertions of economic recovery or jobs growth in the US.

Yes, in the aggregate there has been moderate growth in private sector payrolls since the lows. There has also been a very big turnaround in exports, as this part of the economy has seen a veritable resurrection, growing to 15% of GDP. However, the upsurge in national Food Stamp participation (SNAP) has been stronger than them all. In December of 2007, just after the declared start of the “recession,” national participation in SNAP (Supplemental Nutritional Assistance Program) stood at 27.385 million. As of the latest data, this has ballooned to 46.268 million.

Because the national figures are so enormous and harder to comprehend, for several years I have kept track of Food Stamp (SNAP) users in Los Angeles County -- alongside oil prices. Southern California illustrates well the dilemma for most of the nation: Through the force of US demand, we have lost the control we once enjoyed over oil prices, while at the same time we remain locked in to automobile-based transport. Previous recessions in the US would have knocked gasoline prices down for longer. Not so anymore. Earlier this year, it became clear to me that before year end, the number of L.A. County participants on Food Stamps would eventually cross the one million mark. That grim marker has now been achieved:

The above chart of L.A. County SNAP users echoes the FAO chart from the United Nations. Upward-moving volatility in energy is concurrent with wild swings in food prices and waves of people in need of public assistance. Wages in the US have remained flat while millions of workers remain either unemployed or underemployed. Meanwhile, urbanization in the developing world has continued apace, forcing food prices and energy prices up at the margin. The results are not complicated. When demand begins to hit a resource whose supply cannot be easily increased, then price moves to ration demand and price becomes more volatile.

That process, so obvious to many, can unfortunately digress into a series of time-wasting arguments about speculators and whether the world is running out of...(insert your preferred natural resource here). On the contrary, natural resources rarely, if ever, run out in the marketplace. The US is not running out of oil, or corn, and the world is not running out of coal, or copper. What we have seen however in the past decade is that a number of structural changes to human development, primarily industrialization in the Non-OECD, have combined to put an unexpectedly large burden of demand on world resources -- at a rapid rate. Meanwhile, many natural resources, such as copper and oil in particular, had already reached a more difficult place in the arc of their own extraction history when this started to unfold.

The Decline of Arable Land

The result is that energy resources, and thus the ease of using energy resources in food production, began to converge with a long decline in the availability of arable land.

It is not for nothing that farming acreage in the US Midwest is up over several hundred percent since the lows twenty years ago. (As a personal aside, I remember those lows very well; I lived on a struggling soybean farm in Iowa during graduate school in the late 1980s). The world is in the midst of a New Great Game. But this time, the hunt is not on only for energy resources, but for agricultural resources -- mostly cropland.

On my own blog, I recently did a short post on a study of urbanization in China’s Pearl River Delta and its aggregate effect on climate and precipitation. In short? Paving over the earth decreases rainfall. I also found these two photos from NASA, comparing satellite views of the Pearl River Delta over a 14-year period from 1979 to 2003.

The loss of arable farmland per capita in China has placed enormous pressure on the global food system and all of its inputs, especially fertilizer. The miracle of the food revolution, much trumpeted over the past 30 years as the latest achievement of technology and innovation, is not to be dismissed. But there are limits. We can only convert so much farmland to urbanscape while making up the difference with N, P, and K (Nitrogen, Phosphorus, and Potassium) before we lose resiliency -- and redundancy -- in the global food system. It did not used to be the case that a bad wheat crop in Australia or the Ukraine would hit global wheat prices so hard. Moreover, because food is a renewable resource, a level of overconfidence about our ability to respond to demand crept into policy-making and forecasting.

In Part II: Preparing for Higher Food Prices, using the most recent data, I show what’s happened to arable land around the world and talk about how we have created ever more tightly-coupled fragility in our systems of food production. I also chart the relative performance or return on various investments, compared to food, and show that despite the avoidance of the matter, stagflation has now entered the US economy. (How does one cope with flat wages and rising food prices?) Finally, I have just finished reading Julian Cribb’s The Coming Famine: The Global Food Crisis and What We Can Do to Avoid It, 2010, and found his discussion of virtual water very much on point, and relevant to our next set of challenges:

    In theory, countries that lack water can import virtual water as food commodities with those with plenty. So too, countries that lack the energy to grow all their food can import surplus food from countries with highly productive oil based farming systems--provided they are rich enough to afford it. The fact, however, that a billion people starve while another billion wallow in surpluses of food so huge that they throw away half undermines this idea.

    -- from The Coming Famine by Julian Cribb, page 122.

As I discuss in Part II, the United States is also becoming swept up in the globalization of food production, as it remains a titan of commodities exports, on an absolute basis. But the hunger for US food exports has implications for our own population, which struggles with falling (real) wages and depressed purchasing power. Will Americans be able to afford to pay what the world can afford to pay, for food?

Click here to access Part II of this report (free executive summary, enrollment required for full access).

Oddly, one solution may come from the space colonization movement. When the idea of building huge space colonies was popular back in the 80's, much attention was paid to high intensity farming methods to feed people from a small resource base. Techniques such as intercropping (growing different crops in the rows between the corn) and multi cropping (planting new crops befor the old crop was harvested), and experimenting with different species of food plants all showed promise. As an aside, intercropping has been adopted by marijuana growers in SW Ontario, demonstrating that it does work as advertized...

[E.R. Campbell]

Here is the StatsCan Weighting Diagram for the CPI.

While food and gas, being volatile, are excluded from some calculations they are measured and reported and are used in many indices.

Gross data:

Food:                      16  %
Shelter:                  25.5%
Household:             11.5%
Clothing:                  5.5%
Transportation:      20.5% - of which gas is nearly 1/3 or 6% of the total
Health:                    5   %
Recreation:            11   %
Alcohol & Tobacco:   3   %
 

[Old Sweat]

There is nothing new about intercropping. It was used by both aboriginal peoples and settlers in the colonial era. For example, corn would be planted in hills with  a few squash. As there was some space between the individual corn plants, the squash, which spread out on the ground, would fill in the spaces and prosper.

[recceguy]

There is nothing new about intercropping. It was used by both aboriginal peoples and settlers in the colonial era. For example, corn would be planted in hills with  a few squash. As there was some space between the individual corn plants, the squash, which spread out on the ground, would fill in the spaces and prosper.

To amplify Old Sweat's post, it was called 'The Three Sisters'. Corn was planted first. Then beans. The beans would use the cornstalks as uprights to climb. Squash was planted third. The squash plant spread out providing ground cover which prevented evaporation of water from the three root systems.

[Kirkhill]

And to build on Old Sweat's and recceguy's commentary, if I remember correctly, the full recipe called for first planting one fish.  The decomposing carcasse supplied the Nitrogen, Phosphorus and Potassium, as well as some water, that nourished the plants.

If, as has been reported, this system improves yields and trims costs, the biggest hurdle would be redesigning the harvesting system to sort the squash, corn and beans, assuming that they all came to maturity at the same time.  It might be possible to devise something to harvest the beans and corn simultaneously while leaving the squash undamaged (open lanes, a straddling harvester and leaving a long stalk on the corn), but the beans and the corn would be so inter-twined they would have to be harvested concurrently.   Separating mature corn from beans would be a relatively trivial mechanical problem.

The industry is always on the look out for good, workable ideas and adopts them as the economics justify.  Part of the economics is government regulation.  For good or ill.

[Redeye]

And to build on Old Sweat's and recceguy's commentary, if I remember correctly, the full recipe called for first planting one fish.  The decomposing carcasse supplied the Nitrogen, Phosphorus and Potassium, as well as some water, that nourished the plants.

If, as has been reported, this system improves yields and trims costs, the biggest hurdle would be redesigning the harvesting system to sort the squash, corn and beans, assuming that they all came to maturity at the same time.  It might be possible to devise something to harvest the beans and corn simultaneously while leaving the squash undamaged (open lanes, a straddling harvester and leaving a long stalk on the corn), but the beans and the corn would be so inter-twined they would have to be harvested concurrently.   Separating mature corn from beans would be a relatively trivial mechanical problem.

The industry is always on the look out for good, workable ideas and adopts them as the economics justify.  Part of the economics is government regulation.  For good or ill.

They didn't understand it, but the beans also provided another vital function - fixing nitrogen. Modern intensive monocultures don't do that anymore, they just rely on massive amounts of artificial fertilizers to provide nitrogen.

Interesting about regulations. I'm reading a lot on Joel Salatin, who is one of the most interesting farmers I've ever read about. He describes himself as a "Christian conservative libertarian" and he is interesting because his main argument against a lot of regulations is that they're basically set up to favour deep-pocketed industry. The rules essentially protect the interests of ADM, Cargill, Tyson, Purdue, ConAgra, etc and make it difficult for him to really expand and do business. Most of the rules are labelled as "food security" issues, but they're actually basically barriers to entry to the market for small producers like him. While some regulations when it comes to food are probably justifiable and important, many aren't, and are a symptom of the bigger problem of what happens when lobbyists and businesses simply buy the legislation they want to protect themselves.

[Infanteer]

I found that guy's website a few months ago - although he comes off as a bit of an eccentric, he definitely has a lot of interesting things to say about food and the way it works in our society.

[Redeye]

I found that guy's website a few months ago - although he comes off as a bit of an eccentric, he definitely has a lot of interesting things to say about food and the way it works in our society.

Eccentric is an understatement, but he has a lot of really insightful things to say, and it's hard to disagree with him. I first heard of him while listening to Ideas on Radio One, then read the Omnivore's Dilemma in which he features prominently. When I was in the area in September I really wanted to go viist the farm, but I didn't have the chance.

[Thucydides]

Inflexible Europe. We are still much closer to the European model, with predictable results:

http://www.nytimes.com/2012/01/08/magazine/the-other-reason-europe-is-going-broke.html?_r=3&ref=global-home&pagewanted=print

The Other Reason Europe Is Going Broke
By ADAM DAVIDSON

One great way to start a bar fight during an American Economic Association conference is to claim that the U.S. economy is preferable to Europe’s. Someone will undoubtedly start quarreling about how G.D.P. per capita doesn’t measure a person’s happiness. Someone else may point out that if you look at income inequality and entitlements, the average European is doing much better.

But G.D.P. per capita (an insufficient indicator, but one most economists use) in the U.S. is nearly 50 percent higher than it is in Europe. Even Europe’s best-performing large country, Germany, is about 20 percent poorer than the U.S. on a per-person basis (and both countries have roughly 15 percent of their populations living below the poverty line). While Norway and Sweden are richer than the U.S., on average, they are more comparable to wealthy American microeconomies like Washington, D.C., or parts of Connecticut — both of which are actually considerably wealthier. A reporter in Greece once complained after I compared her country to Mississippi, America’s poorest state. She’s right: the comparison isn’t fair. The average Mississippian is richer than the average Greek.

Europe is undergoing not one but two simultaneous economic crises. The first is a rapid, obvious one — all about sovereign debt, a collapsing currency and austerity measures — that we hear about all the time. The second is insidious but more important. After decades of trying, Europe as a whole still can’t quite figure out how to be flexible enough to compete in the global economy.

The story of how Europe lost its flexibility can be told in three stages. First came rapid growth that economists called “convergence.” With a lot of help from the U.S., Europe developed massive industrial capacity in the postwar years. Many of Western Europe’s economies grew so fast that governments could easily afford health and unemployment insurance and other benefits that, by U.S. standards, were remarkably generous. Most observers expected that its wealth would soon “converge” upon that of the U.S.

But the European economy did not recover from the worldwide oil shock of 1973 nearly as quickly as its American counterpart. For more than 25 years (phase two), as its population aged, Europe’s economy grew more slowly than the United States’. Its active capitals belied bloated businesses that were losing contracts to U.S. competitors or growing suburban ghettos filled with a permanently unemployed underclass.

Even its major successes — like Germany’s impressive machine-tool and automotive-industrial sectors — were refinements of old ways of making money rather than innovations in new industries. Western Europe played a remarkably small role in the computer and Internet revolutions. (On the other hand, Estonia, with less than two million people, gave the world Skype.) When the economic forecasts were written during Europe’s doldrums, the Continent looked destined to become a decrepit old-age home with too few young people around to pay the bills.

Enter phase three: what might be called the Principled Compromise. Increasingly since the mid-1990s, European leaders have been trying to figure out how to keep up with this new globalized digital economy. To compete with the U.S., China, India and Brazil, Europe focused more intently on broadening its internal market. It’s easier for businesses to stay competitive when there are a few hundred million potential customers using the same currency and not requiring customs forms.

To many American eyes, however, Europe’s creation of a common market and currency was only half the battle — and probably the less important half. It’s a core view of U.S. business that success requires a degree of destruction. If workers can’t be fired, companies can’t drop unproductive businesses and invest in more promising new ones. If workers know they’ll get generous government benefits no matter what, so the theory goes, they’ll get lazy.

But just as the U.S. was dismantling much of its welfare system — replacing it with the welfare-to-work reforms of the mid-1990s — Europe was (somewhat nobly) trying to show that an economy can be humane and competitive. In 1994, Denmark modernized a system, which came to be known as “flexicurity,” that offered American-style flexibility (layoffs, transitions into new lines of business) coupled with traditional European security. Laid-off workers were offered generous benefits, like 90 percent of their last salary for two years and opportunities to be retrained.

And it worked incredibly well. After Denmark’s unemployment rate sank to among the lowest in the world, the flexicurity model spread throughout Europe. It has been successfully implemented, in locally appropriate ways, in Norway, Sweden and Finland. But in other countries — like Germany, France and Spain — similar reforms faced stiff resistance from workers who preferred the old way. Several countries applied the measures in a two-tier system: people who already had jobs were protected by pretty much the same old rules, while the unemployed — who were often younger — were offered less secure work at lower pay. Greek unions insisted on so much security and so little flexibility that now the country has neither. Flexibility has done little to help Italy, which remains effectively two countries. There is a rich nation in the north where workers earn great salaries in highly productive and competitive industries; many people south of Rome are living in a broken, developing economy that’s considerably poorer than Greece.

Many now believe that Europe’s decision to create a common currency ended up pushing much of the Continent further behind. Greece, Italy, Spain, Ireland and Portugal would arguably be much better off if they could simply devalue their old currencies and sell exports at a relative discount. Instead, they’re stuck with a euro whose value is largely based on their more successful neighbors. The U.S. is in no position to gloat, but our basic mechanisms of competitiveness are still in place. We’ll grow again. We just need to figure out how to distribute the spoils. And Europe, we once thought, was supposed to teach us how to do this.

European leaders like to mock the U.S. for its inequality and lack of social safety net. Though, for now, it looks as if Europe is headed for a two-tier society without any plan for improving the lot of the lower tier. How can Brussels excite a generation of ambitious young people — the ones who will determine Europe’s future success — when too many of them are offered low-wage, short-term work in stagnant industries to pay for the far more generous benefits their elders receive? How can Europe compete if its youth experience the flexibility while the old get the security?

Adam Davidson is a founder of NPR's “Planet Money,” a podcast, blog and radio series heard on “Morning Edition,” “All Things Considered” and “This American Life.”

[Thucydides]

The Economist and their "Big Mac" PPP chart on this link:

http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-3

The Big Mac index
Jan 12th 2012, 16:53 by The Economist online

Burgernomics shows Switzerland has the most overvalued currency

THE ECONOMIST's Big Mac index is based on the theory of purchasing-power parity: in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries. This particular basket holds a McDonald's Big Mac, whose price around the world we compared with its American average of $4.20. According to burgernomics the Swiss franc is a meaty 62% overvalued. The exchange rate that would equalise the price of a Swiss Big Mac with an American one is SFr1.55 to the dollar; the actual exchange rate is only 0.96. The cheapest burger is found in India, costing just $1.62. Though because Big Macs are not sold in India, we take the price of a Maharaja Mac, which is made with chicken instead of beef. Nonetheless, our index suggests the rupee is 60% undercooked. The euro, which recently fell to a 16-month low against the dollar, is now trading at less than €1.30 to the greenback. The last time we served up our index in July 2011, the euro was 21% overvalued against the dollar, but it is now just 6% overvalued. Other European currencies have also weakened against the dollar since our previous index, notably the Hungarian forint and Czech koruna, which have fallen by 23% and 16% respectively. Six months ago both currencies were close to fair value, but they are now undervalued by 37% and 18%.

[Thucydides]

Oil, gasoline and refineries, oh my!

We will be paying more for gasoline as well (and given the lead time for construction and the efforts of the greenies to block new or expanded refineries, there is little hope of ramping up production to offset increasing demand):

http://pjmedia.com/blog/get-ready-for-higher-gas-prices/?print=1

Get Ready for Higher Gas Prices

Posted By Dan Miller On January 22, 2012 @ 12:00 am In "Green" tech,Canada,China,economy,India,Latin America,Middle East,Science & Technology,US News | 33 Comments

An oil refinery in St. Croix, U.S. Virgin Islands, will shut down [1] by mid-February. It is owned by Hovensa, a joint venture of U.S.-based Hess Corp. and Venezuela’s state-owned oil company Petróleos de Venezuela, S.A. (PDVSA).

    Losses at Hovensa . . . have totaled $1.3 billion over the past three years and were projected to continue due to reduced demand caused by the global economic slowdown and increased refining capacity in emerging markets, said Brian K. Lever, president and chief operating officer of Hovensa LLC.

There are various other causes [2] for the shutdown and this may be among them:

    In January, Hovensa entered into a consent decree with the U.S. Environmental Protection Agency and Justice Department in which the company agreed to invest $700 million on pollution controls after a series of chemical releases affected people living downwind from the refinery. Hovensa also agreed to pay a $5.4 million penalty for violating the Clean Air Act.

Under current market conditions and having experienced substantial losses during the past three years, investing an amount equal to 53.85 percent of those losses as required by the EPA could be quite burdensome.

Closure of the St. Croix refinery may well effect U.S. domestic gasoline prices adversely, particularly on the East Coast [3]:

    [T]he coming loss of gasoline supply shocked markets for gasoline futures, which are likely to be soon reflected at the pump. Gasoline for February delivery rose 5.41 cents to $2.8254 a gallon on the New York [4] Mercantile Exchange on Thursday, settling at the highest point since Sept. 8.

In St. Croix, the refinery employs about 1,200 people in addition to about 900 contractors. In 2010, the population [5] of the island was 50,601, so the loss of about 2,100 jobs will have a substantial direct economic impact plus a significant multiplier effect. Food stamps [6] and other welfare benefits [7] are available there and the U.S. federal government contributes [7]. There will also be significant long-term impacts on the tax revenues [8] of the U.S. Virgin Islands, reducing them by at least $60 million per year through diminished real property taxes and employee income taxes.

U.S. mainland-based refineries

Existing U.S. mainland-based refineries have difficulty competing with new refineries in developing countries [2] such as India and China as well as in the Middle East (where the tentacles of U.S. environmental restrictions don’t reach) and we rarely build new ones. Environmental groups [9] have asked a state judge in South Dakota “to strike down a state permit that would allow … the first new U.S. oil refinery built since 1976.” It would “process 400,000 barrels of Canadian tar sands crude oil each day into low-sulfur gasoline, diesel, jet fuel and liquid petroleum gas.”

Construction had been delayed because securing financing had been difficult due to the recession and because of a previous appeal from grant of an original state permit.

    The board issued the revised permit in September, approving changes to reflect updated national air quality standards and new pollution-control technology. The revised permit also gives Hyperion until March 2013 to start construction.

    After the hearing, Hyperion Vice President Preston Phillips [10] said efforts are progressing to secure financing and an oil supply for the project. “We have to perfect this air permit before we can finalize those aspects,” he said.

    In Thursday’s hearing, Graham [counsel for the environmental groups] also argued that the board was wrong to extend the deadline for construction to begin. The original permit expired last February, and Hyperion should wait to seek a new permit based on the latest standards and technology when it is ready to begin construction, he said.

The tactic of delaying regulatory approval for as long as possible, then attacking the approval in court and demanding that the regulatory process begin anew has unfortunately been effective. It doubtless accommodates desires for long and profitable legal careers.

Refineries in the U.S. [11] with capacities of 949,000 BPD recently closed or are for sale while others have curtailed production due to “economics.” Meanwhile [12],

    HOUSTON, Jan 20 (Reuters) – U.S. oil companies are bracing for a potential strike by refinery workers and have plans to keep plants operating if negotiations which began this week for a new labor deal break down.

    Representatives of the United Steelworkers union and oil companies began meeting to hammer out a new three-year national contract before current contract expires at 12 a.m. on Feb 1.

    In September, the head of the USW negotiating team, union International Vice President Gary Beevers, said without improvements in health and safety protections in the new contract, USW members would walk off their jobs.

Venezuela isn’t Glocca Mora and things there aren’t so great [14]. “Oil accounts for more than one-third of Venezuela’s gross domestic product, more than half of government revenue and about nine-tenths of the country’s exports.” Last year [15], the U.S. imported from Venezuela approximately one million BBD, ten percent of U.S. usage and “more than 40 percent of Venezuela’s oil exports.” We can eliminate that economic assistance for Venezuela by drilling in the U.S., building new refineries occasionally, and, of course, obtaining Canadian oil via the Keystone oil pipeline. Oh. Wait [16]:

    This week President Obama handed down what may prove to be one of the most fateful decisions of his entire administration when he rejected the plan to build the Keystone XL Pipeline carrying oil from the tar sands of Canada to the refineries of Houston. The decision did not win him one new vote but was crucial in protecting his environmental flank. The movie stars and Sierra Club contributors were getting restless and had drawn the line in the sand.

But aside from that it was pretty stupid [17] and Congress apparently has the authority [18] to approve the pipeline on its own, subject to a presidential veto. It might even be a useful Republican campaign issue.

Although closure of the St. Croix refinery will be unfortunate for the U.S., it will be worse [19] for Venezuela:

    According to 2010 annual management report released by state-run oil holding Petróleos de Venezuela (Pdvsa), Venezuela’s share in US refineries was 1.08 million barrels per day, which were processed in five plants: Lake Charles, Corpus Christi, Lemont, Chalmette and Saint Croix.

    Hovensa’s shutdown leads to a 22.7% reduction in Pdvsa’s refining capacity in the United States, which stands now at 841,000 bpd.

Venezuelan-owned PDVSA could help [20] but has done little to keep the Hovensa refinery working even though Venezuelan oil has long been a cash cow for the country. However, PDVSA has other things [21] to do:

    What used to be a “mere” oil company has been tasked in recent years with building affordable housing, paving country roads, creating and running farms, and importing, distributing and selling food, amongst other things. As of today, PDVSA will now hold 40% of the venture to develop the country’s gold mines, including Las Cristinas and Las Brisas. Corporaction Venezolana de Guayana (CVG), the state owned heavy industry company, will hold the other 60%.

    “What they are creating is a super-state. No longer is PDVSA a state within a state, but now it is becoming something above the state,” says Rafael Quiros, a professor at Central University specializing in oil economy and author of the upcoming “Marchas y Contramarchas del Petróleo en Venezuela: 1989-2001”, a book that analyzes the last few years in Venezuela’s oil policy.

    Professor Quiros — widely considered pro-Chavez in the local political divide — is very critical of giving PDVSA tasks other than “production, refining, transportation and exporting” of oil.

It’s a bit worse [22] than simply that PDVSA is spread too thin and is a useful tool to help el Presidente Chávez get reelected. Heavily subsidized to the point that it retails at twelve cents per gallon [23], gasoline is essentially free in Venezuela [22] and is used expansively as are other non-economic goods.  The country also provides petroleum to “needy” countries on extraordinarily generous terms:

    Last year, according to the Venezuelan Central Bank, accounts receivable with “friendly countries” reached US$ 23.088 billion. As of September 2011, this number had reached US$ 32.7 billion, a difference of, give and take half a billion of US$ 9 billion in nine month or US$ 1 billion per month.

There may be at least a few small silver linings for the U.S. In preparation for the national elections this year, Chávez needs to find money for projects to provide the illusion of hope and change Venezuelans might, once again, believe in. Closure of the St. Croix refinery may make that even more difficult than at present. Already [24],

    The strategy implemented by Hugo Chávez’s administration to increase spending in order to boost economic growth has been based in part on funds borrowed from Venezuelan banks.

    In the past 12 months, the portfolio of bonds and treasury bills issued by the Ministry of Finance has gained 76% from USD 12 billion to USD 21.14 billion, according to data from the Venezuelan Superitendence of Banks.

Maybe not impossible, because “State-run banks, which are under the control of the Ministry of Finance, are the main buyers of debt and own 53% of bonds and treasury bills issued by the government.”

In addition, any hopes el Presidente Chávez may have had to assist his brother in repression, Ahmadinejad of Iran, may be stymied [25]. Even before closure of the St. Croix refinery, Chávez was impotent to help him:

    [H]e did not promise to pick up Iranian oil in violation of sanctions, or to refine and market it through PDVSA, or to send any refined products into Iran. Nothing whatsoever.

    Put otherwise, President Chavez had nothing to show for all his talk, plans and efforts over the past decade in preparation for precisely such a confrontation with El Imperio. Instead, Venezuela remains abjectly dependent on oil exports via the intermediary of “the global markets of El Imperio” and traded in dollars.

Venezuela needs the U.S. oil market and, until we can produce more of our own oil and import more from friendly neighbors such as Canada, we will continue to need oil from Venezuela and other unfriendly countries. That means we will have to continue supporting them financially.

A clean and healthy environment is good, but there are limits to how closely we can approach what some see as perfection. Excessive regulatory burdens are not good and the United States needs, rather quickly, to strike appropriate environmental balances while taking into account the potential difficulties and disadvantages of securing oil from unfriendly countries as well as from friendly countries subject to attack by others. Nevertheless, we continue increasingly to neglect these factors and therefore continue to fund hostile countries more handsomely than seems to be in our national enlightened self-interest. Lately, we have been galloping off in all but the right directions.

Article printed from PJ Media: http://pjmedia.com

URL to article: http://pjmedia.com/blog/get-ready-for-higher-gas-prices/

URLs in this post:

[1] shut down: http://www.washingtonpost.com/business/industries/hovensa-oil-refinery-run-by-hess-venezuelas-pdvsa-in-us-virgin-islands-to-shut-down/2012/01/18/gIQA38tk7P_story.html

[2] various other causes: http://www.washingtonpost.com/business/industries/hovensa-oil-refinery-run-by-hess-venezuelas-pdvsa-in-us-virgin-islands-to-shut-down/2012/01/18/gIQA38tk7P_story_1.html

[3] particularly on the East Coast: http://www.cnbc.com/id/46047656?__source=google|editorspicks|&par=google

[4] New York: http://www.ibtimes.com/topics/detail/456/new-york/

[5] population: http://en.wikipedia.org/wiki/Saint_Croix,_U.S._Virgin_Islands

[6] Food stamps: http://www.dhs.gov.vi/financial_programs/food_stamp.html

[7] welfare benefits: http://www.vidol.gov/Units/Unemployment_Insurance/UI_Benefits.htm

[8] tax revenues: http://virginislandsdailynews.com/news/v-i-revenue-loss-through-closure-estimated-at-60m-1.1259821#axzz1k2oxb9Vd

[9] Environmental groups: http://www.mysanantonio.com/news/article/SD-judge-asked-to-throw-out-oil-refinery-permit-2484032.php

[10] Preston Phillips: http://www.mysanantonio.com/?controllerName=search&action=search&channel=news&search=1&inlineLink=1&query=%22Preston+Phillips%22

[11] in the U.S.: http://online.wsj.com/article/BT-CO-20120119-710558.html

[12] Meanwhile: http://www.lse.co.uk/FinanceNews.asp?ArticleCode=sf7n2bv7z48yh6x&ArticleHeadline=US_refiners_draft_strike_contingenies_as_talks_start

[13] Image: http://www.youtube.com/watch?v=fMEleQc-liA

[14] aren’t so great: http://laht.com/article.asp?ArticleId=464208&CategoryId=10717

[15] Last year: http://www.csmonitor.com/World/terrorism-security/2011/0525/Venezuela-threatens-to-interrupt-US-oil-supply

[16] Wait: http://spectator.org/archives/2012/01/20/environmentalism-and-the-leisu

[17] pretty stupid: http://pjmedia.com/tatler/2012/01/20/canadian-pundit-destoys-post-american-president-obamas-reasoning-for-passing-on-keystone-xl/

[18] has the authority: http://news.yahoo.com/congress-legal-clout-keystone-pipeline-study-013431403.html

[19] will be worse: http://www.eluniversal.com/economia/120119/pdvsas-refining-capacity-in-the-us-plunges-23

[20] could help: http://www.miamiherald.com/2012/01/19/2598119/virgin-islands-refinery-shutdown.html

[21] other things: http://www.laht.com/article.asp?ArticleId=419889&CategoryId=10717

[22] bit worse: http://devilsexcrement.com/2011/12/08/a-back-of-the-envelope-calculation-of-the-finances-of-a-new-venezuelan-government/

[23] twelve cents per gallon: http://www.marketwatch.com/story/low-gas-prices-plague-venezuela-2011-03-16

[24] Already: http://www.eluniversal.com/economia/120120/venezuelan-government-debt-with-banks-up-76

[25] may be stymied: http://globalbarrel.com/2012/01/18/with-a-usa-dependent-oil-sector-chavez-cant-help-ahmadinejad/

[Thucydides]

A new tool to examine credit ratings: http://www.wikirating.org/wiki/Main_Page

http://metanoodle.blogspot.com/2012/01/aaa-outlook-for-canada-and-others-not.html

A transparent rating tool puts a lot of countries, including Canada, lower on the credit-worthiness scale. The crowd-sourced update makes us look better. The rating agencies drag their feet on downgrades because it affects their income.   The weight given each element is spelled out and input is welcome.  (Guest post at ZeroHedge)  Only Hong Kong and Luxemburg got top rating before the voting.  The new set of numbers is closer to Dagong than to Moody, Fitch and S&P.

Initiated by Austrian mathematics Dorian Credé and and finance whiz Erwan Salembier, ratings are derived from weighted user input. They stress to point out that their model will improve with rising user input who also have a say in improving the formulae used.

The army of davids approach should provide an alternative to the major bond rating agencies. So long as they avoid the "takeover" of subjects the way Wikipedia was contaminated, this should provide a new approach to discovering financial information.

[Thucydides]

Looks like investors may get a haircut and a shave:

http://www.theatlantic.com/business/archive/2012/02/greeks-inch-closer-to-default/252602/

Greeks Inch Closer to Default
FEB 5 2012, 9:51 PM ET 170

Debt negotiations usually seem to get resolved at the very last minute.  After all, the resolution is almost always that someone is not going to get paid as expected, and this gives every "someone" strong incentive to hold out as long as possible, in the hopes that intransigence will get them a slightly better deal.

But even by these standards, the negotiations over Greek debt are really pushing the limit.  It's been hard enough getting the private creditors--on whom the entire haircut looks set to fall--to accept losses which one person quoted by the FT puts at greater than 70%.  But the Greeks are also proving difficult.

Patience with Greek politicians has evaporated among its creditors. During a conference call on Saturday, eurozone finance ministers bluntly told Athens to deliver on its promises and agree to reforms or face default next month.

Jean-Claude Juncker, head of the eurozone group of finance ministers, told Der Spiegel at the weekend that the possibility of bankruptcy should encourage Athens to "get muscles" when it comes to implementing reforms.

"If we were to establish that everything has gone wrong in Greece, there would be no new programme and that would mean that in March they have to declare bankruptcy," he warned.

Mr Samaras last week threatened to veto the package unless concessions were made on private sector wages, claiming the cuts would prolong a recession already in its fifth year. Mr Karatzaferis also opposes further austerity measures.

The two sides were still far apart over projected cuts of 25 per cent in private sector wages, 35 per cent in supplementary pensions and the closure of about 100 state-controlled organisations with thousands of job losses.

On one level, this is entirely amazing.  As has been exhaustively explained everywhere, including this blog, Greece is currently running a primary deficit--meaning that even if they defaulted, their budget wouldn't balance.  And since defaulting would cut off the flow of credit, they'd actually be worse off than with almost any of the austerity plans proposed by their creditors.  And the resulting financial crisis isn't going to do much good for their economy. So watching them threaten to walk away is somewhat reminiscent of that famous moment from Blazing Saddles

And yet, in another way, it's entirely understandable.  How would you, Ms. Private Sector Employee, like to be told that you had to take a 25% wage cut because your government had borrowed too much money, and then cooked the books and lied about it?  I would be rather miffed, I think.

And when people are angry, they are not always perfectly rational.  They will hurt themselves, badly, if it means that they can also hurt other people who they feel have done them an injustice.

Talks will resume tomorrow, and I still expect that ultimately, they'll come to some agreement.  But still, it has never looked less likely.

Update:  I may have spoken to soon; Greece is now allegedly running a primary surplus.

It is a bit hard to imagine that Greece has abruptly gone from a primary deficit to a primary surplus, but we will either have to wait for an audit or watch how the market reacts to discover the truth of the matter.