A Drop of Rain

Interesting article, Deflation In A Fiat Regime?, brought up some recent articles by Doug Noland of PrudentBear.com

• Setting the Backdrop for Stage Two
• The Meaning of Stage II

Update: Noland’s April 25, 2008 column:

I am at this point more convinced than ever that only a severe crisis will instigate the necessary adjustment to the distorted and imbalanced U.S. and global economies. One is then left with the disconcerting view that Stage II will lead our authorities to exhaust all policy measures in a futile attempt to sustain the unsustainable. The obvious question: how long does the lead up Crisis Stage II last? I would today guess a number of months, although I wouldn’t at all be surprised if it was rather short. What will be the impetus for Crisis Stage II? A spike in interest rates, a run from U.S. Treasury and agency debt, a disorderly drop in the dollar, another bout of derivative and Credit market implosion, or acute global financial tumult should be considered leading candidates based on Stage II ramifications. Or it could easily be something completely unexpected, perhaps even war.

From Noland’s April 18, 2008 column:

With crude hitting a record $117 today, there is every reason to expect that newly created global liquidity will further inflate energy, food, and commodity prices generally. The Goldman Sachs Commodities index has gained 21% already this year. But when it comes to Monetary Instability, our financial markets might just prove the unappreciated wildcard. When the Fed and Washington radically altered the rules of U.S. finance last month, they placed in jeopardy huge positions that had been put in place to hedge against and profit from systemic crisis. With the end of “Stage one” arises a major short squeeze in the Credit, equities, and derivatives markets. And when it comes to contemplating the scope and ramifications of today’s “hedging” activities, we’re clearly in Uncharted Waters. It is not beyond reason that a disorderly unwind of “bearish” Credit market positions could incite a mini bout of liquidity, speculation, and Credit excess that exacerbates Global Monetary Instability - while Setting the Backdrop for Stage Two of the Crisis.

The title is somewhat tongue-in-cheek… but the stories are getting increasingly surreal, and I didn’t want to leave these rice stories alone.

As the chart makes clear, the ascent of the cost of rice to $24 from $10 per hundredweight over the past year tracks the declining value of the American dollar. The link between the declining parity of the US unit and the rising price of commodities, including oil as well as rice and other wares, is indisputable. China has bid aggressively for rice all year, and last week banned rice exports, along with Vietnam and several other producers.
[..]
Never before in history has hunger become a global threat in a period of plentiful harvests. Global rice production will hit a record of 423 million tons in the 2007-2008 crop year, enough to satisfy global demand. The trouble is that only 7% of the world’s rice supply is exported, because local demand is met by local production. Any significant increase in rice stockpiles cuts deeply into available supply for export, leading to a spike in prices. Because such a small proportion of the global rice supply trades, the monetary shock from the weak dollar was sufficient to more than double its price.
[...]
The George W Bush administration might as well have used the State Department as a set for the Jackass reality show. American arrogance has eroded the ground under many of the governments on which its foreign policy depends. It is hard to characterize what will come next, except, like the stunts on Jackass, that it is going to hurt.
Asia Times

(more…)

Read a review of Reinventing Collapse by Dmitri Orlov. His stuff is slightly tongue-in-cheek, but only in terms of tone, in terms of reality, it’s pretty much what he sees.

Also check out Dmitri Orlov’s comparison between the former Soviet Union (USSR), and the United States of America (USA) in terms of the structural similarities and differences between pre-collapse USSR and USA.

If you want a quick summary, the USA is in serious trouble if collapse happens, we have invested too much in the wrong areas, given too much power to the corrupt state/business entity, and have grown too lazy ourselves, as well as simply having put our money, time, and energy into the wrong places for too long.

Think James Kunstler’s The Long Emergency, for example.

(more…)

If you haven’t checked out Jim Rogers, ex partner of George Soros, here’s some good interview videos of him. The first one is from March 2007.

(more…)

The predictions about the results of oil price increases are hard to really get a sense of, though I found an interesting analysis of this matter, from I think about 2003, though it’s not dated:

Conventional economic reasoning, embodied in the notion of ‘price elasticity’ of demand, is that large oil price rises will necessarily cut oil demand and economic growth, perhaps resulting in zero economic growth, or recession. The higher the rise of oil prices, the faster it is assumed that ‘price elastic’ responses will play. Higher oil prices will “of course” reduce economic growth, may generate stock exchange panics and will produce inflation, leading to monetary and financial instability. Higher interest rates, and even a plunge into recession will then be needed to combat this through rapidly ‘decompressing’ the economy, thus cutting world oil demand, and reducing its price in a context where oil supply is always thought of as growing as fast, or faster than demand.

No received wisdom has any utility unless it can be demonstrated and proved, if it is have any more than the status of belief. The relation between oil prices and economic growth is in fact complex. The notion that price elastic responses describe inevitable, real and worldwide responses, and that any oil price rise necessarily and immediately reduces economic growth is in fact a travesty of the facts. From today’s price levels for oil (around $30/barrel in the USA for light crudes), ‘extreme’ price levels would be needed before world economic growth fell. Until very elevated oil prices are achieved - probably well above $70/barrel in 2003 dollars - world economic adjustment mechanisms will always result in higher oil demand through the economic expansion, with or without inflation, that higher oil prices bring about at the world, or ‘composite global’ economic level.
GasAndOil.com

It’s interesting to see how the world is scrambling to try to figure out what is happening and fit it into some model or other when the sad fact is there is no model to fit it into, because nothing like this has every happened on a global scale before.

(more…)

Here’s some things to think about, courtesy of the Market Ticker. I’m not sure, as I will try to say again and again, who is 100% right, but what is becoming more interesting is who has tended to be right, especially in the macro areas of the economy and other global issues. One cost of globalism, of course, is now clearly being revealed: problems quickly escalate to a global level.

Let me be clear - if we cross this line in the sand there will be no warning and no way to “take it back” once it happens. Consider your daily life - could you survive for more than two weeks if you suddenly had no access to credit of any sort? If you were forced to pay for each and every thing you buy, from gasoline to groceries, with cash from your bank? If your credit card was suddenly reduced to “zero available”, irrespective of how much you paid off?
[...]
A more appropriate response would be to go after the lenders who made knowingly-inappropriate loans to people, and force them to eat the bad paper in a court of law. That would take courage too - get some injunctions against the bad actors, including the Wall Street investment banks who securitized and effectively bribed the ratings agencies, halt the process, and let it grind through the courts. Get a few “unconscionable contract” rulings and voila - we have a couple of insolvent Wall Street “icons” and we can sell their office buildings off to pay the judgements.
[...]
Where’s the truth - you can’t spend more than you make for very long, and now the gravy train has run out!

(more…)

Sigh… you know, when the guys who used to look sort of bad start to talk like this about the new people in charge, you know the situation is getting pretty damned serious…

“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,” [Paul] Volcker [Fed chairman from 1979 to 1987] said in a speech to the Economic Club of New York.
[...]
Volcker said the modern financial system has “failed the test” of the marketplace. When asked whether he predicts a “dollar crisis,” he said, “you don’t have to predict it, you’re in it.”
bloomberg

What else is there to really say? Today was a bad day for the US and global economy in general. To put it mildly.

On the bright side, Washington Mutual got bailed out by a group of investors, cheating death, but only at the cost of screwing over their current stockholders, by diluting WaMu shares by about 30%, but personally, I don’t care what happens to any investors at all, investment never had any business in the hands of beginners, and opening up that pit just guaranteed the outcome we see today.

“While diluting returns to existing shareholders, the capital raise would significantly strengthen WaMu’s capital ratios and could prevent further downgrades on its debt to below investment grade”.
[...]
“When a firm has to double its shares outstanding and yet still be under credit-quality pressure, it’s not a particularly comforting move”
bloomberg

But that’s only the beginning of the bad news today.

(more…)

If you are interested in starting to understand why the so called free market ideologues have almost no ground to stand on, read this great recent history of financial industry de-regulation. I found this one on theAutomaticEarth.com, which is doing a consistently high quality job tracking this finance stuff.

I’m not going to quote it at length, just a few choice pieces:

In 1980 the US had 4,600 thrifts, by 1988 mergers and bankruptcies left 3000. By the mid 1990’s less than 2000 survived.
[...]
Meanwhile, just a few years before the S&L crisis culminated in a massive U.S. taxpayer bailout, the deregulators, undeterred, had set their sight on a far bigger prize, the elimination of barriers between investment banks and commercial banks, as represented by the Glass-Steagall act, which was put in place as a response to the stock market crash of 1929 and the ensuing Great Depression.
[...]
Fresh off of this “victory”, incredulously, the man who was charged with being the banking systems chief regulator, Fed Chairman Alan Greenspan continued to lead the charge towards a completely unregulated financial system as he turned his sites towards championing the growth of unregulated derivatives.

And that takes us up to today.

(more…)

Any doubts I had about just how serious the issues facing us actually are were dissipated today in a series of new articles.

The first is from Business Week. In general, while I will use left leaning resources, I now prefer to find most stuff in the mainstream, because that shows much more clearly where awareness actually lies. It’s pretty much a given that left analysis tends to be far ahead of the times.

Rising populations. Skyrocketing commodity prices. Strains on natural resources. Is this our Malthusian moment?
[....]
The rise of the frontier economies is putting too great a strain on natural resources. The price increases we’re witnessing aren’t a temporary market dislocation, but a permanent shift into an Age of Scarcity.

Could the pessimists be right?

They have some evidence in their corner. Certainly, despite some recent declines, commodity prices are at nosebleed heights. The Rogers International Commodities Index, made up of 36 different commodities ranging from agriculture to energy to metals, is up 383% over the past 10 years. Oil prices have jumped from $23 a barrel in 2003 to around $100 currently. Part of that oil price hike could also reflect that the world is near “peak oil,” the term used to define the transformative moment when global oil production starts declining gradually over time.

Just as central, in my opinion, are these articles in Scientific American, The Economist Has No Clothes, and Brother, Can You Spare Me a Planet? (full version).

The strategy the [19th century] economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.

(more…)

The difference between how the mainstream media is reporting the current economic situation and how people who actually understand the stuff because they work with it day to day is quite astounding. This is the kind of article that you have to read yourselves, pretty much every sentence is worth some pretty serious thought.

“We are facing the worst financial crisis since the Great Depression”, Soros writes in The New Paradigm for Financial Markets, a book rushed online this week. The culprit, he says, is a misconception that markets can correct themselves, no matter how we short-circuit them with easy money, massive leverage and brain-bending synthetic instruments.

“The belief that markets tend towards equilibrium is directly responsible for the current turmoil,” the billionaire philanthropist writes. “It encouraged the regulators to abandon their responsibility and rely on the market mechanism to correct its own excesses.”

(more…)